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Jeff Madrick

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Summers' View on Monetary Policy Not So Hidden

Posted: 07/31/2013 4:29 pm

Larry Summers

Though some have claimed Larry Summers's views on monetary policy are unclear, his time in public service reveals a history of accommodating Wall Street over Main Street.

The reason Larry Summers has become a leading candidate for Federal Reserve chairman is because President Obama is now leaning his way. No, I don't have direct proof of that, but some journalists claim they have heard this from insiders. And the reason this is credible is that Obama is a centrist on economic issues.

Contrary to some claims, there are no mysteries about Summers's view on monetary economics. Inflation is his big concern, as was Alan Greenspan's. If Summers is appointed, we will return to the era of bond trader dictatorship. Obama simply wants protection from 'inflationary expectations,' the bugaboo of the Clinton 1990s. Any sign that the bond traders will push up rates for fear a strengthening economy will generate inflation will provoke a quick reaction from Summers. He is far more likely to crack down on the economy than his competitor, the estimable Janet Yellen.

Indeed, Yellen is the one who recently made the much-needed case for resurrecting employment as a Fed goal, on equal footing with others. Wall Street regards her with danger. Greenspan practiced the opposite. He was worried workers would regain confidence and, heaven forbid, ask for a raise.

Is Summers as profound an ideologue as Greenspan? Of course not. He will be more flexible. But jobs will remain hostage to Wall Street needs if he is chairman. The 1990s record is pretty clear. The Clinton administration had a virtual romance with Greenspan. When he unexpectedly pushed up rates in 1994, Clinton was furious. He had gotten his landmark tax increase passed the year before, a highlight of his administration. The Fed chairman raised rates anyway, but Secretary of the Treasury Robert Rubin urged him not to say a word publicly. Give Greenspan his independence. It's likely Summers, then Assistant Secretary of the Treasury, reinforced his boss' view.  

Basically, Clinton, Rubin and Summers had a pact with Greenspan. Any increase in tax revenues would be used to pay down debt, not to build up social programs. Some spending on public investment occurred, but only in the late 1990s, leaving federal public investment at historically low levels.

I was at a closed meeting of the Democratic leadership while Bush was president when one Congresswoman pleaded for more infrastructure spending.  Let me remind everyone, said Summers, infrastructure spending is still government spending.

Of course, Summers favors more fiscal stimulus now. It's a no-brainer. Even Bernanke is talking about stimulus, and he was mostly a right-of-center monetarist, solely concerned about inflation targeting, until he had to face the real world of the 2008 crash as Fed chairman.

So, if Summers is Fed chairman, expect slower growth and higher unemployment than necessary in the future. Nothing would better serve the nation's economy than raising the inflation target right now, and Yellen would more vigorously pursue that than Summers. But under Summers, the stock market might rise because interest rates are more likely to remain low. He is a Wall Street man, not a Main Street man.

As for financial regulation, Summers has an implicit record there, too. It is a miserable one. He was one of the ringleaders who kept Brooksley Born from regulating derivatives, the only serious mistake President Clinton admitted to in his recent book, Back To Work. He persists in saying that ending Glass-Steagall did not cause the financial crisis eight years later. This is a naïve and narrow interpretation. Undoing it enabled banks to grow much larger through diversification and acquisition, and to take on far more risk. In some ways, this forced investment banks to take more risk in order to compete. Citigroup, while Rubin was there, bought trailers full of risky mortgage securities, becoming one of the Street's leading investors in them.

Of course, Glass-Steagall had already been watered down since the late 1980s by Alan Greenspan. Commercial banks were doing lots of investment banking already. Citigroup and JP Morgan lent money to the fraudulent Enron, then raised equity money for them from their investment banks, and also advised on some pretty nasty risk-disguising partnership.  

The big problem in the 1990s was that research analysts were really promoters of the equity issues of their employers. There should have been a Chinese Wall keeping analysts and researchers apart. Eventually, the Securities and Exchange Commission tried to enforce one, but it took Eliot Spitzer to stop the conflicts of interest. Where was the Clinton administration or Summers? All this happened under their watch -- the analysts' lies, the Enron and WorldComm frauds, the absurd high-technology bubble built in part on deceptive sales practices.

There were also massive stock options issued to corporate executives. The Clinton administration did not fight very hard to force companies to expense them. But they became popular because the Clinton administration limited executive compensation to $1 million in actual salary, with no limit on stock options. Stock options encouraged job cuts, I'd ague, because it raised the short-term profits that seemed to drive stock prices and make CEOs rich, helping to drive inequality to their well-know outrageous levels.

Summers was also there when AIG executives were allowed to keep their outsize bonuses. This did great damage to the reputation of the Obama administration. They were in league with bankers, it seemed. Summers claimed you couldn't break these contracts. Really? Watch municipalities break the contracts they have with their retirees on pensions and healthcare almost every day of the week.

Obama, sadly, is comfortable with heavy-handed Summersomics, which is light-handed when it comes to Wall Street. Or perhaps he thinks Summers will give him cover for more liberal social spending.

After the glow of the Clinton boom, so dependent on the stock market bubble, Summers says he was converted in the 1990s to thinking more like Milton Friedman. He leaves his students with the view that "the invisible hand is more powerful than the hidden hand," he told Daniel Yergin and Joseph Stanislaw for their book The Commanding Heights, a paean to free-market economics. "As for Milton Friedman," Summers went on, "he was the devil figure in my youth. Only with time have I come to have large amounts of grudging respect. And with time, increasingly ungrudging respect."

Need I say more? 

 
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