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Financial Integrity, the First Requirement for the Fed

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The current debate over the Fed Chairmanship displays the ethical emptiness at the top of U.S. political and financial power. We have just had a near-death experience in the world economy thanks to the unprincipled behavior on Wall Street. You might think that financial integrity would therefore loom large in the selection of the new Fed Chair. Yet among the elites weighing in on this issue, including the president, the concept of financial integrity doesn't even enter the discussion.

Financial ethics are indeed a quaint topic for the people in power. Why should they care about financial ethics when their own money and power are at stake? The answer, for the rest of us, is that the unprincipled behavior of the great and greedy on Wall Street has been our worst nightmare. Good macroeconomic analysis is relatively easy to obtain. Financial ethics are not so easy to find.

President Obama's description of his criteria for Fed Chairman is alarming. He describes the job of the Fed Chair as a "dual mandate" of low inflation and full employment. That's a quaint, and woefully incomplete, description of a job that actually has a triple mandate, including the regulation and supervision of the banking system. (A description of that role can be found here). The Fed "works with other federal and state supervisory authorities to ensure the safety and soundness of financial institutions, stability in the financial markets, and fair and equitable treatment of consumers in their financial transactions." Equally important, the Fed "has extensive and well-established relationships with the central banks and financial supervisors of other countries, which enables it to coordinate its actions with those of other countries when managing international financial crises and supervising institutions with a substantial international presence." The Fed is crucial not only for national regulation and supervision but also for global regulation and supervision.

Alan Greenspan presided over the worst monetary disaster in modern history in no small measure because of his lifelong belief in the morality of unbridled wealth seeking. Ayn Rand, Greenspan's guru as a young man, taught Greenspan that the rich and powerful should be unrestrained by the weaker parts of society. Greenspan put that ethically repugnant and naïve idea to work, and thereby helped to create the biggest financial crisis in history.

Robert Rubin, Greenspan's enabler and partner in this disaster, is the reigning champion of the Wall Street-Washington revolving door that has done so much to corrupt both Wall Street and Washington. As Treasury Secretary, Rubin led the fight for financial deregulation that enabled Citicorp and Travelers Group to merge into Citigroup. Within months of leaving the government, Rubin took an enormously lucrative job at Citigroup. Nine years later, having collected a reported $126 million in compensation, Rubin helped to install his many acolytes, including Larry Summers, into the Obama White House where they would oversee the mega-bailout of Citigroup and other Wall Street firms.

Larry Summers is the third of the Greenspan-Rubin-Summers triumvirate. He, like his patron Rubin, has excelled at the Wall Street-Washington revolving door, also heading for Wall Street in the early 2000s after helping Rubin push through financial deregulation in the Clinton period. Even in the short time since leaving the Obama White House, and knowing that he would be a candidate for the Fed job, Summers couldn't restrain himself from heading straight back to lucrative advisory positions on Wall Street with Citigroup and, reportedly, several other firms. While in the Obama White House, Summers protected the financial industry from attempts to crack down on their recklessly high and unjustified compensation. (For example, see here). Characteristically, when one of Summers' friends and colleagues at Harvard engaged in serious financial malfeasance, Summers shrugged it off, even under oath.

Obama is considering Summers to lead the Fed at a time when Wall Street's crimes and lack of ethics stare us and the world in the face. Each day brings new indictments of Wall Street firms, for fraud, insider trading, and other financial malfeasance. A Goldman Sachs trader was recently convicted of a serious financial fraud. News reports speculate that two JP Morgan traders are soon to be arrested in London and extradited to the U.S. for trial. The mere fact that Obama is seriously considering Summers for the Fed position strongly suggests that the President is far more interested in coddling his friends and campaign donors on Wall Street than he is in regulating the Wall Street banks.

Summers supporters might respond that Summers' macroeconomic insights are so great that they should overcome any ethical lapses. That is incorrect. Summers has a long history of serious macroeconomic mistakes, including his profoundly misguided advocacy of financial deregulation at the end of the 1990s; his serious mismanagement of the U.S. and IMF response to the Asian financial crisis in the late 1990s; his mismanagement of the U.S. Treasury role in Russia in the mid-1990s; and his support for the massive buildup of public debt under Obama, while actively blocking long-term economic and financial reforms. This is no scintillating macroeconomic track record that should even begin to excuse or overcome the ethical blinders and the dangers that he would pose to financial supervision and regulation.

Laurence Kotlikoff is William Fairfield Warren Distinguished Professor and Professor of Economics at Boston University and Jeffrey D. Sachs is Quetelet Professor of Sustainable Development at Columbia University