Here is a little joke. Why is Larry Summers the weatherman of economics? Because he is wrong 99 percent of the time, but is still considered employable.
You have to hand it to Summers. He is a very well-credentialed man -- if you consider presiding over or abetting multiple economic disasters credentials. Yet despite this, both Republican and Democratic administrations cannot seem to get enough of him. Now it seems he may be our next Fed Chair, a possibility that makes me shudder and want to hide all my savings underneath a mattress.
So what's the problem with Larry Summers? Well, where shall we begin?
For one thing, he is more a politician than an economist. Much like the venture capitalists who funneled billions of dollars into Internet companies with no business model, no strategy, and no revenues, but then claimed to have seen it coming all along when the bubble burst, Summers goes whichever way the wind is blowing and is a master at political spin. I have heard the man speak, and the post-mortem of his own role in our economic history is always perfectly sanitized. The same man whose beliefs and policies helped create a climate of reckless deregulation that not only led to the massive gaming of the derivatives market and made it possible for banks like Goldman Sachs to turn subprime mortgages into ticking time bombs, but also to the horrifically expensive bailout of Wall Street now maintains that he was on the side of the angels all along.
That brings us to the core problem with Summers, which is his belief system. As the protégé of Alan Greenspan, Summers is a diehard proponent of laissez faire economics (which at this point should really be renamed Greenspan Economics) and of the belief that in a free market, players always behave in a rational and fair manner because of self-interest. Never mind that even Adam Smith, the father of free market philosophy, was moved to acknowledge the limitations of unfettered capitalism, or that the last 20 years of deregulation on Wall Street have resulted in catastrophic asset bubbles, massive financial fraud, trillion dollar shadow markets, and extreme greed that has made a mockery of the free market paradigm.
Greenspan, taking his cue from Ayn Rand's extremist beliefs, staunchly refused to provide oversight to the markets even when it was urgently needed, and Summers seconded that. Even when it became obvious during the Clinton years that the derivatives market was a financial Wild West, and which -- due to its sheer size and counterparty exposures -- could implode disastrously, neither Greenspan nor Summers had enough economic sense to consider regulating it. They blithely ignored the concerns of the CFTC, choosing to believe in the non-existent economic Unicorn of perpetual growth instead, and insulated the President from dissenting views. The Greenspan-Summers mantra was to stay completely out of the markets and let the various players figure out the risks they were taking by themselves.
Unfortunately, the Wall Street money machine could make so much money by camouflaging those risks that the transparency necessary for the functioning of a free market was bound to be compromised, as it was eventually. It is worth noting that the reason something so obvious was not foreseen was not because Greenspan and Summers are dumb but because laissez faire philosophy has two fatal flaws that its supporters are psychologically incapable of grappling with: 1) human behavior cannot be predicted adequately on the basis of pure logic, and 2) the unlimited capacity of humans to cheat when big sums of money are involved.
Cut to today, and the climate is ripe for someone like Summers to do even more damage. The economy is slowly recovering, the memory of the financial crisis is slowly receding into the background, and Wall Street is spending enormous amounts of money to strip down the Dodd-Frank financial reform bill before all its provisions can take hold. In the position of Fed Chair, Summers cannot unilaterally deregulate Wall Street, of course, but he can still exert an enormous amount of influence on the president and legislators; and he will. As a man mired so deeply in Greenspan Economics, Summers is simply not capable of recognizing the dangers of letting the banking industry run fast and loose, or of grasping the wisdom of regulated capitalism.
Finally, there is the matter of women. Unlike his former master Bill Clinton, Summers actually seems to dislike women, as evidenced during his tenure at Harvard University, when he speculated that women may be inherently less capable than men when it comes to scientific disciplines. But that was really a sideshow; the bigger issue is that in today's climate, where the participation of women in all fields and at all levels of our economy is growing rapidly, Summers' prejudice could be a dangerous blind spot in his thinking about our economic future. The Chairman of the Federal Reserve does not need to be a feminist but he does need to understand the major drivers of our economy, and the assumption that women are less capable is not a step in the right direction.
But then I guess it doesn't matter if your whole idea behind being Fed Chairman is to do absolutely nothing...
For all these reasons, Larry Summers should not be Chairman of the Federal Reserve, and if anything, would be better suited for weatherman. At least in that capacity, we already know not to rely on his prognosis.
SANJAY SANGHOEE is an active political and business commentator. He has worked at leading investment banks and hedge funds, has appeared on CNBC's 'Closing Bell' and HuffPost Live on business topics, and is the author of two thriller novels, including "Killing Wall Street". For more information, please visit www.sanghoee.com
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