Sean King

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Knoxville, Tennessee, United States

Sunday, October 17, 2010

Charles Ferguson explains why...

...Larry Summers embodies "so much of what's wrong with economics, academe, and indeed with the American economy":

As a rising economist at Harvard and at the World Bank, Summers argued for privatization and deregulation in many domains, including finance. Later, as deputy secretary of the treasury and then treasury secretary in the Clinton administration, he implemented those policies. Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector. He also successfully fought attempts by Brooksley Born, chair of the Commodity Futures Trading Commission in the Clinton administration, to regulate the financial derivatives that would cause so much damage in the housing bubble and the 2008 economic crisis. He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, including exempting them from state antigambling laws.

After Summers left the Clinton administration, his candidacy for president of Harvard was championed by his mentor Robert Rubin, a former CEO of Goldman Sachs, who was his boss and predecessor as treasury secretary. Rubin, after leaving the Treasury Department—where he championed the law that made Citigroup's creation legal—became both vice chairman of Citigroup and a powerful member of Harvard's governing board.

Over the past decade, Summers continued to advocate financial deregulation, both as president of Harvard and as a University Professor after being forced out of the presidency. During this time, Summers became wealthy through consulting and speaking engagements with financial firms. Between 2001 and his entry into the Obama administration, he made more than $20-million from the financial-services industry. (His 2009 federal financial-disclosure form listed his net worth as $17-million to $39-million.)

Summers remained close to Rubin and to Alan Greenspan, a former chairman of the Federal Reserve. When other economists began warning of abuses and systemic risk in the financial system deriving from the environment that Summers, Greenspan, and Rubin had created, Summers mocked and dismissed those warnings. In 2005, at the annual Jackson Hole, Wyo., conference of the world's leading central bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people's money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a "full-blown financial crisis" and a "catastrophic meltdown."

When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a "Luddite," dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.)

Read it and puke.

Look, I don't begrudge anyone selfishly pursuing his or her own self interest in a competitive fashion. In my mind, that's what makes our country great and insures our freedom. Because there are so many of us, and because each of our interests are so varied, none of us stands much of a chance of gaining a secure, long term advantage over our fellow man and our freedom is thus assured--that is, unless the government takes sides.

And, that's my beef with the likes of Summers. Summers co-opted the government to change the rules in such a way that his interests (and the interests of his cronies) were favored over others, making them all rich. And, because the resulting economic changes were government subsidized--indeed, government mandated and enforced, even over the will of the states at times--they weren't real. The boom times weren't the result of a competitive "free market" run amok, but rather a market steered and corrupted from the top to achieve a certain end.

And, even more inexcusably, once it became apparent that the emperor had no clothes--that the boom times were faked and rigged--and that Summers and his cronies were about to lose it all, they didn't have the decency to jump from a tall building in shame. Instead, they once again co-opted government's resources in order to save themselves and their friends at your and my expense.

What a racket.

I can understand why some argue that the only way to check the unbridled ambition of these guys (or anyone, for that matter) is through more regulations. That seems to be the bias of the author quoted above. But, truth be told, more regulation is exactly what these guys want! It was, after all, regulation and government programs that gave these guys their advantage to start with. Irresponsible banks could not have raised capital so cheaply were it not for the FDIC insuring their deposits. Banks would not have loaned so much money to bid up the price of real estate if interest rates hadn't been kept artificially low for an extended period of time by Greenspan. Mortgages wouldn't have become securitized in such great numbers were it not for the likes of Fannie and Freddie. Banks would not have loaned so much to so many sub-prime credit risks had the government not required and/or incentivized them to do so in an untold number of ways.

No, the simple truth is that regulations make government bigger. And, the bigger the government, the larger the prize for successfully corrupting it. Corruption insures success like competition never can. Thus, increased regulation doesn't penalize the wealthy and established in the long-run, as so many believe, but rather it harms the upstarts and innovators who seek to challenge the establishment and keep it honest through competition. You and I stand no chance of corrupting the government, but the establishment always stands a very, very good chance.

Thus, the solution to managing greed isn't a bigger government with more regulation, as so many are suggesting, for if history teaches us anything it is that such a government will always be corrupted to serve the ends of the few. Rather, the solution is a smaller, divided government--one that can't be manipulated to overly favor one group's interests over another. The smaller a government is, the less the benefit from corrupting it, and the more exposed is the establishment.

We had a small federal government once. And it all went away thanks primarily to a few Supreme Court rulings that broadly interpreted Congress's authority to regulate so-called "interstate commerce". Ironically, thanks to Obamacare, the legal rationale of those cases is now being re-examined by the courts.

There's still hope.

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