That Lawrence Summers, a president emeritus of Harvard, is a consummate distorter of fact and logic is not a revelation. That he and Bill Clinton, the president he served as treasury secretary, can still get away with disclaiming responsibility for our financial meltdown is an insult to reason.
Yet, there they go again. Clinton is presented, in a fawning cover story in the current edition of Esquire magazine, as “Someone we can all agree on. ... Even his staunchest enemies now regard his presidency as the good old days.” In a softball interview, Clinton is once again allowed to pass himself off as a job creator without noting the subsequent loss of jobs resulting from the collapse of the housing derivatives bubble that his financial deregulatory policies promoted.
At least Summers, in a testier interview by British journalist Krishnan Guru-Murthy of Channel 4 News, was asked some tough questions about his responsibility as Clinton’s treasury secretary for the financial collapse that occurred some years later. He, like Clinton, still defends the reversal of the 1933 Glass-Steagall Act, a 1999 repeal that destroyed the wall between investment and commercial banking put into place by Franklin Roosevelt in response to the Great Depression.
“I think the evidence is that I am right about that. If you look at the big players, Lehman and Bear Stearns were both standalone investment banks,” Summers replied, referring to two investment banks allowed to fold. Summers is very good at obscuring the obvious truth—that the too-big-to-fail banks, made legal by Clinton-era deregulation, required taxpayer bailouts.
The point of Glass-Steagall was to prevent jeopardizing commercial banks holding the savings of average citizens. Summers knows full well that the passage of the repeal of Glass-Steagall was pushed initially by Citigroup, a mammoth merger of investment and commercial banking that create the largest financial institution in the world, an institution that eventually had to be bailed out with taxpayer funds to avoid economic disaster for millions of ordinary Americans. He also knows that Citigroup—where Robert Rubin, who preceded Summers as Clinton’s treasury secretary, played leading roles during a critical time—specialized in precisely the mortgage and other debt packages and insurance scams that were the source of America’s economic crisis.
Even Clinton, in a rare moment of honest appraisal of his record, conceded that his signing of the Commodity Futures Modernization Act (CFMA), legalizing those credit default swaps and collateralized debt obligations, was based on bad advice. That advice would have had to come from Summers, his point man pushing the CFMA legislation, which Clinton signed into law during his lame-duck days.
When the British interviewer reminded him of Clinton’s comment, Summers, as is his style, simply bristled: “Again, you make everything so simple, when in fact it’s complicated. Would it have been better if the whole financial reform legislation had passed in 1999, or 1998, or 1992? Yes, of course it would have been better. But … at the time Bill Clinton was president, there essentially were no credit default swaps. So the issue that became a serious problem really wasn’t an issue that was on the horizon.”
That is a lie. Credit default swaps had been sold at least since 1991, and collateralized debt obligations of all sorts quickly became the rage during the Clinton years. Summers surely remembers that Brooksley Born, the legal expert on such matters that Clinton appointed to head the Commodity Futures Trading Commission (CFTC), warned about the ballooning danger of those unregulated derivatives. Born, who served with Summers as one of four members of the President’s Working Group on Financial Markets, tried repeatedly and in vain to get her colleagues to act. When her pleas fell on deaf ears she issued a “concept release” calling attention to an unregulated derivatives market that was even then spiraling out of control.
The CFMA legislation that Summers pushed and Clinton signed was a specific rebuke to Born’s efforts. As Summers testified at the time before a Senate committee: “As you know, Mr. Chairman, the CFTC’s recent concept release has been a matter of great concern, not merely to Treasury, but to all those with an interest in the OTC [over-the-counter] derivatives market. In our view, the Release has cast the shadow of regulatory uncertainty over an otherwise thriving market—raising risks for stability and competitiveness of American derivative trading. We believe it quite important that the doubts be eliminated.”
Those doubts were eliminated by the new law exempting all of that troubling OTC derivatives trading from all existing regulations and regulatory agencies. Summers argued in his congressional testimony that there was no reason for any government regulation of what turned out to be tens of trillions of dollars in toxic assets:
“First, the parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies and most of which are already subject to basic safety and soundness regulation under existing banking and securities law.
“Second, given the nature of the underlying assets involved—namely supplies of financial exchange and other financial instruments—there would seem to be little scope for market manipulation of the kind seen in traditional agricultural commodities, the supply of which is inherently limited and changeable.”
Has any economist ever gotten it so wrong?