Tuesday, October 25, 2011
Larry Summers: Economic War Criminal...
by Chris Whalen
Where does Larry Summers get off giving Americans advice on how to fix the continuing housing crisis? And where does this political opportunist find the unmitigated gall to instruct us not to “finger point” and thereby identify culprits in Washington who helped enable the housing mess? Like advising the White House to ignore the fact of a collapsing credit market for jumbo and high SATO loans for the past several years?
As a general rule I like to follow the sage advice of Roger Kubarych, formerly of the Fed of New York and then Wall Street, but now working in the public sector, in 2008 during the depths of the crisis. “I have nothing bad to say about anybody,” he quipped during a discussion about how and when the FRBNY senior staff were first apprised on the problems at Bear, Stearns & Co. Good advice in these dark times.
But former Harvard University head Larry Summers is a special case and one that rises to almost Kissingerian dimensions, to borrow from Christopher Hitchens. In “Rational Irrationality” in The New Yorker last May, John Cassidy compared Summers to Henry Kissinger, an apt appraisal which begs the question: Is Larry Summers an Economic War Criminal?
Not only did Summers work tirelessly during his years in the Clinton Administration to undermine regulatory and prudential controls in our financial markets, but he joined Fed Chairman Alan Greenspan and his political sponsor, former Treasury Secretary Robert Rubin, and public paragon Arthur Levitt, in smearing CFTC Chairman Brooksley Born so as to make the world safe for OTC derivatives.
“The moratorium was a huge victory for Wall Street,” Robert Stowe England writes in his new book, Black Box Casino. “And a big win for Rubin, Summers and Greenspan,” though he rightly notes that Levitt later expressed regrets over his actions. But not Larry Summers, a man for whom ideology has never gotten in the way of the practical necessities at a given moment in time. He rolls in his own mess, in political terms you understand, and then expects us to believe that it smells so very sweet. The latest case in point is seen as Summer prescribes solutions to the housing crisis.
In their book Reckless Endangerment, Gretchen Morgenson and Josh Rosner describe in vivid detail how Larry Summers, Robert Zoellick and others bullied critics and won and influenced friends for Fannie Mae, one of the key Washington agencies that helped lead to the subprime debt crisis. Ed Demarco, now head of the agency that supervises Fannie and Freddie Mac, wrote a report in 1996 suggesting that the housing GSEs be privatized. But Summers bullied Demarco and other staffers, eventually forcing them to rewrite the entire document. The cost to the taxpayer of Summers’ intervention regarding the housing agencies is over $150 billion and climbing. And this number will climb dramatically after the 2012 election.
But perhaps one of the biggest indictments of Summers when it comes to his contribution or lack thereof to economic public policy is also his last, namely the advice to President Obama to do nothing about either the top-four zombie banks or the housing GSEs. By allowing the GSEs and the cartel they form with the largest four banks – JPMorgan, Wells Fargo, Citigroup and Bank of America – in the secondary market for home loans to deny millions of middle to lower income borrowers the opportunity to refinance, Summers has cost millions of Americans livelihood and security. I wrote about this issue in “Are the low US home mortgage rates for real?”
Summers deserves the censure of all Americans for his hideously bad advice to President Barack Obama regarding the housing crisis. First Summers told Obama not to restructure the largest zombie banks, the very same institutions that today deny millions of Americans their contractual right to refinance their mortgages.
Cassidy quotes Summers on Obama’s view of the big banks last year prior to his flight from the White House: “In the same spirit that the president did not want to take ownership of the banks, he has a healthy skepticism about schemes involving large government action and an awareness of the possibilities of unintended consequences.”
Second, Summers told the POTUS that there was no need to address the fact that tens of millions of American households are under water on their mortgages. As Laurie Goodman of Amherst Securities has noted, there is a cost to doing nothing. For Summers now to offer us advice on the mess he helped to create is quite outrageous.
“This guy and his crew from Harvard have fought me on this for the last three years when it comes to dealing with the home refinance issue,” notes one banking industry official who has argued for a government response to refinancing. “When we finally get the Obama administration to change their mind on dealing with under water mortgages, Summers pops up pretending to lead the parade.”
Bottom line is that Larry Summers has nothing to say about the housing crisis. His role in creating the catastrophe and pandering to the worst tendencies on Wall Street should rule him out of any attempt to fashion policy or a coherent history going forward. And for the media especially, you need to commit Morgenson & Rosner to memory as a lesson in the ways and means of Washington and people like Larry Summers.