Larry Summers: From Arch-Neoliberal to Regulator

♠ Posted by Emmanuel in , at 4/15/2010 12:10:00 AM
I do not need to rehash Larry Summers' chequered past: harbouring ideas about dumping toxic waste in Africa as World Bank chief, yelling at Japanese finance officials as a Treasury Undersecretary at the height of his Washington Consensus phase, and resigning before being nearly booted as Harvard president prior to a certain vote of no confidence from its faculty. However much his gaffes have become part of public folklore, it seems the world has yet to see the last of him as he is now the director of the White House's National Economic Council.

It is thus no surprise that when it comes to hypocrisy emanating from American officials, there is one who takes the cake--the highly controversial figure of Larry Summers. During the Clinton administration, Summers was of course one of the strongest proponents of banking deregulation as recounted by former US Treasury Secretary Robert Rubin:
Rubin declined to comment for this article, but provided excerpts from his book, "In an Uncertain World," in which he writes that his deputy, Larry Summers, "thought I was overly concerned with the risks of derivatives...Larry characterized my concern about derivatives as a preference for playing tennis with wooden racquets -- as opposed to the more powerful graphite and titanium ones used today."
Later on, we received news that Paul Volcker may have gotten the upper hand at the Obama White House when it comes to financial regulation. In a recent Financial Times interview, though, he seems to exhibit selective memory as he paints himself as being more in line with the Volcker camp. Here is Summers being interviewed by the FT's Martin Wolf -

MW: Okay, my last question, financial sector reform, you mentioned confidence in that as another crucial thing, you’ve done I think a more successful job and most people would agree in putting together the financial sector back together than many thought more than a year ago, but many are also concerned that you have not yet remedied the underlying weaknesses that led to the meltdown and that’s why of course there’s legislation going through Congress at the moment.

LS: We’re the originators and proposers of that.

MW: Indeed. Are you reasonably confident that you will get legislation and that the legislation that you will get will basically lead to a fundamentally transformed, fundamentally sounder and more stable financial system going forward, and essentially the sort of catastrophe we’ve just seen will not be repeated in the at least for the foreseeable future?

LS: Well, we’re optimistic at this point that there’s been a very substantial gathering of support behind the president’s vision of a financial reform that protects consumers, that assures that all major institutions are supervised in a comprehensive way, that provides for the possibility of failure and so makes the system more safe through resolution authority, that regulates key markets like the derivatives markets as well as institutions and that rationalises regulation so as to make races to the bottom more difficult. And that eliminates some of the riskiest activities in which financial institutions engage.

We believe that there’s now quite widespread support for such legislation and those who oppose it across the board increasingly appear isolated in defence of a status quo that it proved itself manifestly irresponsible. We believe that the steps we’ve proposed, in conjunction with strong execution by regulators and strong execution’s absolutely important, whether it’s with respect to setting the actual levels of capital or carrying out the scrutiny that makes sure that capital is properly measured and risks are properly attended to, we believe this offers both the best potential and very substantial potential to minimise the risks of financial crises in the future. We’ll probably never eliminate financial crises but we can do vastly better than the run up to the last one where more generally the observation that after the 1987 Stock Market crash, the S&L debacle, the Mexican crisis, the Asian crisis, Russia, LTCM, NASDAQ, Enron, that we’ve been running in a way where we had a major financial crisis once every three or four years, for more than a generation now, and we can surely do much better than that. And we believe this legislation will enable us to.

As usual with Summers, there's a certain slipperiness evident in suggesting that crises occur "every three or four years" to deflect blame. I wish Martin Wolf had put Summers on the spot by asking the question we all want answers to: does Summers believe he was culpable in being a principal architect of banking deregulation? This softball line of questioning won't result in him owning up like his then-counterpart Gordon Brown has to the rather harmful effects of unchecked bank deregulation.