Thursday, August 29, 2013

(End of) Summers Updates

Bloomberg has a piece this morning about the debt swap fiasco at Harvard, and what it says about Larry Summers's tolerance for risk and his suitability for the Fed job. I am glad that the reporter at least mentioned the Shleifer affair as a factor in Summers's exit from the presidency, though the reference to Shleifer is too obscure to serve as anything but a reminder to the small number of people who knew about it already. The same reporter wrote a stronger piece several years ago.

Summers's defenders have a fair argument when they say that Summers can't be held responsible for the disaster caused by the inaction of his successors. The investments, goes the argument, were unconventional but smart ("brilliant," I can almost hear them say) at the time, but they required constant monitoring for changes in the interest rate picture. The losses came because Harvard waited too long once Summers was gone and, apparently, no longer micromanaging the investments.

I said that argument was fair--I did not say it was convincing. The counter-argument is that these investments were utterly inappropriate for any non-profit, certainly at the scale they were being made. In fact the logic of the defense raises more questions than it tries to answer. EITHER these investments were Larry's personal play, in which case the Harvard Corporation was letting him make billion-dollar gambles. OR these investments were subject to thorough vetting by the Corporation, in which case the Corporation should be honest enough to take responsibility for making investments that no expert on nonprofit management would defend. And let's see now--who is on the Harvard Corporation who might have been thinking about this bright idea of Larry's? Why, his old crony capitalism buddy Robert Rubin. (Cf. my 2009 Huffington Post piece.) But no, Summers's apologists are instead throwing our history professor president under the bus.
The blame lies with Faust and her administration, not Summers, said Brad DeLong, an economics professor at the University of California, Berkeley. They failed to monitor the contracts and opted to terminate them at a time when the financial panic made the cost of exiting more expensive.
That is outrageous. Fine, maybe throw in some blame for the CFO. But where are the Treasurer, the Senior Fellow, and most of all, the financial wizard Mr. Rubin, either at the time these bets were made or the time they were lost?

But enough on the debt swaps. A couple of other interesting pieces have appeared lately.

In a post modestly called The Confidential Memorandum at the Heart of the Global Financial Crisis, Greg Palast parses a curious memo of which he somehow got a copy. Here is Palast's opening:

When a little birdie dropped the End Game memo through my window, its content was so explosive, so sick and plain evil, I just couldn’t believe it.
The Memo confirmed every conspiracy freak’s fantasy:  that in the late 1990s, the top US Treasury officials secretly conspired with a small cabal of banker big-shots to rip apart financial regulation across the planet.  When you see 26.3%unemployment in Spain, desperation and hunger in Greece, riots in Indonesia and Detroit in bankruptcy, go back to this End Game memo, the genesis of the blood and tears. 
The Treasury official playing the bankers’ secret End Game was Larry Summers.  Today, Summers is Barack Obama’s leading choice for Chairman of the US Federal Reserve, the world’s central bank.  If the confidential memo is authentic, then Summers shouldn’t be serving on the Fed, he should be serving hard time in some dungeon reserved for the criminally insane of the finance world. 
The memo is authentic.

Now this is a fascinating piece. I don't know anything about Palast and I am in no position to comment on any part of Palast's interpretation of the significance of this memo. But one part of his explanation looked quite familiar.

To avoid Summers having to call his office to get the phone numbers (which, under US law, would have to appear on public logs), Geithner listed their private lines.  And here they are: 
  • Goldman Sachs:  John Corzine (212)902-8281
  • Merrill Lynch:  David Kamanski (212)449-6868
  • Bank of America, David Coulter (415)622-2255
  • Citibank:  John Reed (212)559-2732
  • Chase Manhattan:  Walter Shipley (212)270-1380

No, I don't recognize the phone numbers, but there is something familiar about the idea of doing something that a law is clearly intended to prevent but technically does not prevent. It reminded me of something Summers said in his deposition in the Shleifer case.

  1. I did, I believe, remark at one stage that because of the sensitivity that I had acquired in Washington to ethics rules, which at least in my experience in Washington I wasn't ever smart enough to predict -- things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to me were thought of as perfectly fine -- and so I remarked that it would be a good idea for him to make sure that he was operating within the rules of whatever legal arrangements he had with Harvard. 

As I said in an earlier post, "The flip side of suggesting that ethical rules are arbitrary, and what you need to do is adhere to whatever the rules say, is to suggest that if the rules don't prohibit it there isn't anything wrong with it and you might as well do it if it's profitable."

And while we are on the subject of profiting from technicalities in the rules, the MathBabe blog has a fascinating piece about The Lending Club, one of the many businesses on whose boards Summers serves. TLC is a social-network-enabled, person-to-person lending business. How can a social network make money in the risky business of facilitating loans between individuals? By screening borrowers on the basis of the information about them via the social networks to which they belong. But if they can make money doing that, why can't banks exploit the same information to cut their default rates? Because they legally can't. There are laws such as the Equal Credit Opportunity Act that would prevent banks from lending money, say, only to Turkish people and not to Azerbaijanis,, even if Turks were generally the best credit risks and Azerbaijanis tended to be deadbeats. By federal law, banks can't use race, or gender or a bunch of the other expected criteria, as the basis for deciding whether to lend you money.

But TLC can, or can use social network data to infer your race, gender, sexual orientation, etc. with such high probability that TLC can beat the banks and make lots of money. Why? Because TLC is a lending company that is not subject to the laws that were put in place to ensure that minority groups would not be redlined by the banks.

As MathBabe says (her real name is Cathy O'Neil), employers are already alarmingly good at screening  out applicants through guilt-by-association online searches. If you never get called back for an interview, you may never know whether it is because of something in your resume or because you have too many Black friends on Facebook. And
people denied loans from Lending Club by a secret algorithm don’t know why either. Maybe it’s because I made friends with the wrong person on Facebook? Maybe I should just go ahead and stop being friends with anyone who might put my electronic credit score at risk?
Nice business, totally legal. No wonder TLC wanted Summers on its Board -- the value of knowing the banking rules, the profitable but socially regressive abuses they were meant to prevent, and how to work around them is hard to overstate.

And finally -- last one for tonight, I promise -- Laurence Kotlikoff and Jeffrey Sachs have another strong piece today entitled "Why Wall Street Wants Larry Summers and the Rest of Us Should Not." Answer: Because he is so expert at profitable ethical compromises that fly under the radar of illegality. But the authors continue to question even what is sometimes held to be one of Summers's strengths.

If Summers had demonstrated some magical powers of macroeconomic judgment over the years, his revolving-door approach to personal enrichment might be held in a different light, at least partially. Yet Summers has not displayed such magical powers. He has failed repeatedly to anticipate financial crises, whether in Mexico, Russia, and East Asia in the 1990s, when he had the Treasury’s international portfolio, or in the sub-prime crisis. 
His crisis responses have been undistinguished as well. Most recently, Summer’s Keynesian policies piled on trillions of dollars of public debt but did very little to restore robust growth or reign in risky bank behavior. Behind the scenes Summers has also been on the biggest foes of responding effectively to climate change, another example of his big-business bias.
Again, I can't judge. Whatever Summers's policy strengths and weaknesses, and strengths and weaknesses as a crisis manager, I still think, with David Warsh, that the Shleifer affair should rule him out for the Fed or any other high office.

The closer you look at Summers’s not-so-tacit approval of the affair, the more appalling it becomes. That fact that no one in economics has mounted a defense of Shleifer’s and Summers’s conduct – not Andrei, not Larry, not any of their numerous seconds – should tell you all you need to know: their actions were indefensible. All the more alarming has been Summers’s ability to suppress criticism.  Taken altogether, my hunch is that the story is more than enough to put the kibosh on his appointment.  He can make money, give advice, mentor students, but no more running for high office.

(Thanks to the readers who pointed me to several of these articles.)


  1. I hate to get in the way of Summers bashing, but this memo seems innocuous to me. Is the claim that the US government should ignore business interests altogether in negotiating trade agreements?

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