• August 31, 2015

Larry Summers and the Subversion of Economics

Larry Summers and the Subversion of Economics 1

Jim Watson, Agence France-Presse, Getty Images

Lawrence H. Summers (right) joined Secretary of the Treasury Timothy Geithner as President Obama spoke about the nation's financial health in January.

The Obama administration recently announced that Larry Summers is resigning as director of the National Economic Council and will return to Harvard early next year. His imminent departure raises several questions: Who will replace him? What will he do next? But more important, it's a chance to consider the hugely damaging conflicts of interest of the senior academic economists who move among universities, government, and banking.

Summers is unquestionably brilliant, as all who have dealt with him, including myself, quickly realize. And yet rarely has one individual embodied so much of what is wrong with economics, with academe, and indeed with the American economy. For the past two years, I have immersed myself in those worlds in order to make a film, Inside Job, that takes a sweeping look at the financial crisis. And I found Summers everywhere I turned.

Consider: 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 Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector.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.)

Soon after that, Summers lost his job as president of Harvard after suggesting that women might be innately inferior to men at scientific work. In another part of the same speech, he had used laissez-faire economic theory to argue that discrimination was unlikely to be a major cause of women's underrepresentation in either science or business. After all, he argued, if discrimination existed, then others, seeking a competitive advantage, would have access to a superior work force, causing those who discriminate to fail in the marketplace. It appeared that Summers had denied even the possibility of decades, indeed centuries, of racial, gender, and other discrimination in America and other societies. After the resulting outcry forced him to resign, Summers remained at Harvard as a faculty member, and he accelerated his financial-sector activities, receiving $135,000 for one speech at Goldman Sachs.

Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge of coordinating U.S. economic policy, deftly marginalizing others who challenged him. Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations—quite a feat. Never once has Summers publicly apologized or admitted any responsibility for causing the crisis. And now Harvard is welcoming him back.

Summers is unique but not alone. By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government. What few Americans realize is that the revolving door is now a three-way intersection. Summers's career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.

Starting in the 1980s, and heavily influenced by laissez-faire economics, the United States began deregulating financial services. Shortly thereafter, America began to experience financial crises for the first time since the Great Depression. The first one arose from the savings-and-loan and junk-bond scandals of the 1980s; then came the dot-com bubble of the late 1990s, the Asian financial crisis; the collapse of Long Term Capital Management, in 1998; Enron; and then the housing bubble, which led to the global financial crisis. Yet through the entire period, the U.S. financial sector grew larger, more powerful, and enormously more profitable. By 2006, financial services accounted for 40 percent of total American corporate profits. In large part, this was because the financial sector was corrupting the political system. But it was also subverting economics.

Over the past 30 years, the economics profession—in economics departments, and in business, public policy, and law schools—has become so compromised by conflicts of interest that it now functions almost as a support group for financial services and other industries whose profits depend heavily on government policy. The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight through the economics discipline. And it's due not just to ideology; it's also about straightforward, old-fashioned money.

Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby. This is now, literally, a billion-dollar industry. The Law and Economics Consulting Group, started 22 years ago by professors at the University of California at Berkeley (David Teece in the business school, Thomas Jorde in the law school, and the economists Richard Gilbert and Gordon Rausser), is now a $300-million publicly held company. Others specializing in the sale (or rental) of academic expertise include Competition Policy (now Compass Lexecon), started by Richard Gilbert and Daniel Rubinfeld, both of whom served as chief economist of the Justice Department's Antitrust Division in the Clinton administration; the Analysis Group; and Charles River Associates.

In my film you will see many famous economists looking very uncomfortable when confronted with their financial-sector activities; others appear only on archival video, because they declined to be interviewed. You'll hear from:

Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.

Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy.

Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks' Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6-million to $17-million.

Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000 per year.

Richard Portes, a professor at London Business School and founding director of the British Centre for Economic Policy Research, paid by the Icelandic Chamber of Commerce to write a report praising Iceland's financial system in 2007, only one year before it collapsed.

And John Campbell, chairman of Harvard's economics department, who finds it very difficult to explain why conflicts of interest in economics should not concern us.

But could he be right? Are these professors simply being paid to say what they would otherwise say anyway? Unlikely. Mishkin and Portes showed no interest whatever in Iceland until they were paid to do so, and they got it totally wrong. Nor do all these professors seem to make policy statements contrary to the financial interests of their clients. Even more telling, they uniformly oppose disclosure of their financial relationships.

The universities avert their eyes and deliberately don't require faculty members either to disclose their conflicts of interest or to report their outside income. As you can imagine, when Larry Summers was president of Harvard, he didn't work too hard to change this.

Now, however, as the national recovery is faltering, Summers is being eased out while Harvard is welcoming him back. How will the academic world receive him? The simple answer: Better than he deserves.

While making my film, we wrote to the presidents and provosts of Harvard, Columbia, and other universities with detailed questions about their conflict-of-interest policies, requesting interviews about the subject. None of them replied, except to refer us to their Web sites.

Academe, heal thyself.

Charles Ferguson is director of the new documentary Inside Job and the 2007 documentary No End in Sight: The American Occupation of Iraq.


1. khesriram - October 04, 2010 at 12:31 am

Thanks for the piece.
Let us see how the profession responds not only to this essay, but to its legitimacy itself in the wake of the Great Recession.

2. zagros - October 04, 2010 at 07:14 am

The profession is not being hypocritical -- indeed, the problem is that the profession is not being hypocritical! These professors actually BELIEVE what they spout. It is true that they would not likely have turned their attention to Iceland without the money but if they had, they would likely have said exactly what they said. Thus the problem is not a conflict of interests but a lack of accountability -- if the economics professional wants to argue that only predictions matter, not the assumptions (the classic tenant of the Friedman positivist agenda), then the results better match what the theory suggests will occur. Uh oh . . . they don't.

3. mcrocco - October 04, 2010 at 07:55 am

This problem pervades the university--from med schools with their pharmaceutical company ties to ed schools with their publisher ties. Where's the conflict of interest reporting in these institutions?

4. 11245928 - October 04, 2010 at 09:45 am

I look forward to watching Mr. Ferguson's documentary, but I heard nothing in his article that made a case for Larry Summers or any other economist being anything but a practitioner of the dismal science as he or she has learned and theorized it. There are brilliant economists and there are Harvard professors and they only place they meet is in the humor of Twain, who is said to have written brilliantly on government that "there is no such thing as good government,"... and whose Tom Sawyer wrote ofwork, that it

"consists of whatever a body is obliged to do, and that play consists of whatever a body is not obliged to do. And this would help him to understand why constructing artificial flowers, or performing on a treadmill, is work, whilst rolling nine-pins or climbing Mont Blanc is only amusement. There are wealthy gentlemen in England who drive four-horse passenger-coaches twenty or thirty miles on a daily line, in the summer, because the privilege costs them considerable money; but if they were offered wages for the service that would turn it into work, then they would resign."

Is there any more to it than that?

5. recoveringmba - October 04, 2010 at 09:46 am

"Starting in the 1980s, and heavily influenced by laissez-faire economics, the United States began deregulating financial services. Shortly thereafter, America began to experience financial crises for the first time since the Great Depression." The implication of the author is that laissez-faire economics leads to financial crises and that we need more/better regulation.

Nothing could be further from the truth. On the contrary, the lesson from Summers and others is that manipulation of the regulatory state enriches insiders at the expense of the rest of us. Hoping that the answer is more/better regulation from more/better regulators is foolish.

What we need is minimal regulation that puts the burden of losses on those that stand to benefit if things go well. What we have now is a corporate-government state with private benefits and socialized losses.

6. judithryan43 - October 04, 2010 at 10:19 am

Although there was a voe of no confidence in Summers' presidency at Harvard after he made the remarks about women, that was not what forced him to resign. His resignation came a year later, when faculty members became concerned about quite different issues--notably the Andrei Shleifer case--and a second vote of no confidence was scheduled (it did not take place because Summers resigned). The Shleifer case is pertinent to the column above, because it has to do with money and ethics. Harvard University paid a huge sum of money to settle the lawsuit that the government had brought against Shleifer for his misconduct as a consultant in Russia. I believe that Shleifer paid a fine of $2 million out of his own pocket, while Harvard paid something like $26 million to settle the case.

7. heathertwo - October 04, 2010 at 10:38 am

This is an impressive piece, and it's articles like these that make me support the Chronicle. I wonder though if it will do any good since people like Summers are so entrenched in both academe and government. But thanks for trying to point out how academe, government, and the financial services sector have begun to intersect in disturbing ways.

Too bad explanations like this one don't make their way into textbooks. If they did, kids might have more faith in textbooks and what they have to offer i.e. a way of understanding the world around them. Current textbooks, particularly those for government and business, paint a picture of a world that doesn't exist, a perfectly functioning laissez faire democracy. No wonder students don't want to read.

8. rburns - October 04, 2010 at 11:00 am

I will be interested to observe the notice that is given to the documentary by the media that is so in love with the current government. I saw Mr. Feguson on Morning Joe today and though he did a great job of outlining the facets of Summers' shifty career and of the crimes of the bankers, he was more or less ignored--very little interest on the part of the "show's" cast. Summers and the others involved in these scandals have too much government and Wall Street clout at this moment to be easy to expose or at least for that exposure to get the attention it deserves. The media will pass over this with its usual easy style and focus on Washington's and Wall Street's importance to the rest of us--especially with the midterm elections so near. Perhaps with more bipartisan power in Congress we will see some of these issues examined in the open. We live in hope.

9. gmclean - October 04, 2010 at 11:20 am

Great article and I look forward to seeing the film. This is so important. Why has Obama been so blind? To me, this is the full flowering of the lie that was foisted on my generation (BA 1971) that we had to accept (way back then) that the U.S. was no longer a manufacturing economy, and welcome the new "service" economy - the best paying service, of course, turning out to be financial services. Who started this fiction, and why? A good research project. But clearly the fiction has reigned supreme and unchallenged, with Summers and the Wall Street boys leading the charge -- all the way to the banks, whichever ones are still open (and it doesn't matter in which country - this level of greed has nothing to do with national loyalty). But recoveringmba also has an important point: "What we have now is a corporate-government state with private benefits and socialized losses." Very twisted.

10. rpoulin - October 04, 2010 at 11:37 am

I was fortunate to see the film at Telluride Film Festival. While a bit hard to follow all the nuances of the financial markets and misdeeds, the story definitely enlisted an angry response from the audience. The one thing the film weas missing at the time was suggestions to the question: "what do we do about this?" They were working on responses and hope their new web site has useful suggestions.

11. ellenhunt - October 04, 2010 at 12:04 pm

Left out of this article is the core of the problem that has occurred and is still being covered up. Very few people understand what happened in the banking meltdown and the real role that AIG's credit default "swaps" (i.e. insured loans) had on the meltdown because most people (including academics) don't know how a bank works. So a brief overview of banking principles is in order using a simplified system of two banks, A and B.

Bank A receives a deposit of $100, then loans out $95 dollars to Customer X. This leaves bank A with a 5% reserve, or a 1:20 ratio. Customer X deposits the $95 loan in Bank B. Bank B loans out 95% of this $95 to Customer Y, or $90.25. Customer Y deposits this loan into Bank A. Bank A now has $95.25 in its capital account. Bank A now gives a loan of 95% of its fresh capital ($83.73) to Customer X. This goes on and on. If one works it out, one can see exactly how much money is created out of accounting fiction by the concept of banking.

This concept of kiting customer depository funds is the body and sould of capitalism. And yet very few people know it happens.

So what did the big-money bankers do that changed everything?

In a bank, there is a capital account and a suspense account. Loans can be made from the capital account. Loans outstanding are logged to the suspense account, and remain on the books as assets of the bank's value. But money cannot be put into the capital account until it is received as a payment on the loan. That has been a foundation of banking since banking was invented.

But then AIG sold notes to Chase, Bank of America, Goldman Sachs, and the rest of the insider big operators. Those notes said, that if the loan goes bad, we will pay it at some declared value. Many people have heard about this but they don't know why it matters.

This AIG-Banker scam matters because the banks decided that if their loans were now insured, they could move the money from the suspense account into the capital account. All of a sudden, the more loans they make, the more money they have! Of course, it is quite clear that those AIG guarantees (and possibly other unknown underwriters) were "underpriced". They were so underpriced they were and are a joke. My considered opinion is that the whole thing was and is so underpriced that it amounts to RICO fraud on a global scale.

It is from this fraudulently engineered "money" that those huge bonuses were and are paid to investment bankers.

12. pdhazard - October 04, 2010 at 12:13 pm

The corruption of Academe is a disgrace. Fat cat economics will institutionalize peonage among most of our teachers, and contribute to the disappearance of the middle class that FDR's initiatives made possible. Reagan's fatuous commitment to make American safe for billionaries is a stupid, contemptible way to run an egalitarian democracy.Patrick D. Hazard, Weimar,Germany.

13. cosmopolite - October 04, 2010 at 12:14 pm

I have been very puzzled by the Obama administration's reluctance to engage the regulatory and institutional flaws that led to the 2007-08 financial sector meltdown. This article explains why; Obama's economic advisers are happy hookers.

We should all be suspicious of the public policy advice of any academic economist who retires with a net worth in 8 or more digits.

@heathertwo: I can confirm that my students seldom read the texts I assign.

@judithryan: I knew that Shleifer had been convicted of one charge in Federal court. I did not know that that conviction had not been overturned on appeal and that he had paid an ample fine. I am fascinated to read you say that Harvard paid $26M to settle its liability in the case. Shleifer and Summers were good friends, and Summers supported his friend throughout this scandal. That was ample reason for Summers to resign.

@recoveringmba: You wrote: "What we need is minimal regulation that puts the burden of losses on those that stand to benefit if things go well. What we have now is a corporate-government state with private benefits and socialized losses."

The current recession is the resulted from gross mismanagement and excessive optimism in the British and American mortgage businesses. Industry executives thought that because homeownership is a sacred cow, and because the subprime mortgages facilitated homeownership, the government would backstop losses if anything went wrong. When Lehman Brothers was allowed to fail, everybody suddenly realized that this expetation would not be realized, and the world financial system fell out of bed. We are still recovering from the broken bones.

14. trendisnotdestiny - October 04, 2010 at 12:24 pm

Yves Smith has an in-depth discussion in the book Econned (covering much of the rise of the economist class; determined to legitmate entrepreneurial analysis through mathematical prediction, however many of these models do not account for the psycho-social elements of human decision making in a complex and evolving culture....

Also, Dan Ariely discussed this in a more nuanced way (separating our economic and social selves in a culture looking to exploit the differentials of culture, class and practical economic decision-making...

Great Piece here, will see the movie also!

15. cosmopolite - October 04, 2010 at 12:37 pm

Pay close attention to what this article reveals about
Martin Feldstein and AIG, Glenn Hubbard and Capmark, Frederic Mishkin and Richard Portes on Icelandic banking, Laura Tyson and Morgan Stanley,

I did not know that finance industry directorship pay as much as 250-350K/year.

The allegiance of Summers and Geithner to Democratic party and to progressive ideas is no more than a coat of paint. These and others of their ilk are in bed with the financial industry and have done
very well by it. Summers is a hypocrite: he does the bare minimum to make himself appointable by Democratic administrations, then advances a GOP agenda. If Summers were an avowed GOP or libertarian intellectual, he would have fewer friends in high places, and his rise in academia would have been more difficult.

Pay close attention to the Summers-Robert Rubin connection.

"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.)" This is very disturbing.

I do not blame financial derivatives traded on exchanges for the 2008 meltdown. I do blame AIG's credit default swaps and the securitization of subprime mortgages, with the blessing of the rating agencies and worst of all, of Fannie and Freddie, who at one time held 500B of subprime mortgage-backed securities.

"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."

Prophetic words.

"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."
Summers has yet to pay a price for being catastrophically wrong here.

"Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations."

Rolling Stone recently published a long investigative piece coming to the same conclusion. The White House is filled with Republican wolves wearing Democratic fleeces.

"Starting in the 1980s, and heavily influenced by laissez-faire economics, the United States began deregulating financial services. Shortly thereafter, America began to experience financial crises for the first time since the Great Depression. The first one arose from the savings-and-loan and junk-bond scandals of the 1980s; then came the dot-com bubble of the late 1990s, the Asian financial crisis; the collapse of Long Term Capital Management, in 1998; Enron; and then the housing bubble, which led to the global financial crisis. Yet through the entire period, the U.S. financial sector grew larger, more powerful, and enormously more profitable. By 2006, financial services accounted for 40 percent of total American corporate profits."

The Obama administration has not seen fit to challenge this Wall Street empire in any way. Given the above, it is astounding that Lehman was allowed to fail.

"Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby. This is now, literally, a billion-dollar industry." This is very true and thank you for shining a light in this corner.

Meanwhile, what goes begging nowadays? The notion of fiduciary duty to one's depositors and stockholders.

16. mush9902 - October 04, 2010 at 01:24 pm

Nothing can stop the momentum. We are doomed.
As an economics degree holder I want to come up with better analysis, and as a law grad I could ramble on and on. But my first two sentences are the only ones I can come to terms with that most closely resemble reality.

17. tigerhawk - October 04, 2010 at 01:48 pm

Great article. It seems that the leaders we once respected for guiding our economy were nothing more than Snake Oil salesmen.

18. jwgilley - October 04, 2010 at 02:00 pm

Ssummemrs did as great a job running the country's economy as he did as president of Harvard. And he collected tens of millions of dollars for creating two huge train crashes. But Harvard knew what to do...sent him packing.

19. judithryan43 - October 04, 2010 at 02:19 pm

Well...don't forget that he's coming back in January.

20. walkerst - October 04, 2010 at 03:22 pm

Just to clarify - it is not the case that all of academe does not require professors to report outside activities or income. I've worked as a faculty member at several academic institutions, and by and large, they did require disclosure. Harvard doesn't require disclosure (and I did work there, though in an academic staff position), but the City University of New York and the University of Toronto in Canada, where I've also worked, both required an annual disclosure of all outside activities, affiliations, and work, whether compensated or uncompensated. I think the difference is that Harvard is a private institution, and can do mostly as it pleases, as long as it complies with law. Public institutions have far more strictures, in my opinion.

21. gbra8441 - October 04, 2010 at 03:51 pm

>>Again, thank you Mr. Ferguson for this commentary and exposing these hypocrites on film!


22. boiler - October 04, 2010 at 04:59 pm

This piece is typical of the vituperative conspiracy mongering that's paralyzing the left these days. Summers and the other deregulators were wrong, sure, and the policies they advocated turned out to be disastrous. And sure, they had conflicts on interest that probably influenced their views. But none of these economists were legislators, and none of them had any power whatsoever to pass the deregulation policies that fed the financial bubble. That was done by the congress and the successive presidents that these people served. The legislators didn't do this because they were hypnotized by Rasputin-like advisors -- they did it because they wanted to benefit the financial institutions that had them in their pockets. Instead of calling these legislators to account, the left has been having hysterics about the evil machinations of Summers, Geithner, and Rubin. That's safe, I suppose, and awfully convenient, giving them a scapegoat that everyone hates anyway: rich, Jewish bankers. But it's ultimately a sideshow, and it lets the elected people who made the real decisions off the hook. Bill Clinton, George Bush, and Barack Obama could have fired these people anytime they didn't like their advice. The congress could have declined to regulate the banks, and they could bring back Glass-Steagal anytime they like. The emerging narrative, of shifty hypocritical bankers controlling the economy from behind the scenes, is an old one with a grisly history, and it never leads anywhere good. If you're angry about what's going on, put your focus where it belongs.

23. dank48 - October 04, 2010 at 05:21 pm

Economist n. Someone who can tell you why it happened.

As mentioned above by Zagros, #3, Summers et al. are not being hypocritical. They really believe this bologna. In The Black Swan, N. N. Taleb mentions that taking L-dopa for Parkinson's may make one more gullible and vulnerable to superstitions like tea-leaf reading, tarot cards, economics, and astrology.

There's a reason contemporary economists abhor Ludwig von Mises, quite aside from his disagreement with the current dogma. Mainly it's that Mises declined to festoon his written works with bewildering mathematics. But, just like some dim-bulb deconstructionist decorating the page with physics terms he doesn't understand but pretends to, one can tart up the blandest, most cliche prose with a few equations, and presto! It's "profound."

What's really breath-taking is the way the same clowns who got us into this economic mess want to annoint themselves our saviors from it.

24. banguyen2 - October 05, 2010 at 12:10 am

Larry Summers left the government because he had done his job of transfering billions of dollars to his chums. Now it's high time for him to make more money again. It's all about money for these people. Call it the American capitalism.

25. thingumbob - October 05, 2010 at 07:50 am

Thank you for a bit of sanity in what otherwise seems at the moment to be a ginned up political lunatic asylum governing America. The one I'm referring to is where we are given phony choices that are all artificial bluster constituting a medicine man con game show of left versus right. Where international financiers control the game from behind the scenes and get exactly what they want no matter which party is in power. That is, the power to loot the populace at will. Although you don't offer any remedies, at least you have diagnosed the disease.

26. lexalexander - October 05, 2010 at 09:23 am

It's no longer left vs. right, and it may not even be large corporations vs. the rest of us. The biggest conflict now is banksters, specifically, against the rest of us. And the banksters are winning.

27. 1233312 - October 05, 2010 at 11:31 am

#12 doesn't actually explain credit default swaps. What is described is normal banking through the circulation of money. (Yes, money is a fiction that we all agree upon. But that makes it fun to study.)

Credit default swaps are conceptually not too different from private mortgage insurance, except that these contracts get traded around. What AIG did was to sell "insurance" on high risk derivatives (mortgage backed securities), or a guarantee of payment in case of defaults, and that allowed the derivatives to be sold as AAA, or low risk. Please check your wikipedia at least.

Other than that, while seeing a wholesale rejection of finance from smart academics who should know better about nuances is disappointing, it is interesting to find out about these closed door dealings. The author makes an excellent point about economists and conflict of interest issues. At least some business schools and journals require disclosure of this work, but obviously there is a lot more room for improvement.

28. dancole - October 05, 2010 at 07:46 pm

Congratulations to Charles Ferguson for managing to convince the Chronicle to publish, as commentary, a long advertisement for his new film. None of the economists profiled (slandered might be a better word) in his advertisement could do anything other than admire his marketing skills in the quest to earn profits from his labors.

29. rambo - October 05, 2010 at 08:53 pm

many economists have no practical experiences, just theoretical experiences...

30. mental_wanderer - October 06, 2010 at 04:02 am

To RecoveringMBA: I'm afraid you are missing an important point: have you ever asked yourself just where these evil regulations come from? Consider this: the profit motive drives giant corporate/financial interests to do everything in their power to maximize returns, reduce costs, and minimize risk. With vast resources at their command, (cash, lawyers, lobbyists, AND "brilliant" academics), they employ these resources to bamboozle dumb congressmen and dumber presidents -- and manipulate public opinion -- into enacting regulations that protect the personal fortunes of their upper management and their boards of directors, wrap artificial barriers around their business markets, insulate them from all forms of liability, erase their tax burdens, and allow them to get away with white collar crime on an unimaginable scale. (Or, in some cases, they relentlessly oppose regulations that don't serve these ends -- and keep up the pressure until they get what they want -- and they always get what they want in the end).

Put simply, these regulations you want to get rid of were mostly put there by Big Business interests -- not by progressive ideologues or independent-minded legislators or strong-willed presidents. Very little government regulation exists solely to protect the shrinking middle-classes or the growing poverty-classes. The Golden Rule will always be: the ones with the gold, make the rules.

Thank heavens for Charles Ferguson! His film won't really make a difference, but at least he gives us a chance to see the bus as it runs us over. My suggestion for the title of his next film is: "Big Business and Big Government: Partners in Plunder."

31. garylyndaker - October 06, 2010 at 08:11 am

Excellent article.

Summers is a perfect example of a "flexian" as defined in Janine Wedel's book, 'Shadow Elite.'

People like Summers glide easily among corporate, educational, government, NGO, and other positions. They push their own agenda from each position, often without indicating the obvious conflicts of interest as they move from position to position. Their loyalty is to themselves and others in their "flex net" group, and not necessarily to the intitutions they represent.

I'm glad to see him gone from the President's circle, but I regret that Harvard is welcoming him back.

32. gredlin - October 06, 2010 at 05:59 pm

Well done, Mr. Ferguson.

33. pjpdoyle - October 07, 2010 at 07:48 am

Obama was aware of Summers and Rubin's role in deregulating the financial industry, yet he chose Summers and Rubin's son to be financial advisors. Is it because he's a Harvard Alumni or is it because he's just frontman for financial and other interests. He could have chose Volcker, Krugman but he didn't.
It is time Academia instituted some kind of sanction/ethics mechanism so that "experts" who fail so badly are given the proper disapproval.

34. organicgeorge - October 07, 2010 at 12:54 pm

You can follow an onging disucssion of the state of the economics profession at the following econ blog.


35. kleint - October 07, 2010 at 03:10 pm

Deregulation didn't really cause the problem. That argument basically takes the approach of thorwing up your hands at the complexity and going "complexity bad! OMG! Those deriviatives are too complicated for me to understand, so let's ban them!"

If you want to actually understand the causes of the crisis, you have to dig into those complexities though. I'm not claiming to understand everything about what went on, but there are two significant points that are rarely made.

1. Naked credit default swaps. There's noting wrong with CDSes in principle. But taking out insurance on someone else's property ought to be as illegal as taking out a life insurance policy on someone else without their permission. And if an insurance company is dumb enough to sell you one (AIG), then they deserve to go bankrupt.

2. The ratings agencies. Contrary to the myth, the ratings agencies weren't actively colluding in giving fake AAA ratings to subprime securities. The problem was due to misuse of risk models which assumed that housing markets were local and uncorrelated nationally. If you spread out a basket of morgates across the country, local fluctuations in the housing market should average out, reducing risk. But, due to the bubble, housing markets became correlated, which meant that assumption was false. Simple in retrospect, but when you plug the numbers into a mahcine and out pops 'AAA' ratings, it's not so obvious.

3. The oligopoly in the ratings industry. Due to various government policies, there are only three firms that are certified to rate these kinds of securities, and they have become quasi-governmental agencies, in effect. As a result, they have become lazy and uncompetitive. Probably a contributing factor to their poor models and generally lazy ratings. The market should be opened up to competition. Allow anyone to rate securities, and let investors shop for credibility.

4. The Fed. Setting interest rates low in early 2000s contributed to the loose credit that fed the housing bubble. Interest rates were so low that investors sought an alternative place to put long-term investments, besides treasury bonds. The housing market appeared to be low-risk, high-reward, and so there it went.

So, there you have two "regulatory" policies and one "deregulatory" policy that contributed. Federal manipulation of interest rates, anticompetitive policies in the ratings market, and allowing naked credit default swaps.

Though even the latter you can lay at the stupidity of the insurance agencies, mainly AIG.

36. jimbobreski - October 07, 2010 at 09:45 pm

Thank you Mr. Ferguson. Is it the new paradyne to create a problem so big that only the one who created can fix it. Is intellectual sociopathy the new disease?

37. professor2000 - October 07, 2010 at 11:37 pm

Thank you for this article. It is about time that someone details the conflict of interest and outright corruption in economics. Unfortunately Summers is just the tip of the iceberg; there are so many other cases.

The Shleifer affair is very relevant to this article and should have been mentioned. Andrei Shliefer used his position at Harvard to get a very large grant from USAID, which he then used to enrich himself and his family and associates. That is all chronicled in an Institutional Investor article by David McClintick called "How Harvard Lost Russia" in January 2006 (http://www.InstitutionalInvestor.com/Article.aspx?ArticleID=1039086). That article was e-mailed to every faculty member at Harvard. At the faculty meeting that followed, Summers was asked about the Shleifer case, and although he was close friends with him and had testified in the case, he claimed he knew nothing about it. It was a bald-faced lie in front of the whole faculty. That, in addition to the fact that Summers disrespected virtually every faculty member outside of economics (though he disrespected some there too), was the reason he was forced out at Harvard. If you read the complaint against Shleifer, the level of venality is striking. Shleifer meanwhile won the Clark medal (for best economist under 40) and was promoted to a named chair after having been found guilty...

In addition, Shelifer's wife, Nancy Zimmerman, a hedge fund manager, was also part of the govt. lawsuit, because she also used the USAID money to enrich herself. Amazingly, she was named part of Summers' whitehouse team. Although her corruption was part of the public record and available to anyone who looked, even the NY Times never mentions her affiliation with Shleifer and the govt. lawsuit, whenever they talk about her has one of Summers' good friends and advisers.

Indeed the NYT ran a story about how wonderfully uncorrupt Summers is. In an article titled, "A Rich Education for Summers (After Harvard)" by LOUISE STORY, on April 5, 2009
they say "Friends of Mr. Summers say he has always been meticulous about avoiding conflicts of interest."

Another example: Yale economist Florencio Lopez-de-Silanes, who was a student of Shliefer's and who worked on corporate governance (he was head of Yale's International Institute for Corporate Governance and also worked on corporate governance at the World Bank) was forced to resign over $150,000 in financial misconduct. THis amount is small potatoes compared to the tens of millions in the Shleifer case, but at least he resigned. I don't know where he is now though.

38. mainiac - October 11, 2010 at 07:06 am

I always wondered where the idea of a "non manufacturing economic model" originated. If indeed the "non-manufacturing sevice" economy model came from Harvard, there should be real accountability for such a nation wrecking policy. The university's bloated trust can be used to reclaim those lost manufacturing jobs.....

39. cookgary - October 11, 2010 at 09:50 am

Mr. Ferguson:

While I agree with the proposition that Larry Summers should be accountable for what he does, and that he should disclose the conflicts he has, there is a certain tone in your article that bears addressing.

ALL of us have conflicts of one kind or another. For example, you yourself have a built-in conflict here: You gain more noteriety for yourself and your work the more controversial you are. Yet I see no mention of that in your article, only in the tag line at the bottom: Shouldn't you disclose that you are going to personally gain from your attacks on Summers?

I'd add to your closing, "Author, heal thyself:

40. ellenhunt - October 11, 2010 at 02:36 pm

1233312 - #27 gets an "F" in reading comprehension, because I explained credit default swaps. To wit, "Those notes said, that if the loan goes bad, we will pay it at some declared value."

But I also explained how ordinary banking works because most people don't know.

What I explained that #27 did NOT explain is EXACTLY what those credit default swaps were used for!

"...the banks decided that if their loans were now insured, they could move the money from the suspense account into the capital account."

And that is why the president of Chase said in 2007, "Capital is now virtually infinite."

41. nickel - October 14, 2010 at 08:37 am

I want to draw attention to the very important points that "ellenhunt" and "recoveringmba" make. They have nailed it and if their insights could become more widely understood we just might find a way out of this mess.

42. nickel - October 14, 2010 at 08:50 am

In regard to "boiler" comment above:

"Bill Clinton, George Bush, and Barack Obama" Just how astute in financial matters do you really think these three are?
Versus our trilogy of:
Larry Summers, Robert Rubin and Allan Greenspan.

Robert Rubin is the puppet master here along with George Soros, Summers is their gopher and Greenspan was and is the fall guy.

I would stay away from ethnic associations and focus on who is pulling the strings and they aren't all Republicans.

43. ellenhunt - October 15, 2010 at 04:59 pm

I will note for the record, that having followed Soros' writing for many years, I would not include Soros. He, like Buffet, has said that more regulation is necessary. He has taken many positions against things he has been able to do and pointed to certain plays as examples of what nobody should ever be able to execute.

44. rich_rostrom - October 17, 2010 at 04:02 am

I find two blatant errors of fact in this essay.

1) Mr. Summers never stated or suggested that "women might be innately inferior to men at scientific work". What he discussed was the evidence that the distribution of mathematical ability in women is narrower than in men. The average in the two sexes is the same, but men have a higher proportion of very high (and very low) ability individuals. Top-flight professional scientists require very high math ability; while this requirement excludes nearly all men, it excludes essentially all women.

2) The author asserts that "America began to experience financial crises for the first time since the Great Depression" after the deregulation of savings and loans in the 1980s, and further deregulatory moves later on. This is contradicted by the savings and loan crisis of 1979-1981. At that time, interest rates on demand deposits (which is all S&Ls could hold) climbed from 4% or to 8% and higher. S&Ls had loaned out their deposits in long-term mortgages at fixed rates of 6% or less. Thus they were suffering severe immediate losses and many were faced with bankruptcy. The deregulation of S&Ls was a response to this crisis; it allowed S&Ls to diversify their loan portfolios and maneuver out of that deadly trap. Some S&Ls mismanaged the transition, or abused their new abilities, but most did not. The deregulation avoided what would have been an industry-wide collapse.

45. fonsecastatter - October 19, 2010 at 08:40 am

I refer to the brilliant paper by the late Prof. Andre Gunder Frank
"Equating Economic Forecasting with Astrology is an Insult - to Astrologers"
in "Contemporary Crisis", Amsterdam,Vol. 4, No. 4, 1978, pp. 97-102 Il Manifesto, Roma, 1978 Der Gewerkschafter, Frankfurt, Vol. 26, 1978 Transición, Barcelona, Vol. 1, No. 1, October, 1978

46. robburns4congress - October 19, 2010 at 10:25 pm

I eagerly await the opportunity to see Inside Job. This sounds like an important and timely film. It would have been better to get a wide release before the November 2nd election, but given the options for most voters, I'm not sure what responses would be in order. Both the Democrats and the Republicans have sold out the American people and made raiding the public treasury to enrich Wall Street banks and other ignoble corporations a routine operation.

However, here in Chicago I am running for US Representative as the Green Party nominee for the 4th Congressional district of Illinois. A central piece of my campaign platform introduces sweeping financial reforms to remove the inappropriate powers from Wall Street and place them back into public hands. I propose separating the natural monopoly components of our economy and placing those natural monopoly components under public proprietorship through public agencies which will operate them transparently, equitably and with tight democratic oversight. In these reforms I propose: 1) abolishing the Federal Reserve and placing control of our money back in federal hands; 2) a new federally hosted electronic money system and asset portfolio tracking system with equitable and low cost access to all; 3) removing the adverse incentives created by FDIC by providing an array of public savings options through a new National Credit Union, all federally insured through FDIC but no longer extending FDIC insurance to private banks; 4) a National Insurance Fund to provide insurance for financial instruments, monetary transactions and any other core risk funds needed; 5) a new National Credit Bureau to serve as a centralized locus for the monopoly component of credit rating: the credit incident and history reporting.

These are all detailed here:


I think separating the natural monopoly components of money, insurance and finance and operating those as transparent systems with equitable to all and tight democratic oversight is by far the best solution to the financial problems we face. Wall Street will not like it since they understand that most of their income derives from cheating the chumps as they refer to us. These are also the solutions a reputable economist would propose if that economist were devising a solution for the American people and not for Wall Street. Compare these solutions to our current corrupt financial institutions and the case for sweeping reform becomes even more compelling.

47. robburns4congress - October 20, 2010 at 07:53 pm

For a more popularized explanation of my proposals for how we need to reform our money, banking insurance and finance, see:

We must reprogram the machines or The futility of breaking up too-big-to-fail banks

48. sand6432 - October 21, 2010 at 05:41 pm

Don't forget that economists like Jeffrey Sachs, encouraged by the Clinton Administration, also advocated changes that ended up ruining the economy of Russia in the 1990s, which resulted in Putin's rise to power. Thanks, guys, you're doing a great job everywhere!---Sandy Thatcher

49. dworfrecaut - October 23, 2010 at 08:41 pm

That great Ferguson documentary could be generalized to show how US universities bear a large share of responsibility for the US current economic and political crises. US politics have become so dysfunctional that no consensus can be found on crucial issues such as health care, financial reform or foreign policy. The dysfunctional politics reflect largely that the US has become one of the most inequal countries among developped nations. And that in turn can be traced mainly to 2 trends: the decline in the number of college graduates that has driven the income differences between college and high school graduates to the highest ever. This decline is largely the result of universities using their market power to price themselves beyond the reach of the middle class. Colleges are no longer about educating our kids; rather they are about cashing in as much as they can on their role as gatekeepers to good jobs. (the second trend driving income inequalities is special interest business groups lobbying both Republicans and Democrats to grant them lax regulations or market power; this has generated super profits for a number of corporates which have not been distributed to shareholders or workers but shared among a few insiders). Ferguson's documentary is a call to save capitalism from the capitalists!

50. jayaraman18 - October 25, 2010 at 03:50 am

Inside Job is a great attempt. What is done cannot be undone. Ferg may be right about the figure of $20 trillion. What's the way out? The way out is to institute preventive measures, but how? There are two: 1. Study of Cost Consequence and 2. Real-time monitoring of Governance. Today Governance is blind riding on a lame. $20 trillion will get multiplied. Please visit http://jayaribcm.wordpress.com/category/uncategorized/ where I have already posted for Ferguson to spare 3 minutes of his time. Charles Ferguson the man I admire because of FrontPage can join me in promoting the way out rather than wait for another disaster to be reported. Let Summers and Greenspan leave the scene, it is good, that new measurement of Governance becomes the hallmark of the future. Be my guest.

51. harryrlewis - October 25, 2010 at 04:07 pm

Since #27 mentioned Janine Wedel's book, I wanted to note a piece I wrote for the HuffPo in January about the flexian nature of the Harvard connections:
Harvard's Secret Seven.

52. eeisenlohr - October 27, 2010 at 08:23 am

In doing research for my book on the history of the building of the financial bubble (Fairy Tale Capitalism), I noticed that Larry Summers frequently referenced the importance of what is legal. Employment contracts -- ie the requirements to pay big bonuses -- are legally-binding contracts. Conflicts of interest in government are subject to the Congressional Ethics Committee. I gave several examples I'd found. He neglects to mention that these biggest banks avoided bankruptcy due to taxpayer-funded bailouts. Bankruptcy would have made the contracts null and void, at best in line with all the unsecured creditors. That Congressional ethics panel is a group of foxes deciding how to guard the hen house.

As this article points out, Larry Summers was one of several powerful, government individuals that manipulated the passage of laws that allowed the bubble to continue to build. A citizen can be held responsible only if a law states that he should be responsible. Our legal system doesn't support this kind of accountability because of Mr. Summers and friends.

And we can add this most recent piece of legislation to his efforts -- the Dodd-Frank bill. Back in the 1990s the GAO published many research pieces that warned of the risks with which we are all now so familiar. Ten years ago Congress totally ignored its own research and passed Gramm-Leach-Bliley and then made sure over-the-counter derivatives wouldn't be regulated. One doesn't have to read far into the Dodd-Frank bill to see Congress ordering one research report after another. It's just a smoke screen to make citizens think they are seriously looking into the meltdown.

The Financial Crisis Inquiry Commission hadn't even completed its job before the "reform" bill was passed. Guess Congress and the Larry Summers types knew what they needed to know -- that this bipartisan powerful group at the top of finance and government will not address the true causes of the meltdown. So systemic risk remains. It is ironic to see taxpayer-funded Fannie Mae suing taxpayer-supported Bank of America. Taxpayer dollars are pitted against each other.

The June 29th testimony of Professor Michael Greenberger before the FCIC pointed briefly to how the biggest banks, who are also the big derivatives dealers, are linked together. Before any examination of this systemic issue was added to the FCIC's hearings, the Dodd-Frank bill was passed. I used to work at both Citibank and at Moody's and know exactly what Professor Greenberger means. It's the aspect of these systemic banks that our federal officials and the biggest banks don't want people to know. I spelled it out in the book so it can see some light of day.

The Wall Street Journal published an Op-Ed by a Harvard professor who claimed the bursting of the bubble couldn't be predicted. Jane Bryant Quinn had predicted it in Newsweek in 2005! She just laid out some simple math on the floating-rate mortgages and interest-only mortgages and when these would reset. It was a pretty simple argument. The regulators didn't make those simple connections nor did the rating agencies' structural ratings side. Yet Dodd-Frank dishes out even more reliance on regulators and on rating agencies.

This is the kind of "reform" that Mr. Summers and his friends pushed yet again on the American public. He is cynical enough to believe nobody understands what goes on in finance. But as the electorate gets more and more unsettled, the political volatility and misery is on his hands. We are just beginning to explore the causes of the meltdown. Will Harvard be able to hold any honest discussion of the topic, or will Mr. Summers bully them again?

I look forward to seeing the movie.

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