Stop Larry Summers Before He Kills Again

By Steve Weissman, Reader Supported News

27 August 13

ay what you will, the combative Harvard economist Larry Summers is a brilliant apostle of John Maynard Keynes and a strong advocate of using government spending to stimulate faltering economies and create jobs. He also understands - and has shown mathematically with Berkeley economist Brad deLong - why inflation does not become a threat in a severely depressed economy.

But, for all his smarts, Larry Summers has one major crime on his rap sheet. He helped orchestrate the Clinton-era deregulation that ended up fueling the crash of 2008, killing economies, jobs, growth, and hope across the globe. President Obama should not name him to head the Federal Reserve, which would only encourage him to kill again.

Like it or not, the Fed remains Washington's most powerful regulator of the financial sector. As one of the most destructive deregulators of our time, Larry Summers is exactly the wrong fox to guard the henhouse. Close to Wall Street, for whose firms he sometimes works, Summers also profited personally from the deregulation, but he is far more dangerous than a hired killer. He believes in what he does.

This comes through clearly in an October 2009 Frontline documentary called "The Warning." It is available online, as are the transcript and full-length interviews, from which I've taken most of what follows.

"The Warning" takes us back to the Bill Clinton boom of the late 1990s and tells of a very personal clash over how best to manage America's rapidly expanding financial sector. Should we stick to the regulatory approach that had guided the American financial system with relative safety since the New Deal? Or should we let the "free market" - or to be more precise, Wall Street - regulate itself, even in the case of fraud?

Backing self-regulation stood Summers, who had become deputy secretary of the Treasury, along with two financial titans - his mentor and former head of Goldman Sachs, Treasury Secretary Robert Rubin, and the long-time Fed chairman Alan Greenspan, a disciple of the über-capitalist Ayn Rand and an ideologue with an almost mystical faith in free markets. Summers was the youngster on the team, and the mild-mannered Rubin used him as his chief enforcer.

Supporting at least a minimum of government regulation stood a very clever woman called Brooksley Born, a veteran securities lawyer whom Clinton named in 1996 to chair the little known Commodities Futures Trading Commission. CFTC regulated agricultural futures and oversaw complex "financial derivatives" like credit default swaps and collateral debt obligations, which derive their notional value from underlying indexes, securities, commodities, mortgages, and other items of worth. Banks and insurance companies sold them as tools to help governments and corporations manage and minimize risk, but they were little more than wagers on future outcomes.

Having practiced derivatives law for some twenty years, Born knew the field first-hand, and she grew increasingly worried as a regulator that the vast majority of derivatives traded in private over-the-counter (OTC) transactions beyond even the minimal regulatory supervision and transparency of recognized options and futures exchanges. As a result, the world was flying blind, since no one could know the true extent of risk to the global financial system, or how much individual banks, insurance companies, hedge funds, and sovereign wealth funds stood to lose.

Lack of transparency opened the door to outright fraud, as a scandal involving Bankers Trust showed at the time. As we subsequently learned, Enron went even further, using price swap derivatives, credit derivatives, and accounting fraud to inflate asset values, hide billion-dollar losses, and keep soaring liabilities off the books in bogus reports to investors, creditors, and employees. Derivatives also greatly increased economic risk, and could, Born feared, drag down the entire financial system if anything went wrong.

"You have one big institution that fails, it can't pay its obligations, it forces somebody else into dangerous territory who can't pay their obligations, and pretty soon, it's a falling domino effect through the economy," explained Born's aide Michael Greenberger. The derivatives are "hidden like land mines in a battlefield and nobody wants to give money to anybody else because they don't know."

To avoid all this, Born proposed to regulate OTC derivatives. But the free marketeers - Greenspan, Rubin, and Summers - immediately balked. Summers, the enforcer, called and read Born the riot act. He claimed to have 13 bankers in his office. All of them demanded that she stop. "You're going to cause the worst financial crisis since World War II," he warned.

The bankers and their lobbyists wanted no regulation of OTC derivatives. "They were totally opposed to it," said Born. "That puzzled me. You know, what was it that was in this market that had to be hidden? Why did it have to be a completely dark market? So it made me very suspicious and troubled."

Born went ahead and prepared a "concept release" describing her proposed regulations. Rubin reacted by calling a meeting of his "president's working group," where Summers and the others all tried to shut her down, often in a condescending way. Characteristically, they dismissed her as "irascible, difficult, stubborn, [and] unreasonable." She was, in their eyes, only a woman and not a member of their Wall Street club.

Born persisted and two weeks later she published her concept release. For Rubin and Greenspan, this was the final straw. They openly called on Congress to stop her and any regulation of the OTC derivatives. Summers joined in testifying before Congressional committees. "The release has cast a shadow of regulatory uncertainty over a thriving market," he said. Republicans and Democrats all seemed to agree, and four hostile committees turned on Born with a vengeance, accusing her of a bureaucratic grab for power.

"My question again is what are you trying to protect," demanded Alabama congressman Spencer Bachus. Born's reply went right to the point. "We're trying to protect the money of the American public, which is at risk in these markets," she said.

Even as the political momentum against her grew, the fates intervened. Many of the new derivatives were so mathematically complex and confusing that they could fool even the most sophisticated insiders. In 1997, two financial economists - Myron S. Scholes and Robert C. Merton - won the Nobel Memorial Prize for devising the mathematics to determine the value of derivatives. The next year, following Russia's default on government bonds, a hedge fund that Scholes and Merton co-founded and on whose board they sat - Long Term Capital Management (LTCM) - discovered it had lost $4.6 billion on derivative holdings with a notional value of over $1 trillion. Faced with bankruptcy and threatening contagion across Wall Street, LTCM was forced by the Fed to accept a private bail-out deal. If the failure embarrassed the Nobel laureates, it also proved that Brooksley Born knew far better than the titans the dangers that lay ahead.

Still, the stock markets were soaring, the Internet bubble had yet to burst, and the bankers had flooded Washington with lobbyists. Even with the crash of LTCM, no one wanted to listen. Congress declared a regulatory freeze on anything Born's agency could do, ruled OTC derivatives beyond regulation, and raced ahead with the repeal of the Glass-Steagall Act, which had separated commercial banks from the riskier investment banks.

Like a lady, Brooksley Born resigned, and ten years later the global financial system came tumbling down, just as she said it would. "It was my worst nightmare coming true," she said. "Nobody really knew what was going on in the market. The toxic assets of many of our biggest banks are over-the-counter derivatives and caused the economic downturn that made us lose our savings, lose our jobs, lose our homes. It was very frightening."

Worse, the country still won't listen to her. With Larry Summers as one of Obama's top economic advisers, the bankers were allowed to gut almost every effort at reform. They still call the shots. Larry Summers says that he now favors strong regulation of over-the-counter derivatives, but the new regulations are still not in place.

"I think we will have continuing danger from these markets and we will have repeats of the financial crisis," warns Born. "It may differ in detail, but there will be significant financial downturns and disasters attributed to the regulatory gap over and over until we learn from experience."

From that experience, Larry Summers hardly seems the right man to become the nation's top financial regulator. We can only hope that President Obama comes to the same conclusion.

A veteran of the Berkeley Free Speech Movement and the New Left monthly Ramparts, Steve Weissman lived for many years in London, working as a magazine writer and television producer. He now lives and works in France, where he is researching a new book, "Big Money: How Global Banks, Corporations, and Speculators Rule and How To Break Their Hold."

Reader Supported News is the Publication of Origin for this work. Permission to republish is freely granted with credit and a link back to Reader Supported News.

Where Have All the Pariahs Gone?

By William Boardman, Reader Supported News

27 August 13

Contemplating the American way of shame, guilt, and penance

f you Google "people who are pariahs 2013," the first result is concert dates for the band Pariah, which on further inquiry turns out to be the name of more than one band (as in www.pariah.nl), as well as the name of a 2005 album by Naglfar, a Swedish melodic black metal band formed in 1992, none of which actually addresses the question prompting the inquiry.

The second result is more on point: an article from The Guardian in January 2013 about an evangelical minister calling on his fellow Christians to stop treating gay people as pariahs. Even though this minister is a Baptist in Britain, it's not as though treating LGBT people as pariahs is a phenomenon that's hard to find in contemporary America. But it's arguably no longer a majority attitude that defines the culture as it once did.

The third search result shifts focus to future pariahs, linking to an Iranian PressTV article by a British professor of binary economics in Jakarta, who is also a qualified UK barrister and founder of the Global Justice Movement. He also chairs the Committee Against Torture in Bahrain. He argues that the real Axis of Evil in the world today comprises the U.S., Israel, and Saudi Arabia, and he concludes: "They are becoming something else as well - pariahs, as they'll find out one day when even their best friends will buck up the courage to tell them."

Apparently that hasn't happened yet, or there would be considerably more "friends" objecting to attacking Syria for whatever.

This search for contemporary pariahs was prompted by the September 2013 issue of Vanity Fair, in which Graydon Carter's "Editor's Letter" is titled: "The Pariah Shortage."

What Does It Mean to a Culture to Have a "Pariah Shortage?"

According to the Canadian Carter, 64, the United States used to treat its miscreants quite differently and more punishingly. "Many of the architects of the Vietnam War became near pariahs," Carter argues, and Watergate produced "resignations, imprisonments, and an all but certain impeachment."

Well sort of, but not exactly. The real pariahs of the Vietnam war were its veterans, abandoned by their government and too many of their complicit countrymen, while the "architects" went unpunished beyond exclusion from a Georgetown party or two. And Watergate may have brought punishment, but no lasting shame for many - certainly not for Richard Nixon, Chuck Colson, Gordon Liddy, and others. These non-pariahs made out like bandits.

Carter goes on to remind us that the mass looting by deregulated S&Ls cost taxpayers $124 billion and led to thousands of criminal convictions, but he doesn't cite a single pariah - certainly not the presidents (Carter and Reagan) or the Congresses who all thought it was a fine idea to open the banks to the predatory capitalists among their pals. They were not shamed at all, so far as one can tell, and their successor presidents (Bush, Clinton, and Bush) and other Congresses saw fit to commit the same offenses all over again on a larger scale without even blushing.

That's what sticks in Graydon Carter's craw, that: "The deregulation-fueled subprime mortgage explosion and crisis of the past decade wiped out nearly 500 banks and ... will end up costing taxpayers at least $21.8 trillion."

He goes on to fulminate at length about malefactors like Dick Fuld, Angelo Mozilo, and James Cayne who helped to wreck the economy and got to keep hundreds of millions of dollars for their trouble - not a pariah in the bunch. And Carter bitterly points out that "the Department of Justice under Attorney General Eric Holder has brought just two criminal cases against senior executives ... [and] lost one of them." Maybe Holder should be a pariah?

Carter's final point is that no one has been held accountable for the Iraq fiasco - military, economic, political, medical, and environmental - the criminal destruction that Bush, Cheney, Rice, Rumsfeld, and their cohort perpetrated not only on their own country, but so disastrously on Iraq. Worse, for Carter, these perpetrators still say, knowing what they know now, that they would do it again - at a cost of 4,500 dead, 35,000 wounded, and more than $3 trillion.

You Can't Expect Shame from People Who Are Not Held Accountable

But by the end of his "Editor's Letter," he's long since lost track of the idea of turning those who fail with such enormity into pariahs. He fails to note that shame and contrition are not required of banksters and war criminals in America. Just mentioning shame and contrition sounds naïve even to consider in our post-modern hipness, where the rich and powerful too often seem shamed by nothing, unless it's not being more rich and more powerful.

One of America's less attractive qualities is its longstanding, widespread, reflexive impulse to turn so many victims into pariahs, most effectively with Native Americans, but equally with African Americans, Latinos, rape victims, and so many of the people of other countries who dared to want to have some say in their own destinies (Cubans, for example, or Venezuelans and Bolivians and Bahrainis, among others). This is a tendency of collective blame that, in other circumstances for Jews, gypsies, and homosexuals, turned into the Holocaust.

In America today, there's no shortage of efforts the powerful to create useful pariahs. The pattern of blaming the victim is manifest in the way the trial of Chelsea (Bradley) Manning proceeded. The mainstream media's dismal coverage of Manning's trial for revealing war crimes appeared a deliberate effort to turn Bradley/Chelsea into a pariah for daring to reveal some truth about Iraq. Worse was the way the trial ended, not only with an unjust conviction and an unjust sentence, but with the terrible spectacle of Manning feeling the need to apologize for her heroism.

What is it about American culture that pariahs are less likely to be murderers or thieves than people who try to tell the truth? In a long list, these come quickly to mind:

• CBS News made Dan Rather a pariah after he exposed a bit of the truth about George W. Bush.


• The Obama administration is trying to turn Edward Snowden into an international pariah for revealing some of the truth about federal spying on Americans.


• The United States tried to make Cassius Clay a pariah for exposing some of the truth about racism in America, but he became Muhammad Ali instead.

Pop Pariahs Serve to Distract Us From Real Pariahs in Hiding

Popular American pariah-making is, more typically, a short-term staple of infotainment shows, where the stakes are low and the titillation factor is high. A recent example: Mika Brzezinski (46) on Morning Joe demonizing Miley Cyrus (20) for her dirty dancing at the Video Music Awards, while hypocritically omitting the adults who choreographed and rehearsed the "offensive" act for hours. Sexual pariahs have been with us since the Puritans, for real and imagined offenses.

As a country, as a culture, we don't lack for people who actually deserve to be pariahs for committing profoundly offensive acts. In part, we don't notice such people because we lack the information that would allow us to see our would-be pariahs clearly for who they are. More importantly, too few of us want to look, or want to see, or want to act on what we see.

It's not, as Graydon Carter suggests, that we lack sufficient pariah candidates. Creating new pariahs might not be as difficult as it seems. A change of public consciousness would help, assuming our underlying values remain as we publicly profess them. In that case, all that's really necessary are a few honest investigations, taken to their logical end point, wherever evidence and integrity take them.

What investigations might those be? It seems likely that any serious investigation of 9/11, or torture, or the Iraq war, or banking practices, or drone killing, or depleted Uranium weapons, or any other outrage that goes unaddressed, would produce pariahs aplenty.

In Vanity Fair, the editor does not follow his argument to its logical conclusion - that we have become collectively incapable of imposing even the limited sanction of the Vietnam/Watergate era on our public criminals, that American culture is corrupt beyond even sincere lip-service to basic morality. Perhaps he's right to duck the question, because perhaps it's true.

But none of us will know for sure until we publicly confront unpleasant truths.

William M. Boardman has over 40 years experience in theatre, radio, TV, print journalism, and non-fiction, including 20 years in the Vermont judiciary. He has received honors from Writers Guild of America, Corporation for Public Broadcasting, Vermont Life magazine, and an Emmy Award nomination from the Academy of Television Arts and Sciences.

Reader Supported News is the Publication of Origin for this work. Permission to republish is freely granted with credit and a link back to Reader Supported News.