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A Summers Moment

[ 19 ] October 5, 2010 |

Ah, prescience:

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.)

In conclusion, girls are dumb.

Comments (19)

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  1. Oscar Leroy says:

    What good people Obama chose to head his administration. No wonder things are going so well.

    • Incontinentia Buttocks says:

      It must be because these are the best people he could have chosen because of the GOP…or the 60th Democratic vote in the Senate….or the shadowy, Oliver Stone characters who sat him down immediately after he was elected and told him who was really in charge…

      Or it was all 11th dimensional chess…

      Or it’s only been two six ten twelve twenty-two months! Hope and change don’t happen overnight….

      Or it was all a dream! Is that Bobby Ewing in the shower?

  2. wengler says:

    What country and/or institution will Summers destroy next? I am betting on the IMF.

  3. Ragout says:

    Actually, Summers criticized the “slightly Luddite premise of the paper,” which is not at all the same thing as calling Rajan a Luddite.

    Nor did Summers deny the need for more regulation. He said, “It is probably true that … an evolving [financial] system does require an evolving regulatory response. But it seems to me that one needs to be very careful about stressing the negative aspects of the evolution.”

    Summers remarks are on record.

    More generally, it’s very odd to criticize mistakes made by Summers and Rubin in 1998, or to blame them for the crisis of 2008, without mentioning the other 3 Treasury secretaries who followed them.

    • NonyNony says:

      Summers and Rubin are the direct cause – their advocacy for rolling back protections that were put in place specifically to prevent this kind of shit is the problem.

      The later Treasury secretaries deserve scorn for not trying to undo the damage that Summers and Rubin did, but Summers and Rubin do deserve the bulk of a blame. Just because they were able to throw the hot potato along to someone else doesn’t mean they weren’t the ones who put into the microwave in the first place.

      • Ragout says:

        I’m not a big fan of the role Summers & Rubin played in deregulation. But the fact is, none of the policies that they’re criticized for played any role in the recent financial crisis. Just look at how lame the arguments are in the article Lemieux cites. “Summers allowed the creation of Citigroup” is the closest the article comes to a real argument. But Citigroup was never more than a bit player in the crisis.

        • So he didn’t say that Rajan was a Luddite, he just said that his (very insightful and prescient) paper was Luddism. Not much of a defense.

          The rest of your point would be relevant if anyone was arguing that Larry Summers was singlehandedly responsible for the collapse, but since nobody is…

          • Ragout says:

            your point would be relevant if anyone was arguing that Larry Summers was singlehandedly responsible for the collapse, but since nobody is…

            You really ought to read the articles you link to, or maybe some of the other comments.

            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.

            And just out of curiosity, which point in Rajan’s paper did you find the most insightful?

    • wengler says:

      For a great example of what a positive force Mr. Summers has been in the world, just read some recent history of Russia in the ’90s.

    • Oscar Leroy says:

      “it seems to me that one needs to be very careful about stressing the negative aspects of the evolution”

      You mean like blowing up the world economy so badly that our very democratic way of life was threatened?* Gosh, he’s right, why would we want to stress just that negative! Look at the positive: it made Goldman Sachs a lot of money. So even steven, really.

      *http://boingboing.net/2008/10/06/us-congresspeople-to.html

  4. Ragout says:

    Oops, Summers’ remarks are on record here.

  5. NonyNony says:

    Story – infuriating.

    Final line from Scott – priceless.

  6. Ragout says:

    By the way, the “insightful and prescient” Rajan now thinks that a major cause of the financial crisis was excessive lending to “low-income and minority families.” How wonderful of Lemieux to defend him, and how mean of Summers to (gently) criticize him!

    • larryb33 says:

      Ragout,
      I read the piece you lined to and I don’t see anything controversial. It is hardly the typical WSJ letter to the editor drivel that attributes the housing crisis entirley to the CRA. No, he is saying that the policies of Clinton and Bush to expand homeownership were one piece of the puzzle.

  7. larryb33 says:

    And also: Larry Summers IS a dick.

  8. [...] A Summers Moment : Lawyers, Guns & Money [...]

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