Larry Summers’s public career has been marked by a carnival of policy debacles, punctuated by his brief, accident-prone tenure as president of Harvard. Yet, at 65, he is once again a senior economic adviser to another prospective Democratic president—one who has gingerly embraced transformative policies that Summers has long opposed.
Joe Biden and his handlers are aware that Summers is radioactive to much of the Democratic coalition. His campaign has downplayed Summers’s role. In fact, Summers is not only part of Biden’s senior economics policy team, but he is able to end-run other advisers and have one-on-one conversations directly with the former vice president.
Though much has been written about Summers, it’s worth reviewing the dynamics of his influence, serial repositioning, and uncanny survival. The more mistakes Summers makes, the more he is treated as a seer. This is a complex man, with a brilliant mind and nimble political skills. He has powerful patrons and protégés. Perhaps most importantly, his views are very congenial to powerful financial elites, who have a great deal to lose should Joe Biden turn out to be another Franklin Roosevelt.
Summers has already held the two top Cabinet jobs on economic policy: Treasury Secretary under Bill Clinton, and director of the National Economic Council for Barack Obama. The career-capper post that has eluded him twice is Federal Reserve chair. He’s positioning himself through a familiar Summers tactic: wholesale image transformation.
Since exiting government in 2011, Summers has been engaged in a rebranding exercise, positioning himself well to the left of policies he espoused and carried out while he enjoyed actual power. A Summers trademark is never to apologize for mistakes earlier in his career, and to spin the truth to make his actual views sound different from what they were.
But the one area where he has neither altered his views, nor claimed different ones, is financial deregulation. Summers, unrepentant, continues to view it as his supreme accomplishment. That alone should give Joe Biden pause.
SUMMERS WAS BORN into economic royalty. Two of his uncles, Kenneth Arrow and Paul Samuelson, are Nobel laureates, both left of center. His parents, Robert Summers and Anita Arrow Summers, are also economists. His early work on economic theory and practice, which won him a John Bates Clark Medal for the most outstanding economist under age 40, often assessed how markets in practice were not as self-correcting as they are in theory.
But as a young professor at Harvard, while keeping some ties to more moderate economists, Summers attached himself to Martin Feldstein, the campus doyen of free-market advocates. When Milton Friedman died in 2006, Summers gave a gushing eulogy, declaring, “Any honest Democrat will admit that we are all now Friedmanites.” That certainly describes the Summers wing of the Democratic Party. We will soon find out whether it describes Biden.
Feldstein, who chaired Reagan’s Council of Economic Advisers, gave the young Summers a staff job in 1982–1983. In the 1988 presidential campaign, Summers burnished his Democratic credentials by advising Michael Dukakis. In the meantime, having been introduced by a former student working at Goldman Sachs, he had struck up a friendship with Robert Rubin. The two men were taken with each other. Summers was fascinated to watch a master trader at close range, and Rubin admired Summers’s brilliant capacity to rationalize Goldman’s activities as sound economics.
When Rubin became chair of Clinton’s National Economic Council, a new entity created especially for him, Summers had been serving as chief economist of the World Bank. Rubin brought him in as undersecretary of the Treasury for international economic affairs. In this post, held from early 1993 until 1999, Summers was the lead official in several key policy areas, all involving the use of American influence to pressure Third World countries and the former Soviet Union to marketize as rapidly as possible. In every one of these areas, Summers’s advice proved disastrous.
When these market-opening policies blew up, Washington sponsored bailouts that required even more market-opening as the quid pro quo. Summers, along with Rubin and Alan Greenspan, were lionized in a famous Time magazine cover piece headlined “The Committee to Save the World.” The more interesting question is why the world needed saving: because of the perverse, strong-arm policies inflicted on developing countries by the same Gang of Three.
The East Asian financial crisis of the late 1990s was largely the result of pressure from Washington and the IMF on small countries with successfully managed economies to fling open their capital markets. Summers was the point man. Hot money poured in, stimulated speculative booms, and led to overvalued currencies. When traders concluded that the currencies were at risk of crashing, the money poured out just as fast, creating a self-fulfilling prophecy of collapse. The contagion hit even the strongest East Asian economies such as Korea, and spilled over onto speculation against the Russian ruble, deepening economic privation and paving the way for the rise of Vladimir Putin.
One country spared the worst was Malaysia, where Prime Minister Mahathir Mohamad rejected Western advice. Instead of letting the currency float to attract speculators, Mahathir imposed capital controls. Western money would be welcome only as long-term investments. In early 2002, a young Harvard Business School assistant professor, Rawi Abdelal, presented his first major case study, on Malaysia. He concluded that Malaysia’s policy had been sound. Summers, then president of Harvard, had been invited to the presentation by a colleague. There, in front of some 900 students, he ridiculed Abdelal, indignantly declaring that capital controls were never warranted. Walking across campus, Summers bumped into Robert Barro, a Chicago-school economist ostensibly well to Summers’s right. He recounted the folly of Abdelal’s study. “Larry,” said Barro, “He’s right.”
Mexico was a similar story as East Asia. With NAFTA, Washington had pressured the Mexicans to liberalize capital accounts; the peso got overvalued, the money flow soon reversed, and the currency collapsed. The U.S. and the IMF responded with bailouts to strengthen the peso coupled with demands for further liberalization. Wall Streeters recovered their investments, but in Mexico real wages fell. Once again, Summers was the key player.
On China policy, Summers began as a hawk. As Rubin pressured the Chinese leadership to open its markets to American investment banks, Summers became an enthusiast of admitting a pro–Wall Street China to the WTO, with few other changes to China’s mercantilist behavior. Bankers were protected; the manufacturing industry and its workers were thrown under the bus. Summers was also a big promoter of other corporate-written trade deals such as NAFTA.
The most damaging Summers policy debacle involved the rise of corrupt oligarchs as the path to the Putin dictatorship in post-Soviet Russia. I learned the details of Summers’s previously unheralded role in the extensive interviewing I did for a Prospect piece that ran this January entitled “Was Putin Inevitable?”
After Summers entered Treasury in 1993, he fought with State and Defense Department officials for control of Russia policy. His secret weapon was the International Monetary Fund, whose assistance Russia urgently needed, as its economy was collapsing. Abrupt price decontrol, executed on January 1, 1992, had led to annual inflation rates of over 2,000 percent. Would the IMF be generous or stingy, and what conditions would be attached? As undersecretary, Summers was the main U.S. liaison with the IMF, and not shy about using that leverage.
The Clinton administration was divided. People who knew the region best argued that Russia should be given time and large financial help to convert to a European-style, democratic mixed economy. They were opposed by military hawks who viewed post-Soviet Russia as a continuing geopolitical threat, and by free-market hawks led by Summers, who counseled shock therapy.
Applying free-market theory where it didn’t fit, Summers’s record on financial deregulation, Russia policy, Third World capital market liberalization, trade, and labor policy was marked by one avoidable disaster after another.
Summers pressured then-premier Boris Yeltsin to privatize state assets as rapidly as possible. So-called voucher privatization was carried out in two waves. First, in 1993-1994, Russian citizens were given vouchers with which to buy shares. Aspiring oligarchs bought up the vouchers, picking up the Russian extractive economy’s crown jewels for a song. Insiders at energy giant Gazprom, which was worth at least $40 billion, acquired the company for about $250 million.
In the second wave, in 1995-1996, the Yeltsin government, itself in need of cash, floated a corrupt scheme known as “loans for shares,” which delivered the rest of the state-owned economy to pro-Yeltsin oligarchs, who reciprocated with massive campaign contributions for Yeltsin’s 1996 re-election. The real economy kept faltering, living standards collapsed, and the result was big political gains for both Communists and nationalists. It was Putin who picked up the pieces.
Summers’s advice was also pockmarked by a personal conflict of interest. His close friend and longtime Harvard colleague, Russian-born economist Andrei Shleifer, was head of a Harvard-initiated project in Moscow, which had the prime contract with USAID to help with the post-Soviet economic transition. On the side, according to federal prosecutors, Shleifer and his wife were using insider knowledge to make investments. The case was finally settled in 2004, by which time Summers was president of Harvard. Shleifer paid $2 million; Harvard, as directed by Summers, paid $26.5 million. Shleifer continued as a tenured professor, and this protection was one of the factors that led to faculty pressure for Summers’s ouster.
AS TREASURY SECRETARY, Summers’s damage continued, though he has sought to obscure the realities. On the official U.S. Treasury website, the summary of Summers’s accomplishments as secretary between 1999 and early 2001 (written by Summers) claims that he led efforts to “insure the viability of the over-the-counter derivatives market. Summers also championed reforms to address corporate tax shelters and predatory lending practices.”
This claim is 180 degrees opposite from the role Summers actually played. The story of Brooksley Born, the lonely official who foresaw the danger of derivatives, and was excoriated by Summers and other senior Clinton officials, has been recounted in several books. The title of one, Simon Johnson and James Kwak’s 13 Bankers, refers to an irate phone call Summers placed to Born, then the chair of the Commodity Futures Trading Commission (CFTC), in March 1997, after she proposed issuing a concept paper on the case for regulating derivatives.
“I have thirteen bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II,” Summers told her. These were not just any 13 bankers, but the heads of Wall Street’s largest commercial and investment banks—many of the same bankers who would beg for a trillion-dollar taxpayer bailout a decade later. Summers was right about one thing. The derivatives issue was indeed responsible for the worst financial crisis since World War II. But the cause was not the menace of regulating them, but the failure to regulate them.
Born was driven from the CFTC in 1999. To keep any successor from regulating custom derivatives, Summers convened a high-level task force. In November 1999, the President’s Working Group on Financial Markets issued its report, signed by Summers, Rubin, and Greenspan, as well as Securities and Exchange Commission chair Arthur Levitt and Bill Rainer, Born’s CFTC successor, recommending that such derivatives be exempted from regulation. Rainer had been co-founder of Greenwich Capital Markets, a major bundler of subprime mortgage-backed securities. This exemption was codified in the Commodity Futures Modernization Act of 2000, which prohibits derivatives from being regulated either as securities or insurance; for good measure, it prohibits states from regulating derivatives too.
Tsugufumi Matsumoto/AP Photo
So Summers did insure the “viability” of derivatives—for reckless Wall Street traders, not for the safety of the wider economy. As for “predatory lending practices,” they proliferated on Summers’s watch, thanks to the deregulation he relentlessly promoted. The interaction of predatory subprime lending with unregulated and opaque derivatives such as credit default swaps was the single most important cause of the 2008 financial collapse.
Even Robert Rubin, architect of serial forms of deregulation that benefited both his former employer Goldman Sachs, and his future employer Citigroup, belatedly admitted to having second thoughts. “Larry thought I was overly concerned with the risks of derivatives,” Rubin wrote in his memoir. Rubin’s after-the-fact regret was characteristically disingenuous; while in power, he used his influence to keep derivatives unregulated. But at least Rubin confessed a shred of remorse. Not Summers. It was hard to out-Rubin Rubin on liberating derivatives, but Summers managed it.
In sum, Summers’s record under Clinton on financial deregulation, Russia policy, Third World capital market liberalization, trade, and labor policy was marked by one avoidable disaster after another. The common element was to apply free-market theory where it didn’t fit the circumstances, and where it often benefited his patrons and paymasters on Wall Street. In all of these areas, Joseph Stiglitz, who repeatedly clashed with Summers, warned against these policies. His 2003 book, The Roaring Nineties, written five years before the financial collapse, reads like prophecy. Stiglitz’s views have been thoroughly vindicated. Yet Summers has been treated as the economic prophet, while Stiglitz, a Nobel laureate, has been kept far from power.
AFTER BARACK OBAMA won the 2008 election, it was clear that there would need to be two major policy thrusts—shoring up and reforming the banking sector, and a stimulus for the rest of the economy. But how large a stimulus, and for what?
As head of Obama’s National Economic Council, Summers asked Christina Romer, Berkeley economist and incoming chair of the Council of Economic Advisers, to assess the economy’s projected rate of collapse and the needed offsets. She came up with a $1.8 trillion gap. But in an options memo for the president, Summers deleted that option, narrowing the range to between $550 billion and $890 billion.
Worse, Summers also embraced a classic deficit hawk argument. In a 57-page confidential memo dated December 15, 2008, he warned the president-elect that “an excessive recovery package could spook markets or the public and be counterproductive,” with the private sector reacting to a flood of federal spending by bidding up interest rates.
Nothing of the sort happened. By 2012, the deficit had been increased by $5 trillion—and interest rates stayed around 2 percent. Even with deficits rising dramatically to over $1 trillion a year due to Trump’s 2018 tax cuts, and then doubling again in the pandemic, interest rates have been so low that Fed officials worry more about deflation than inflation.
The memo also included a warning in bold, italics, and underlined, reportedly added at the insistence of OMB director Peter Orszag: “But it is important to recognize that we can only generate about $225 billion of actual spending on priority investments over the next two years, and this is after making what some might argue are optimistic assumptions about the scale of investments in areas like Health IT that are feasible over this period.”
This was a straw man. If Summers wanted more stimulus, simply sending the states money to offset recession-driven cuts would have directly generated over $600 billion in net economic activity. The Recovery Act provided the states just $145 billion over three years. During that period, state governments cut spending or raised taxes by well over $500 billion, according to a Brookings Institution study, and cut 641,000 jobs between 2008 and early 2012, all of which might have been spared with more federal assistance. So even without a single shovel-ready infrastructure project, the government could have generated more than twice the recovery relief that Summers and Orszag claimed was the limit, just via greater state and local aid.
When you offset the net federal stimulus against cuts in state and local outlays, the effective spending was less than half a percentage point of GDP per year. As a consequence, slow recovery and high unemployment dragged on and on.
Obama’s economic team compounded the damage with a severe avoidable error. By late 2009, Obama’s political and economic advisers were worried about his political vulnerability on the budget deficit, as well as the impact on interest rates and investor confidence. Led by Orszag and seconded by Obama’s political team, the economists argued that deficit reduction was now a higher priority than a stronger recovery.
So Obama and his economic advisers convinced themselves that the economy would hit high gear by mid-2010, which they prematurely and disastrously dubbed Recovery Summer. With that assurance, the president could now “pivot” to deficit reduction. In his 2010 State of the Union address, Obama announced the formation of the economically perverse Bowles-Simpson Commission, to put the budget on track to deficit reduction. At the time, unemployment was 9.7 percent. It remained at 9.6 percent for the rest of the year, including on Election Day 2010, when the Democrats were crushed—the worst drubbing in a century—turning Congress over to Republican rule and precluding any further activist policies.
In this bizarre reversal from recovery to premature austerity, the best that can be said in Summers’s defense is that Orszag, not Summers, led the Bowles-Simpson faction, and Summers warned that a commission might box in the president. But he also favored significant deficit reduction, which he weirdly characterized as “recession insurance,” as if less deficit spending now would somehow create more capacity for more deficit spending later, rather than deepening the economic hole.
Summers’s concern with deficits led him periodically to flirt with Social Security cuts. At one meeting in early 2011 of senior Obama officials with the so-called “Big Table” of progressive groups, Summers was asked about Social Security. He replied it was critical to defend Social Security “for the poor”—code for it being OK to make cuts in Social Security outlays for the middle class.
Summers also played a perverse role in the too-slow recovery when it came to mortgage foreclosures. Democrats in Congress insisted that the Wall Street bailout, known as the Troubled Asset Relief Program (TARP), include borrower relief. In a letter to congressional Democrats during the presidential transition, Summers promised that the administration would “commit substantial resources of $50-100B to a sweeping effort to address the foreclosure crisis,” as well as “reforming our bankruptcy laws” so judges could reduce principal on primary residence mortgages, a concept known as “cramdown.”
Almost none of this happened. The foreclosure mitigation vehicle was a complicated mess of a program called the Home Affordable Modification Program (HAMP). Instead of refinancing mortgages, a policy used extensively by the Roosevelt administration, HAMP encouraged banks to offer voluntary loan “modifications” on bank-dictated terms. This tended to trap borrowers in additional debt, squeezing out a few extra payments and foreclosing on them anyway. About one million homeowners got sustained help, perhaps one-tenth of the need. Though Congress authorized $50 billion for mortgage relief, only $12 billion was ever spent, and just $2 billion in the critical first three years, when foreclosures spiked. Meanwhile, Summers and his colleague, Treasury Secretary Timothy Geithner, actively opposed cramdown, though it had the support of most Democrats in Congress.
In short, Summers and Geithner were far more solicitous of bank balance sheets than of the fate of homeowners. Though Summers regularly convened all the players involved with HAMP to review its progress, it continued to fizzle. Leaving aside the cramdown debacle, when Summers was in a position to make HAMP work for homeowners rather than bankers, he let the program fail.
THE LAST FULL disclosure of Summers’s earnings showed that Harvard paid him just under $600,000 as a university professor in 2008. In that same year, he was paid $5.2 million by the private equity firm D.E. Shaw, where he was a managing director, plus $2.7 million in speaking gigs. So Wall Street paid him nearly ten times what Harvard did. After leaving the Obama administration in 2011, Summers returned to Shaw as well as Harvard. Liberating Wall Street is not just in his heart, but in his wallet.
Since leaving office, Summers has rediscovered Keynes. In several op-eds and longer papers, he has called for more public spending, and downplayed the risk of large deficits. But when he had the power to actually make some of that happen, he was AWOL or worse. To read his recent writings, you’d never know that he worried about bond markets and urged only a modest stimulus in 2008-2009, when it most mattered.
In January 2019, he co-authored a piece with Jason Furman, titled “Who’s Afraid of Budget Deficits.” It contains this epic paragraph:
Long-term structural declines in interest rates mean that policymakers should reconsider the traditional fiscal approach that has often wrong-headedly limited worthwhile investments in such areas as education, health care, and infrastructure. Yet many remain fixated on cutting spending, especially on entitlement programs such as Social Security and Medicaid. That is a mistake. Politicians and policymakers should focus on urgent social problems, not deficits.
Larry, we hardly knew ye!
A stunning example of Summers’s revisionism is a paper published in May, co-authored by one of his graduate students, Anna Stansbury. The paper, “The Declining Worker Power Hypothesis: An Explanation for the Recent Evolution of the American Economy,” finds that widening inequality and disproportionate corporate capture of monopoly profits result from declining worker power. Specifically, they cite union busting; a weaker minimum wage; corporate concentration; “shareholder activism” and resulting pressure to cut wages; the fissuring of the workforce via outsourcing; and globalization. They write: “Our focus on the decline in worker power as one of the major structural trends in the US economy is in line with a long history of progressive institutionalist work exemplified by Freeman and Medoff (1984), Levy and Temin (2007), and Bivens, Mishel and Schmitt (2018).”
The mind reels. As the paper obliquely admits in this aside, progressive economists have been documenting these trends for four decades. It’s a eureka moment only because Summers decided, belatedly, that he agrees. It would have been noteworthy if Summers had written this paper around 1985—and acted accordingly in his role as a senior government official.
Where was Summers during 40 years of corporate union bashing, wage stagnation, increasing economic concentration, and relentless globalization? Where was he on whether the government should enact labor law reform? Issue regulations to prevent wage theft and misclassification? Use the president’s contracting power to promote a living wage? Tighten financial regulations to crack down on private equity abuses? Prevent outsourcing and hyper-globalization? These debates were not just academic. During Summers’s two stints in government, there were hard-fought battles over these issues, within both the Clinton and Obama administrations.
David Zalubowski/AP Photo
Summers promised ‘a sweeping effort to address the foreclosure crisis,’ but struggling borrowers saw little help.
In every case, Summers was either actively on the wrong side, or silent. According to a Clinton official (who did not want to be quoted by name), Summers either ignored or actively opposed every proposal to help ordinary working people, including raising the minimum wage, helping workers form unions, or being more aggressive on antitrust. He sided with Rubin on corporate trade deals and deregulating Wall Street, which increased corporate power to crush wages. Another official who worked on labor policy for Obama confirmed that Summers had displayed no constructive interest in these issues in that period as well.
Larry Cohen, then the president of the Communications Workers of America (CWA), told me, “During his tenure in the Obama White House, Summers often mentioned his support for unions to labor audiences, but then supported trade deals with Korea, Panama, and the TPP, which eroded worker power and U.S. jobs. The Obama White House never made collective bargaining a priority.”
If Summers was worried about economic concentration and the collapse of antitrust since Reagan, there is no record of it. On the contrary, in one emblematic paper written in 2001 for the Antitrust Law Journal, Summers celebrated the ability of technology, innovation, globalization, and market competition to solve any lingering problems of concentration. He cautioned regulators against reviving antitrust enforcement: “[P]ain to competitors is somewhat suggestive of efficiency advantage rather than of the presence of monopoly power … and when antitrust divisions seek to derive political support and legitimacy by rallying competitors, there is at least some question as to the appropriateness of the position that they are taking.”
The first pro-union Summers piece I could find was published in 2015, in the run-up to the 2016 presidential campaign. As the prospect of another Democratic presidency has loomed, Summers has belatedly found his inner Joe Hill.
Keynes famously wrote, “When the facts change, I change my mind. What do you do?” But this alibi doesn’t excuse Summers, because he ignored facts that were palpable decades ago. Summers’s recent heresies as a dissenter from the church of corporate market worship seem more cases of political expediency than intellectual conversion. Research by the Economic Policy Institute has been linking union bashing, declining worker power, and income inequality since its founding in 1986. It must be satisfying for EPI’s former president and chief economist Larry Mishel for Summers to admit he was right all along. But that doesn’t make Summers a trustworthy ally.
IN 2013, SUMMERS was running hard for the post of Federal Reserve chair. He had already been denied the job once, when Ben Bernanke’s term expired in 2009. Tim Geithner, Summers’s sometime ally and frequent rival, had advised Obama to appoint Bernanke for a second term, and Obama did. In 2013, Summers had pressed Obama hard for the Fed job, and had something close to a commitment from the president. In the Senate, Jeff Merkley, Elizabeth Warren, and Sherrod Brown were organizing other Democratic senators to warn Obama that they would oppose his confirmation. (Correction: This piece should have acknowledged the lead role of Sen. Jeff Merkley of Oregon in organizing other Democratic members of the Banking Committee to block Summers’s proposed nomination in 2013 to chair the Federal Reserve.)
In the middle of this fight, National Journal reporter Michael Hirsh dropped the most comprehensive Summers dossier, a cover story, that carried the title “The Case Against Larry Summers.” The cover was an unflattering photo of Summers, with a big red line through it. Among other indictments, Hirsh recounted how Summers, in an interview, had tried to spin his blockage of derivatives regulation as an effort to get derivatives traded on exchanges. But Hirsh demonstrates from several key documents that the Clinton administration never pushed exchange trading whatsoever.
Summers, who had already figured prominently and unflatteringly in Hirsh’s authoritative 2010 book on the financial collapse, Capital Offense, was livid. He bitterly complained to the president of Atlantic Media, David Bradley, the owner of National Journal at the time. Though Hirsh’s editors backed their reporter, and no errors were ever found or corrections published, Bradley passed the word that after a decent interval, Hirsh had to go. Within a few months, Hirsh had moved to Politico. This is another of Summers’s trademarks: vindictive retribution for those who cross him, and efforts gross and subtle to undermine potential rivals.
Summers’s recent heresies as a dissenter from the church of corporate market worship seem more cases of political expediency than intellectual conversion.
Meanwhile, Summers’s pattern of spinning earlier views is epidemic. In 1989, Summers co-wrote an academic paper with his then-wife Victoria, in support of taxing securities transactions, on the ground that securities markets had become too subject to short-term trading. This was the original argument of James Tobin, who had proposed such a tax as early as 1973. But in 2009, when several Obama administration officials—including the then-president—wanted to pursue an FTT, according to Ron Suskind’s investigative book Confidence Men, Summers quashed the idea.
What happened between 1989 and 2009, of course, was that Summers had become a Robert Rubin protégé and had done a lucrative stint on Wall Street. Last October, he reversed course again, writing on Twitter that “the case for a well-designed financial transactions tax like that in place in Hong Kong is stronger than the case for a wealth tax. It should be seriously considered.”
In mid-June, Summers wrote on Twitter that the U.S. should have, among other tax reforms, “full taxation of carried interest and capital gains.” Yet, as private equity billionaire David Rubenstein, the co-founder and current executive chairman of the Carlyle Group, pointed out to Summers, he made no moves to eliminate the carried interest loophole when he had the power to do so.
The prime policy area where Summers has resisted revisionism concerns financial deregulation, the signal realm where his own policy influence under both Clinton and Obama produced catastrophic results. In a 2016 CNBC interview, Summers said, “Some parts of regulatory efforts have operated to remove many sources of income for banks, and that has had the perverse effect of when you have reduced future income, your safety declines.”
Summers has also cautioned against regulating a nascent banking industry competitor: financial technology firms, or fintech. In a Washington Post op-ed in 2017, he wrote that he is “quite serene about the impact of fintech on financial stability.” Summers is conflicted here, because he is an adviser and director of two fintech startups, Premise and Square.
As the 2020 Democratic nomination contest heated up, and momentum built for greater regulation, Summers belatedly began sounding like a born-again regulator. “I am very troubled by @federalreserve Vice Chair Quarles efforts to roll back regulation … when many years into a recovery is when the dangerous lending starts and when the problems set hold. We are falling into the oldest pattern of procyclical deregulation. It’s a serious mistake,” he wrote on Twitter in August 2019.
But of course “pro-cyclical deregulation”—reducing financial regulation as a boom becomes a bubble—was precisely Summers’s most perverse legacy in the run-up to the 2008 collapse. Nowhere does Summers acknowledge his own errors in earlier policies.
AS THE PROVERBIAL BULL in the china shop, how does Summers survive these serial policy blunders? One answer, suggested in interviews with multiple people who’ve worked with him, is that he has innumerable allies among former students, colleagues, and Wall Street notables. Another is that he is a world-class briefer. His encyclopedic knowledge of economic issues, his boundless self-confidence, and a capacity to reduce a complex problem to policy options has impressed presidents. “Larry sucks up, and he bullies down,” says a senior official who worked with him.
This complex temperament served Summers well enough when he held senior posts in government, where he was an autocratic master in his own realm, backed by Rubin and Obama himself. It did not work so well at Harvard, where there is a tradition of power being more diffused among administrators and faculty. Once again, Summers’s way was paved by Rubin, who at the time was chair of the seven-member Harvard Corporation, the legal authority that runs the place. Rubin assured skeptics, all too familiar with Summers’s ways, that “Larry had changed.” He had not.
Jacqueline S. Chea/© 2018 The Harvard Crimson, Inc. All rights reserved. Reprinted with permission.
A second campus that Summers wanted as his legacy was delayed more than a decade by the financial collapse.
What most annoyed faculty was Summers’s imperious tendency to treat the professoriate as so many deputy assistant secretaries rather than as scholars in their own right. In one notorious episode, at a meeting with the sociology department that Summers called to try to shore up dwindling faculty support, he offered this winning analogy in response to a question about why sociologists often cite economists but economists seldom cite sociologists: People at the University of Alabama cite people from Harvard but people from Harvard rarely cite people from the University of Alabama.
The publicity surrounding Summers’s Harvard downfall focused primarily on his high-profile gaffes, such as his attack on the scholarship of Cornel West (who soon decamped for Princeton) and his outlandish suggestion that women might be underrepresented in math and science because of gender-based deficits. But other misadventures are more instructive.
When Summers became president, he virtually took over Harvard’s endowment from the university’s very well-compensated money managers. This was an astonishing act of hubris; as brilliant as Summers is, money manager is a whole other skill set than macroeconomist and part-time hedge fund trader. Summers insisted on betting not just endowment funds, but Harvard’s working capital, over the objections of both the money managers and the university’s finance office.
One trade Summers personally directed was based on his assumption that interest rates would rise as the economy strengthened. When the economy began cratering in 2006-2007 and interest rates fell, Harvard had to spend half a billion dollars to buy back underwater securities that were likely to decline further. The endowment had consistently beaten the market in the years when it was managed by professionals. Summers’s mistake cost the university $1.8 billion and led to severe budget cuts.
Summers’s defenders have argued that on balance his gambles over five years made more than they lost. But notably, Summers was epitomizing the very behavior he later condemned: being part of the euphoria in the last stages of a financial bubble. It was a bubble that Summers’s own policies had helped create.
Long before Summers took charge in 2001, Harvard had begun secretly buying up 52 acres of land in Allston, across the Charles River in Boston, using property management companies as straws. When this was made public in 1997, Boston Mayor Tom Menino was furious. Allston was a jumble of affordable working-class housing, low-rise storefronts, auto repair shops, and the like. Harvard viewed it as a future second campus.
Summers enthusiastically embraced the idea, imagining that Harvard’s professional schools could be induced to join the business school, already on the Allston side. But he met fierce resistance, especially from the law school, which had just refurbished much of its cherished campus just off Harvard Yard. Summers settled on the idea of making a science complex the heart of the new Allston satellite. Billions of dollars were borrowed and a massive excavation commenced.
But by the time construction had begun, the losses to Harvard’s endowment put the project on indefinite hold. For a decade, the suspended project was a giant hole in the ground, the perfect metaphor for the multitrillion-dollar hole that Summers’s policies dug for the U.S. economy. Construction finally resumed in 2016. The new science and engineering campus (named for hedge fund billionaire John Paulson, who bought the name with a $400 million gift) is slated to open next spring. The symbolism is apt. Paulson made his billions using financial engineering to bet on a collapse in the housing market.
Summers once again is poised to return to power. In reporting this piece, I gained one other insight about Summers’s zombie-like survival. Several officials who had served with Summers, had tangled with Summers, and even previously criticized him in print, did not want to be quoted for the record. Their off-the-record comments ranged from scathing to unprintable. I don’t want Larry to think I’m gunning for him, said one. We are working with Biden, explained another, and I don’t want to attack one of his team. So even as a well-earned progressive pariah, Summers remains as a force to be feared.
Isn’t that the very definition of power?
