Skip to main content

Don't let Larry Summers lead the Fed

By Rick McGahey, Special to CNN
August 8, 2013 -- Updated 2154 GMT (0554 HKT)
STORY HIGHLIGHTS
  • Larry Summers is a top contender for the job of chairman of the Federal Reserve
  • Rick McGahey: Given Summers' track record, he is unlikely going to be a tough regulator
  • He says Summers supported deregulation of banks and higher pay for financial executives
  • McGahey: We need a fierce regulatory watchdog at the Fed, not a lapdog of the banks

Editor's note: Rick McGahey is faculty fellow at the Schwartz Center for Economic Policy Analysis and professor of professional practice in public policy and economics at the Milano School of International Affairs, Management, and Urban Policy at the New School. He served as executive director of the Congressional Joint Economic Committee and assistant secretary of labor for Pension and Welfare Benefits.

(CNN) -- A battle is raging in the nation's capital over who should be nominated as the next chairman of the Federal Reserve. As President Obama considers his choices, all sides are pushing their candidates.

The two main contenders to replace outgoing chairman Ben Bernanke are the current vice chairwoman of the Fed, Janet Yellen, and Larry Summers, an economics adviser to President Obama, former Treasury secretary and president of Harvard University.

Summers' acerbic and dismissive intellectual style, his support of bank deregulation (he was a key leader in the Clinton administration's team that worked with Congress to repeal the Glass-Steagall Act, a Depression-era law separating investment banking from institutions with federally insured deposits), his fight against regulating financial derivatives (a major source of the financial crisis) and his successful advocacy with Congress to allow higher executive pay and bonuses for financial executives whose firms received billions in federal bailouts during the financial crisis all feed the opposition, who believe that Yellen is perfectly well qualified to lead the Federal Reserve.

Although many people don't know it, the Federal Reserve doesn't just regulate the money supply -- it is also a principal regulator of America's largest banks.

Rick McGahey
Rick McGahey

It's not so much that Yellen is a far superior candidate -- after all, she and Summers are on the same page when it comes to monetary policy. There is little indication from her record about what kind of approach she would take on regulation. But compared with Summers, she cannot be worse.

The real issue is: Given Summers' track record, could he be a tough regulator?

Supporters of Summers say he can be tough. But evidence from his days in government and on Wall Street suggest otherwise.

Summers has advocated for limited regulation throughout his career. In September 2000, while he was the Treasury secretary, he said that the role of financial regulation was to find policies that "help to expand the size of (financial) markets. ... Deregulation becomes that much more important, to ensure that government is not preventing or distorting the development of fast-growing markets."

He also told the Securities Industry Association that "it is the private sector, not the public sector, that is in the best position to provide effective supervision. ... In the past few years, the private sector has risen to meet the challenges ... and we have seen significant self-correction."

A decade later, at a conference in 2011, Summers showed no second thoughts on his previous deregulatory policies, arguing that the financial crisis was not caused by "new-fangled financial instruments," including the derivatives that he fought to protect from regulation in the late 1990s.

When it comes to Wall Street, Summers said he obtained insights based partly on working part-time for the hedge fund D.E. Shaw and Company where he earned over $5 million in just one year. Summers said the experience gave him "a better sense of how market participants sort of think and react to things from sort of listening to the conversations and listening to the way the traders at D. E. Shaw thought."

According to former colleagues at D.E. Shaw, Summers was directly involved in sales, including sales of what turned out to be highly overvalued mortgage-backed securities to Asian sovereign wealth funds, the kind of securities that were deeply implicated in the financial meltdown. He was also a "prized spokesman" for D.E. Shaw, "routinely made himself available for private consultations" with prospective and existing clients, and met with investors from the U.S. and abroad.

One young female quant who worked with him had this to say on her blog, "But when I think about that last project I was working on, I still get kind of sick to my stomach. It was essentially, and I need to be vague here, a way of collecting dumb money from pension funds. There's no real way to make that moral, or even morally neutral."

By "dumb money," she is referring to the fact that investors, including those who manage public pension funds, routinely buy certain types of secure assets on a regular schedule or in other predictable patterns. Hedge funds like D.E. Shaw take advantage of that predictable behavior by selling these assets to investors for a slightly higher price. Because of the huge dollar value and volume of these investments, such strategies can make hundreds of millions of dollars for hedge funds.

Now, Summers has defenders. Michael Barr, a strong advocate of financial regulation who worked for Summers at the Treasury as assistant secretary for financial institutions said, "I wouldn't have gone to work for Larry if he didn't believe in financial regulation."

But arguing that Summers' multi-million dollar sales work for a hedge fund somehow adds to his qualifications for the Fed chairman job is ludicrous.

He was working for and dressing up the work of financial professionals selling high-priced investment products made even more expensive by the exorbitant fees charged by hedge funds.

Moreover, hedge fund investments often are inferior for investors. In 2012, an investor would have done much better by simply buying the S&P 500 index instead of a hedge fund. To convince investors to pay their high fees, hedge funds do a lot of active selling and cozying up to money managers. Summers was part of this public relations strategy -- a glittering ornament to lure in investors.

There's nothing illegal in all of this. But there's also nothing in Summers' experience to suggest that he would be a tough regulator. His supporters include people like Robert Rubin, former chairman of Citibank and co-chairman of Goldman Sachs, and Timothy Geithner, who as president of the New York Federal Reserve and later Treasury secretary, refused to take a tough line on bank regulation. Think they are pushing Summers because he'd be a tough regulator? Think again.

America needs a Fed leader who will protect small businesses, ordinary investors, and the economy from misbehavior by big banks and financial corporations. We need a fierce regulatory watchdog, not a lapdog of the banks.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Rick McGahey.

ADVERTISEMENT
Part of complete coverage on
December 25, 2014 -- Updated 0633 GMT (1433 HKT)
Danny Cevallos says the legislature didn't have to get involved in regulating how people greet each other
December 23, 2014 -- Updated 2312 GMT (0712 HKT)
Marc Harrold suggests a way to move forward after the deaths of NYPD officers Wenjian Liu and Rafael Ramos.
December 24, 2014 -- Updated 1336 GMT (2136 HKT)
Simon Moya-Smith says Mah-hi-vist Goodblanket, who was killed by law enforcement officers, deserves justice.
December 24, 2014 -- Updated 1914 GMT (0314 HKT)
Val Lauder says that for 1,700 years, people have been debating when, and how, to celebrate Christmas
December 23, 2014 -- Updated 2027 GMT (0427 HKT)
Raphael Sperry says architects should change their ethics code to ban involvement in designing torture chambers
December 24, 2014 -- Updated 0335 GMT (1135 HKT)
Paul Callan says Sony is right to call for blocking the tweeting of private emails stolen by hackers
December 23, 2014 -- Updated 1257 GMT (2057 HKT)
As Christmas arrives, eyes turn naturally toward Bethlehem. But have we got our history of Christmas right? Jay Parini explores.
December 23, 2014 -- Updated 0429 GMT (1229 HKT)
The late Joe Cocker somehow found himself among the rock 'n' roll aristocracy who showed up in Woodstock to help administer a collective blessing upon a generation.
December 23, 2014 -- Updated 2115 GMT (0515 HKT)
History may not judge Obama kindly on Syria or even Iraq. But for a lame duck president, he seems to have quacking left to do, says Aaron Miller.
December 23, 2014 -- Updated 1811 GMT (0211 HKT)
Terrorism and WMD -- it's easy to understand why these consistently make the headlines. But small arms can be devastating too, says Rachel Stohl.
December 22, 2014 -- Updated 1808 GMT (0208 HKT)
Ever since "Bridge-gate" threatened to derail Chris Christie's chances for 2016, Jeb Bush has been hinting he might run. Julian Zelizer looks at why he could win.
December 20, 2014 -- Updated 1853 GMT (0253 HKT)
New York's decision to ban hydraulic fracturing was more about politics than good environmental policy, argues Jeremy Carl.
December 20, 2014 -- Updated 2019 GMT (0419 HKT)
On perhaps this year's most compelling drama, the credits have yet to roll. But we still need to learn some cyber lessons to protect America, suggest John McCain.
December 22, 2014 -- Updated 2239 GMT (0639 HKT)
Conservatives know easing the trade embargo with Cuba is good for America. They should just admit it, says Fareed Zakaria.
December 20, 2014 -- Updated 0112 GMT (0912 HKT)
We're a world away from Pakistan in geography, but not in sentiment, writes Donna Brazile.
December 19, 2014 -- Updated 1709 GMT (0109 HKT)
How about a world where we have murderers but no murders? The police still chase down criminals who commit murder, we have trials and justice is handed out...but no one dies.
December 18, 2014 -- Updated 2345 GMT (0745 HKT)
The U.S. must respond to North Korea's alleged hacking of Sony, says Christian Whiton. Failing to do so will only embolden it.
December 19, 2014 -- Updated 2134 GMT (0534 HKT)
President Obama has been flexing his executive muscles lately despite Democrat's losses, writes Gloria Borger
December 18, 2014 -- Updated 1951 GMT (0351 HKT)
Jeff Yang says the film industry's surrender will have lasting implications.
December 18, 2014 -- Updated 2113 GMT (0513 HKT)
Newt Gingrich: No one should underestimate the historic importance of the collapse of American defenses in the Sony Pictures attack.
December 10, 2014 -- Updated 1255 GMT (2055 HKT)
Dean Obeidallah asks how the genuine Stephen Colbert will do, compared to "Stephen Colbert"
December 18, 2014 -- Updated 1734 GMT (0134 HKT)
Some GOP politicians want drug tests for welfare recipients; Eric Liu says bailed-out execs should get equal treatment
December 18, 2014 -- Updated 1342 GMT (2142 HKT)
Louis Perez: Obama introduced a long-absent element of lucidity into U.S. policy on Cuba.
December 16, 2014 -- Updated 1740 GMT (0140 HKT)
The slaughter of more than 130 children by the Pakistani Taliban may prove as pivotal to Pakistan's security policy as the 9/11 attacks were for the U.S., says Peter Bergen.
ADVERTISEMENT