CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Larry Summers and Financial Crises: Is He Being Graded on Attendance?

Larry Summers and Financial Crises: Is He Being Graded on Attendance?

Thursday, 01 August 2013 08:01

According to Ezra Klein, a major plus in the case for Larry Summers as Fed chair is his experience dealing with financial crises. While it is true that he took a leadership role in dealing with far more crises than Janet Yellen, the other leading contender for the job, it is hard to believe that his record in this area would be a plus if he was being graded by the outcomes.

Starting with the Mexican peso crisis in 1994, Summers helped to negotiate a deal that protected big investors in Mexico's debt, like Goldman Sachs. Mexico suffered a severe downturn in the immediate aftermath of the crisis and has had the slowest per capita GDP growth of any country in Latin America in the two decades since the crisis. That one doesn't look like much of a success story.

Then we can go to the East Asian financial crisis in 1997. As even the IMF now admits, Summers and the rest of the Committee to Save the World (CSW) largely misdiagnosed the crisis. They saw it as a problem of economies that were badly misbalanced as opposed to being largely an issue of liquidity and confidence. Malaysia broke with the IMF and applied capital controls, which were roundly rejected by Larry Summers, and managed to escape some of the worst effects of the adjustment.

The deal for the East Asian countries was that they had to repay their debts in full. In order to do so, the currencies of the countries in the region plummeted against the dollar and their exports to the U.S. soared.

It was not only East Asian countries that hugely increased their exports to the United States. Because of the harsh terms imposed by the Summers-IMF gang, developing countries throughout the world began to accumulate foreign exchange (i.e. dollars) like crazy as insurance, so that they would not be put in the same situation as the East Asian countries in dealing with the IMF.

This led to a huge run-up in the dollar. That in turn caused the trade deficit to explode, reaching a peak of almost 6.0 percent of GDP (@$960 billion in today's economy) in 2006. The trade deficit has been the fundamental imbalance in the U.S. economy. It means that a huge amount of the income generated in the United States is being spent overseas rather than creating demand domestically.

In the 1990s this hole in demand was filled by the demand generated by the stock bubble. In the last decade it was filled by the demand generated by the housing bubble. Currently the demand gap is being partially filled by the budget deficit and partially going unfilled, leaving millions unemployed. This outcome hardly seems like an item to put on Summers' boast sheet.

Finally we have Summers' role in the 2008-2009 financial crisis. Summers was one of the people who pushed the Democrats in Congress to accept the no (real) conditions TARP bailout given to them by Henry Paulson. Once in the White House he was the staunch defender of the bankrupt banks belligerently challenging anyone who proposed letting the market work its magic and put these behemoths out of our misery. As a result of Summers' work the too big to fail banks are bigger and more profitable than ever.

In fact, if we want a serious assessment of Larry Summers performance as a crisis manager we might ask what happens when countries don't take his advice. Probably the best example in this category would be Russia in 1998. The CSW had been struggling with the Yeltsin government for years to keep them paying their bills and maintain the ruble's link to the dollar. In the summer of 1998, Yeltsin gave up the effort. He abandoned the link to the dollar and temporarily defaulted on Russia's debt.

The word from the Summer's crew, which was dutifully repeated in the business press, was that Russia's economy would go down the tubes. While it did fall sharply in 1998, it made up all the lost ground in 1999 and then grew by more than 10 percent in 2000. In fact, Russia enjoyed a decade of exceptionally strong growth before the economic crisis in 2009 finally sent it into recession. The Russians probably do not miss the wisdom of Larry Summers.

In short, if we look at Larry Summers track record in dealing with crises it is pretty abysmal. But on attendance, he gets an "A."

Comments (17)Add Comment
written by Chris Engel, August 01, 2013 8:59
Nice dose of reality. The case against Summers is overwhelming. He's simply not qualified to be Fed chair. He underestimated the depth of the crisis and thus helped deliver a suboptimal stimulus. He's a deregulatory nut who will continue the Greenspanesqe "what regulatory and supervisory role?" attitude toward the Fed's responsibilities, and we can't afford that mentality. Yellen is more qualified, so is Romer, so are a number of other individuals. Summers' political insider status could set us back to the days of Arthur Burns in terms of Fed independence.

It's a shame that certain self-serving co-authors of Larry Summers' from Berkeley can't find the integrity to support the superior candidate for Fed chair. I guess the opportunity to say you worked with a Fed chair is too good of a career highlight to not attempt to influence.
Case against Janet Yellen
written by JayR, August 01, 2013 9:20
Larry Summer's competition is Janet Yellen. The problem with Janet is she may want to confront the new housing bubble that is emerging. Parts of Wall street and Washington DC may not want someone who might be tempted to warn the public and take action against bubbles.
written by medgeek, August 01, 2013 9:26
Don't forget the self-inflicted wounds (blacks, women) when he was president.
written by kharris, August 01, 2013 9:47
As regards the Mexican Peso crisis, the first job of any US official is to protect US interests, not to foster Mexican growth. That doesn't mean Mexican growth is of no interest. Immigration, trade and other issues with Mexico are driven partly by Mexican economic performance. A guy who pretends to think deeply about policy and the wider world cannot be let off the hook for the secondary effects of his actions. The question is, how much did he do for US interests at the time to balance the bad effect of slow Mexican growth since then? And how much of slow Mexican growth is actually the result of US policy during the peso crisis?

The East Asian episode is pretty straight-forward. Summers (and Geithner) got just about everything wrong that could have been gotten wrong, and did so by being conventional thinkers. (Gasp!) Not the sort of performance that suggests these guys are all that much smarter than the rest of us outside of DC policy infighting. (Let's admit, though, that DC policy infighting is what gets you esteem where it matters. Sorry, Janet.) And, yeah, the links in the causal chain right through to slow US wage growth, excess mortgage borrowing and the crash are clear.

In the Russian case, it is again a question of whether keeping Russia paying its debts was good for the US. Summers was not responsible for Russian welfare. I don't have any clear notion of how to answer that question.
Larry Summers, Mexico and the US illegal immigration problem...
written by David Helveticka, August 01, 2013 9:49
Thanks for the synopsis on Larry Summer's career---his policies created dislocation and disaster on everything he got involved with.

You don't mention one of consequences of his bailout of Goldman Sach's failed investments in Mexico: the huge economic refugee problem the US calls "illegal immigration"...if the US had propped up Mexico instead of GS, would we have the huge flood of economic refugees from Mexico that now populate our neighborhoods and businesses?
written by Mike, August 01, 2013 11:11
Did he have anything to say about Argentina's default? If not, might he get an A- for attendance. I mean, that one was pretty big, right?
written by TK421, August 01, 2013 11:21
Larry Summers deserves credit for his experience dealing with the financial crisis of 2008. Of course, he helped cause that crisis in the first place by pushing for deregulation of derivatives contracts.
written by Last Mover, August 01, 2013 12:20

As Paul Krugman says, Larry Summers is a whip smart academic which may be a necessary but certainly not a sufficient condition for strategic and judgemental wisdom in a political jungle, much less a crisis.

The way Dean Baker lays it out here, Summers was in lockstep with Robert Rubin setting up the housing bubble, then when it blew up in his face he panicked and rescued the very criminals who crafted it, twisting the economic knife deep in the aftermath by looking the other way in the face of mass unemployment.
Housing Bubble
written by jonny bakho, August 01, 2013 12:48
Summers and Rubin may have laid some of the groundwork for the housing bubble. But it really blew up on the watch of GW Bush and Alan Greenspan. Paul O'Neill and John W Snow were in the mix during the big blow up but no one criticizes them for their anti regulatory stance or refusal to sound the alarm. As late as 2005, Snow was blathering about the impossibility of a housing price collapse. Bush was a huge cheerleader for home ownership and set higher targets for home ownership than were realized.

Better fiscal policy and regulatory after the 2001 recession could have made the 2008 fiscal crisis less of a problem. Fiscal policy was skewed toward tax cuts for the wealth and regulatory policy was gutted and regulations unenforced.
Summers and Russia's 1990s
written by PJR, August 01, 2013 1:49
I am glad to see somebody mention this period of time. I believe Summers had a key influential role, beginning roughly in 1992, in arranging for and backing-up (from within the government) US "advice" to Russia on how best to transition their economy. The likely impact of recommended policies on ordinary people was foreseeable, but Summers and his fellow-brilliant economist colleagues appear not to have given such considerations much if any weight. And the political consequences were large. This ancient history is relevant insofar as it bears on the broad question of whether Summers today has a better understanding of the role and purpose of economic policy--one of several reasons to question his qualifications for any powerful government position. I'm hoping that Obama recognizes this--after all, in discussing his selection criteria, he began with "The idea is to promote those things in service of the lives of ordinary Americans getting better."
written by Xelcho, August 01, 2013 3:36
Insofar as I can tell, Summers is simply disqualified. As Dean clearly illustrated he is a complete fail, kinda like a bizzaro version of King Midas. While this clearly does not mean he wont be selected to be fed chairman, it should be noted. When it comes to out and out failure, the best is Greenspan, but that is for another day. Seeing as President 0 installed the fresh prince of jackass, aka Geithner, why not finish the job with a true Jackass like Summers?

All of our plebeian whining will not stop the elites from making sure they are protected. I think we can all agree that the chances of Yellen getting the position are questionable at best.
Missing the point
written by Blue Meme, August 01, 2013 7:03
Of course Summers is qualified. In each of the examples listed above, didn't Summers side with the Masters of the Universe?

If there is another relevant criteria, I am unaware of it.
written by adb, August 01, 2013 10:28
How come nobody is talking about the notorious Andrei Shleifer affair, which involves criminal wrongdoing by Harvard cronies in Russia, and a cover-up, including a whopping $22 mill fine/penalty paid by Harvard and orchestrated by, yes, the usual Harvard suspect- SUMMERS!
Applebaum in Economix ignores Krugman, Baker, Konczal, & pimps Summers
written by JaaaaayCeeeee, August 02, 2013 1:56

NYT for master of Universe, ignoring Krugman, Baker, Konczal, & pimping Summers

actually says Janet Yellin's record on regulation deserves mixed reviews, and that Larry Summers' disappoints only libtards. Arrgh

Done Deal
written by Azimir, August 02, 2013 8:23
Seems to be a done deal. Larry got job.

By the way, I thought that "liberal media" was something only republicans used, but I guess Obama has no problem relying on it when it fits him. Yeah, I voted for him twice, mediocrity is still better then pure monstrosity.
written by Bob, August 02, 2013 10:53
Just look at who the winners were in all those decisions. The wealthy interests won, at a wave of costs to working people both here and abroad.

Any real question why he's a top candidate?
written by http://bankcardsacsguess.blogcindario.com/2013/08/00002-bank-card-sacs-guess-assistance-that-will-assist-you-with-your-spending-budget.html, August 06, 2013 12:09

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.