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Home Publications Blogs Beat the Press NYT Tells Readers Larry Summers Too Ineffectual as Treasury Secretary to Get Attention to Regulatory Efforts (see Correction)

NYT Tells Readers Larry Summers Too Ineffectual as Treasury Secretary to Get Attention to Regulatory Efforts (see Correction)

Wednesday, 14 August 2013 05:06

The supporters of Larry Summers drive to be Fed chair are desperately trying to rewrite history so that this world class champion of financial deregulation was actually a prescient supporter of tighter regulation all along. Exhibit A in this historical rewriting is a report on predatory lending that the Department of Housing and Urban Development (HUD) and the Treasury Department put out in 2000, when Summers was Treasury Secretary. The report is featured as an example of Summers' commitment to regulation in a NYT article comparing Larry Summers' and Janet Yellen's record on regulation.

The report contains many sound recommendations about requiring lenders to better disclose terms of loans, limiting loan flipping, and sharply restricting the use of prepayment penalties. The article tells readers:

"The report recommended modest changes in federal law but Congress, then controlled by Republicans, made none. The Fed and other banking regulators also ignored the findings."

If readers are unfamiliar with this history of Larry Summers as a crusader for regulations protecting consumers, they can be forgiven. Summers was apparently unable to get even a single mention for this report in the New York Times in the month it was issued. Furthermore, it is inaccurate to imply that the report was a major departure from views held at the time by all Republicans or even Federal Reserve Board Chairman Alan Greenspan.

A NYT article from April 2, 2000 began by telling readers:

"After several years of inaction, pressure is building in Washington to impose tighter rules on banks and finance companies that specialize in lending money to homeowners with blemished credit records.

"Representative Jim Leach, the Iowa Republican who is chairman of the House Banking Committee, said last week that his committee would be pressing for more vigorous enforcement of a law adopted in 1994 to combat deceptive lending practices, and may do more."

Later the piece added:

"all four federal banking regulators -- including Alan Greenspan, chairman of the Federal Reserve -- had spoken out against deceptive lending practices, and some are beginning to develop new regulations."

The piece then goes on to cite comments from Franklin Raines, then the CEO of Fannie Mae, about cutting off access to funds to abusive lenders. It then tells readers;

"Wall Street, where Fannie Mae is a formidable voice, is also sensitive to the views of Mr. Greenspan. And he, too, recently condemned predatory lending practices.

"'Although markets have 'vastly expanded credit to virtually all income classes,' Mr. Greenspan said in a speech on March 22, he was concerned about 'abusive lending practices that target specific neighborhoods or vulnerable segments of the population.'

"The Fed has formed a multiagency study group to explore ways to address predatory lending, aides to Mr. Greenspan said."

In short the report that the Treasury Department co-authored with HUD under Summers leadership was largely repeating warnings that even the arch-deregulators were also making at the same time. He apparently did not view the issue as important enough to draw even minimal press attention to the report. 

The article also notes Summers' role in stifling Brooksley Born's effort to regulate derivatives as head of the Commodities and Futures Trading Commission. It reports the defense of Summers' allies:

"But he and his supporters have maintained that the failure occurred because the use of derivatives changed over a decade in ways that they did not anticipate."

Actually, the idea that derivatives could pose a threat to financial stability should not have been a surprise to sentient beings even in the late 1990s. Alan Greenspan said that he felt it was necessary for the Fed to intervene in the collapse of Long-Term Capital Management in September of 1998 in order to preserve the stability of financial markets. Long-Term Capital had been heavily involved in derivative markets at the time, which should have provided some hint as to ability to create instability for the financial system.



The report was actually released in June of 2000, not April. Its release did get an unattributed 6 paragraph story in the New York Times, with no mention of Summers.


Comments (3)Add Comment
shocked shocked...
written by pete, August 14, 2013 9:21
Raines et al. fought increased scrutiny of lending. Do not mistake public comments with behind the scenes action. (You always say). Instead follow the money. Fannie and Freddie profited well from lax regulation which they lobbied for. Increased scrutiny was fought by inner city congressmen and congresswomen (recipients of substantial F&F Lobbying). So, it is hard to lay all this on Summers/Greenspan/Rubin/Clinton..Frankendodd and Shumer were in the loop too. Increased calls for scrutiny, such as requiring F&F to register their securities with the SEC were fought hard by F&F through their bought congresspeople.
Is Summers Too Smart to be Fed Chair?
written by Robert Salzberg, August 14, 2013 10:35
Summers said that regulating derivatives would cause a financial disaster and so he stopped it. I can't get inside Summer's head but I think it is because he's too smart.

Derivatives are designed to shift risk. Alan Greenspan claimed that derivatives reduced risk. He was wrong.

Instead of being super smart like Greenspan and Summers and figuring out new theoretical solutions to old problems, what's called for right now is old solutions to old problems.

Fannie is a good example. Fannie was created because of Free Market failure and functioned as designed for decades. Because of deregulation and not recognizing a $6 trillion dollar housing bubble, Fannie went bust due to Free Market failure so we got her back. But now that Fannie and Freddie are solvent and making money we must, must, must give Fannie back to the Free Market because the Free Market is smarter than the government?

The backing of mortgages by the U.S. is a direct subsidy for mortgages. Subsidizing mortgages stabilizes the housing market and helps control long term interest rates. A win, win for Americans. The old system of having banks write the mortgages and then sell them to Fannie and then Freddie packaging them and having the Free Market buy them up worked just fine as long as housing prices didn't get grossly inflated which any economist based on empirical data instead of theory would have noticed but few besides Dr. Dean Baker did because they were "too smart". Mortgage fraud was systemic and widely known. Yet the "smart" people knew, knew, knew that there was no housing bubble because their theory was right and you just weren't smart enough to understand.
salzberg....housing has not been a free market for years...
written by pete, August 14, 2013 6:35
"Win win" wow. Please elaborate on the market failure. Seems that this is just a grab by the homebuilders. Somehow this shift of resources into Mac Mansions makes everyone better off? I am so confused. When Fannie and Freddie fight for reduced regulation, and then collapse because of it, what are we to make of that. It was not free marketers, it was most clearly crony capitalism.

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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.