The Return of Larry Summers?
According to accounts in the business press, there is a campaign among Washington insiders to get Larry Summers appointed as Ben Bernanke’s replacement as Federal Reserve Board chair. This could end up being the scariest horror movie of the summer.
It is bizarre that Summers would be seriously considered as the next Fed chair if for no other reason that there is an obvious replacement for Bernanke already sitting at the Fed. Janet Yellen, the vice-chair, has in the past served as the president of the Federal Reserve Bank of San Francisco, a member of the Board of Governors in the 1990s and head of President Clinton’s Council of Economic Advisers. She also has an impressive academic background, having been a professor at both Berkeley and Harvard.
No woman has ever served as chair of the Fed and Yellen would be an obvious choice to break the barrier. She also has been a consistent advocate of expansionary Fed policy focused on reducing unemployment. In terms of people who could plausibly make the short list for Fed chair, it is difficult to imagine a better choice than Yellen.
But even if President Obama were to decide for some reason not to promote Yellen to Bernanke’s position, it is difficult to see why Summers would be the alternative. Memories tend to be short in Washington, but those of us removed from elite circles know that Summers’ policies played a central role in setting up the economy for the crash that got us where we are today.
Summers was a key actor in the Clinton economic team that pushed for bigger and less regulated banks. He was there for the repeal of Glass-Steagall. He was also among those hectoring Brooksley Born, when the then head of the Commodity Futures Trading Commission argued that it would be a good idea to regulate derivatives. And he famously ridiculed as Luddites those warning of the risks of financial deregulation at the Fed’s Greenspanfest in 2005.
Even more important than his role in pushing financial deregulation is the fact that Summers played a direct role in promoting the imbalances from which the economy continues to suffer. The trade deficit was relatively modest through President Clinton’s first term in office, averaging just over 1 percent of GDP.
This changed dramatically in 1997 following the East Asian financial crisis. The basic story was fairly simple. The crisis knocked the fast growing economies of the region off their feet. South Korea, Thailand, and the other economies of the region saw a massive capital flight as creditors rushed to take their money home.
The IMF, acting under the direction of then Treasury Secretary Robert Rubin, Federal Reserve Board Chair Alan Greenspan, and Rubin’s top assistant Larry Summers, agreed to a bailout, but only with harsh conditions. They required the East Asian countries to pay back their debts in full. In order for this to be possible, the currencies of the region plunged in value against the dollar. This made their goods very cheap and allowed them to hugely increase exports to the United States.
Seeing the harsh terms imposed by the I.M.F. on the East Asian countries, developing countries throughout the world decided that they must protect themselves by accumulating vast amounts of reserves. This meant lowering their currencies against the dollar so that they could run large trade surpluses.
The resulting run-up of the dollar was the cause of the huge trade deficits the United States has seen over the last 15 years. The trade deficit peaked at almost 6 percent of GDP ($960 billion in today’s economy) in 2006, as the over-valued dollar made U.S. goods and services less competitive in the world economy.
The huge trade deficit created a gap in demand that was filled by the stock bubble in the late 1990s and the housing bubble in the last decade. Since the collapse of the housing bubble, much of the demand gap has been filled by the budget deficit. The need to fill the hole in demand created by the trade deficit has been the economy’s central problem over the last 15 years. And this problem has LARRY SUMMERS written all over it.
This fact alone should be sufficient to keep Summers safely removed from anything resembling a position of power well into his next life, but there’s more. Summers has been very close to the financial industry, pocketing millions of dollars in fees for speaking and consulting. Would this affect his willingness to put an end to Wall Street’s too-big-to-fail subsidy as Fed chair?
Even Summers’ successes are failures. The business press often touts his role in the bailout of Mexico following the peso crisis in 1994. Those of us with access to IMF data know that Mexico has had the lowest per capita GDP growth of any major country in Latin America over the last two decades.
There has been more talk of “the new Larry Summers” than the new Dick Nixon. Maybe such an animal exists, but those of us who remember the old Larry Summers would like to keep anyone with that name far away from the levers of power for a very long time.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.