Larry Summers, the Next Fed Chairman?
When mainstream press outlets, like the New York Times, Wall St. Journal, CNN money and others, issue front page articles on a topic related to the government more or less simultaneously, it usually means they have received confidential, not-yet-for-publication notice from the government of decisions made but temporarily embargoed. So it was on September 5, 2013, that all the above noted media sources printed lead stories on Larry Summers’ candidacy for the chair of the Federal Reserve Bank. The stories have continued to appear, with the New York Times editorial page on September 6, 2013 going so far as to say “Mr. Obama is expected to announce his nominee soon…”
Is an announcement of Summers’ appointment to replace current Fed chairman, Ben Bernanke, therefore imminent?
This writer has been predicting for weeks that Summers was the heavy ‘odds on favorite’ for appointment by President Obama to replace Bernanke for several reasons.
Is A Summers’ Appointment Imminent?
Summers’ appointment may come more quickly than some think. Again, the surge of front page press articles and talking heads electronic commentary in recent days suggests it may be imminent. While current Fed Chairman, Bernanke, doesn’t officially leave until next January 2014, Obama needs to ensure there is time for the new Fed Chair’s Senate confirmation.
Then there’s the need for Obama to get his full economic team on board before the coming fight over the debt ceiling with House Republicans begins in earnest again in October 2013. Emerging Markets economies are pressing hard for a quick decision on the Fed chair to reduce the uncertainty concerning the Fed’s reported plans to ‘taper’ its $85 billion a month free money injections into the global banking system. That pending decision, and the delay, has been causing severe economic stress among many economies, like India, Indonesia, Turkey, Brazil and others. International developments perhaps slowing the decision process include Syria. But there’s little reason to assume even that will significantly delay, and may even accelerate, Obama’s decision on a Fed Chair nominee—including Summers.
The likelihood that that nominee will be Summers is further supported by the widespread and deep endorsement for Summers by Obama’s ‘old boy’ network. It has been reported, for example, that current Treasury Secretary, Jack Lew, former advisor, Obama former chief of staff, David Axelrod, Rahm Emmanual, and McDonough, Obama’s current chief of staff, all have expressed to Obama that Summers is their preferred choice for Fed Chair.
Finally, and perhaps most importantly, it should be remembered that no one gets appointed to Fed chair, or the key New York Fed district governor, without a green light pre-approval from bankers, finance, and institutional investors. And Larry has been their ‘boy’ for decades. He has consistently proposed programs, taken positions, made recommendations, and always acted in their interests, even when doing so has meant an about face in policies and recommendations he’s made. For that, he’s been nicely rewarded over the years in terms of career advancement and income.
Summers’ Public ‘Service’ Record
An academic economist in name only, Summers started out his government career early in the Reagan administration, his early academic work arguing strongly in favor of corporate tax cuts and opposition to improving unemployment insurance benefits endearing him to the pro-business, free market Reaganites. After his Reagan years, he assumed the top role in the World Bank—a very nice preparatory appointment preparing him for even bigger things to come. He then joined the Clinton administration in the early 1990s as assistant secretary of the Treasury, serving as hatchet man for then secretary of the Treasury, Robert Rubin, a top dog at Citibank loaned to government in the early Clinton years to ensure that Clinton cut welfare and government spending and to ensure long term bond rates were reduced. The lowering of bond rates contributed much to the subsequent speculation in Asian financial markets later in the Clinton administration that resulted in the ‘Asian Meltdown’ financial crisis of the late 1990s. Larry rode shotgun for the banks in that event, making sure the US government and Federal Reserve bailed the US banks—Citibank and friends—who speculated heavily in Asian currencies and loans and then were covered for their losses by the US Treasury and Fed when the bust came.
Promoted to Treasury Secretary at the close of the Clinton years, Larry then played a central role, on behalf of the bankers again, to ensure the repeal of what was left of the Glass-Stegall Act in the late 1990s. He was also centrally instrumental in the passage of the Gramm-Bliley and Commodity Futures Trading Acts, two pieces of legislation that deregulated derivatives and other financial instruments, set the stage for the subprime mortgage bust in 2006-07, while also setting in motion repeated spikes in commodity prices (including oil) for the next decade that decimated household incomes.
Leaving the Clinton team with the advent of the Bush II administration in 2001, Larry then went out to make a lot of money, to cash in on his ‘good service’ to the banksters. He joined the big Hedge Fund (shadow banking) firm, D.E. Shaw, and also served as director on, and consultant to, other funds and financial institutions. He made speeches to business groups and conferences, for which he was compensated nicely. That’s how politicians are amply rewarded in corporate dominated government America.
He continued these lucrative appointments while serving unremarkably as president of Harvard University; that is until the liberal professors ganged up on him—not for anything he had done before for the banksters or for holding positions on boards of companies as he served as University president—but for being insensitive to womens’ issues. But that was no big deal. Harvard was just a ‘holding pen’ for him in between government jobs anyway.
With Obama’s election in 2008, Summers was immediately brought on board again. Speculation arose that he expected either the Treasury Secretary or Federal Reserve Chair position appointments. But in the midst of the worst period of the financial meltdown of 2008-09, he was asked by Obama, and accepted, the role of Obama’s number one economic advisor—taking precedence over the Chair of the Council of Economic Advisors, Christina Romer, whose position typically has played that role.
In this role as chief advisor to Obama, Summers was reportedly the key architect of Obama’s first Economic Recovery Program, a package of $787 billion fiscal measures, tax cuts and government spending. This fiscal stimulus was heavily overweighted on business tax cuts and subsidy payments to the states for one year—with no programs of any note to save the millions of homeowners being foreclosed at the time or to ensure jobs were created in exchange for the tax cuts and subsidies (which weren’t). The emphasis on business tax cuts showed Summers’ views on that topic had not changed much since his Reagan years.
In a New Yorker magazine article last year, it was reported how in early 2009 Summers argued in the Obama administration stronglly for a minimalist stimulus program—no more than $800 billion—again n composed mostly of business and investor tax cuts—as well as for a bail out of the banks that involved the Federal Reserve essentially writing a ‘blank check’ for the banks. He argued banks had to be bailed out first, at whatever the cost. But the rest of the economy could not spend more than $800 billion in fiscal stimulus, he further recommended to Obama. While others in the Obama administration—like CEA chair Romer—advocated inside the administration for more than a $1 trillion in fiscal stimulus, Summers insisted on the lowest ball stimulus. Even Congress initially proposed more than $900 billion. But the consumer tax cuts were largely stripped out from the Congress proposal in the final $787 billion package that Summers recommended, and President Obama chose to approve. (For a more detailed analysis of these details, see this writer’s 2012 book, ‘Obama’s Economy: Recovery for the Few’, Pluto press).
The barely 5% of GDP stimulus of $787 billion soon dissipated after a year, the economy relapsed in the summer of 2010, housing foreclosures spiked, job losses reappeared, the states ran out of their subsidies, and the US economy ‘bounced along the bottom’—and has continued to do so for the past five years.
Meanwhile, bankers and investors feasted on the more than $10 trillion in free money generously doled out by the Federal Reserve—in the form of five years of nearly zero interest rates and three editions of ‘quantitative easing’ (QE) Fed direct purchases of bad subprime and other bonds from investors, most likely bought at above prevailing market values for those securities. But the public will never know the exact price the Fed paid for the junk via QE, since the Fed refuses to reveal details even to Congress.
During his two years, 2009-10, in the Obama administration, Summers also played a key role in the housing non-recovery. The pittance that the Obama administration earmarked for homeowners’ bailout, less than $50 billion, in the form of his busted HAMP program, mostly went to banks as subsidy payments to bribe banks to lower mortgage interest rates. Of course the banks took the bribes, but preferred to offer the lower rates to new home buyers, instead of refinancing for existing homeowners. You can charge fees on the former and make still more money, while homeowners in foreclosure can be better ‘milked’ by letting them foreclose and collecting credit default swap bets previously place on them. More than 15 million foreclosures were the result.
Summers: Chameleon Economist of Corporate America
Summers was somewhere involved in all these policy fiascos—from the original $787 billion, business tax cut heavy stimulus, to the generous bankster bailouts, to failing to prevent the homeowner foreclosures (while subsidy mortgage lenders).
The point of this Summers’ policy history review is to show that Larry Summers has always done what the banksters have wanted—and he’ll do that again when appointed as Federal Reserve chair.
Therefore, contrary to what some pundits have been saying, there will be no ‘Summers Effect’ if he is appointed. Summers’ appointment will not spook the markets. Most assume it will happen. There will be no major departure under Summers from existing Fed policy under Bernanke.
There is no contradiction between what Summers as Treasury Secretary did for the banksters in the late 1990s in pushing financial deregulation and what Summers (or any future Fed chair) will do with QE and zero bound interest rates. Both result in rentier (i.e. super) profits for financial capitalists. In the former case, deregulation released banksters to achieve super profits by means of extraordinary asset price inflation; in the QE case, to achieve super profits by reducing interest costs to virtually zero, and by the Fed printing money, QE, to buy back bad subprimes at more than their busted market value (taking the ‘bad debt’ from private speculators onto its own Fed balance sheet.
Larry did their bidding back then, and if (when?) appointed, he’ll do it again. He’s always done it. And for that he’s been nicely rewarded over the years. In his latest personal financial records he admits a net worth of as much as $24 million. He didn’t accrue all that from his salary for service in government over the years, but from his connections to hedge funds and other corporate buddies.
Federal Reserve Policy: Past Failures & Future ‘Tail Risks’
The Fed soon plans to ‘taper’ its existing policy of QE after its next September 18 meeting. A Summers at the Fed helm will represent no major change from this. The Fed without doubt will taper later this year, but very very slowly. Instead of $85 billion a month in ‘free money’ for banksters, speculators, stock and bond traders, and the very high net worth individuals—i.e. those folks that drive the financial markets globally—the Fed may reduce that to $75 or $65 billion. Big deal. Or the Fed may try to indirectly cut back on the free money spigot by a policy of ‘reverse repos’ (don’t worry, no need to understand that financial legerdemain). But none of that will stop the banksters and company from using the remaining mountain of virtually free cash to speculate in stocks, junk bonds, foreign exchange, and derivatives to keep the ‘global money parade’ going.
The ‘wildcard’ in this monetary policy poker deck, of course, is what’s happening with the emerging markets right now. Just the talk of the Fed tapering has driven bond rates up by nearly 100% in the last few months. The 10 year T-Bond was 1.6% this past spring; it’s now 2.9% and will almost certainly go higher.
That rapid rate shift is now resulting in the trillions of dollars of Fed money injection of the past five years flowing into emerging markets, especially Indonesia, India, Brazil, Turkey and So Africa (now referred to as the ‘BITTS’). Now that mountain of liquidity (money) is flooding back to the US and Europe. That reversed flow—precipitated by the Fed’s upcoming QE policy shift—is resulting in currency collapse in these emerging markets, massive capital flight back to the west, worsening trade deficits, commodities price deflation, coming oil price inflation, and in turn what will prove a significant slowing of these countries’ real economies that will in turn further exacerbate all the above.
In other words, the locus of the global economic crisis is now quickly shifting—from Europe in particular to Asia, emerging markets, especially the BIITS.
This growing instability may result in the Fed moving toward a ‘tapering’ of QE even more carefully and slowly. But it doesn’t matter who’s leading the Fed. Whether Bernanke or Summers, or even someone else, the Fed policy will not change significantly. Again, forget any ‘Summers Effect’. Summers will do as he always has done for the banksters: ensured their interests are protected—whether offshore or in the US.
In conclusion, whomever assumes the role of Fed Chair—Summers, current Fed Vice-Chair, Janet Yellen, or some compromise candidate like Fed governor, Kohl—will have to address a new ‘tail risk’ domestically, as well as globally (e.g. emerging markets crisis).
The domestic tail risk may prove to be a US economy and economic recovery that is highly sensitive to interest rate hikes, already having risen more than 1% since June for mortgages and other loans. US monetary policy makers have experienced nearly five years during which lowering interest rates to record levels has produced very little recovery in the real economy—i.e. housing, jobs, or real investment in the US—even as those record low rates produced a boom and bubble in financial securities investments, in stocks, bonds, derivatives, etc.
It may soon be revealed that the US economy is extremely sensitive to increases in interest rates, just as it has been largely insensitive to reductions in interest rates the past five years. The markets having become addicted to free money and super-low rates for five years may act like junkies without their fix if the Fed goes ‘cold turkey’ on them. If so, and interest rates in the US rise even moderately, then the US economy’s latest tepid rebound will quickly result in yet another ‘relapse’.
But no fear. Summers as chair will then respond appropriately, no different than has Bernanke his predecessor. The Free Money spigot will be re-opened to the max once again by the Fed to protect investors and speculators—and emerging markets be damned. If there is such a thing as a ‘Summers Effect’, it will prove a rehash of the ‘Bernanke Effect’.
Jack Rasmus is the author of the book, “Obama’s Economy: Recovery for the Few”, published by Pluto Press, London, April 2012. He is the host of the weekly internet radio show from New York, ‘Alternative Visions’, on the Progressive Radio Network, prn.fm. His website is www.kyklosproductions.com and he blogs at jackrasmus.com. His twitter handle is drjackrasmus.