Why Larry Summers Track Record of Failure Actually Helps His Fed Nomination

Why Larry Summers Track Record of Failure Actually Helps His Fed Nomination

December 10, 2019 16 By Kailee Schamberger


JAISAL NOOR, TRNN PRODUCER: Welcome to The
Real News Network. I’m Jaisal Noor in Baltimore. And welcome to this latest edition ofThe
Black Financial and Fraud Report
. Now joining us is Bill Black. He’s an associate
professor of economics and law at the University of Missouri-Kansas City. He’s a white-collar
criminologist, a former financial regulator, and author ofThe Best Way to Rob a Bank
Is to Own One
. He’s also a regular contributor to The Real News. Thank you so much for joining us, Bill. BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW,
UMKC: Thank you. NOOR: So, Bill, what do you have for us this
week? BLACK: So we actually have a discussion of
regulation, which is quite amazing, because there hasn’t been much of any serious discussion
of regulation. It’s in the context of this silly thing about Larry Summers and Janet
Yellen and such. But I–caused me to look back at Larry Summers,
not in terms of what he did in terms of deregulation, but what was his explanation for why he did
it, what’s his theory, in other words, of regulation. And it comes down to brilliance
versus, in his phrase, idiots. And, of course, the classic example that he
gave was in creating the regulatory black hole known as the Commodity Futures Modernization
Act of 2000, which he was all in favor of. And this is to remove all regulatory authority
over these complex financial derivatives. What’s his rationale? His rationale was that
both sides to the contract, both typically corporations, were financially sophisticated.
And because both corporations were financially sophisticated, fraud couldn’t occur. And so what he’s missed, of course, is that
corporations don’t make decisions and they don’t implement decisions–people do. And
the officers could be quite sophisticated, and they could be ripping off the corporation
and the firm, which is precisely what we saw all through this crisis. So in the first level, Summers has forgotten
that it’s not a question of intelligence; it’s the fact that the only people that can
protect the corporation from loss are the very senior officers who are looting the corporation.
So he missed it, I argue, on that whole concept of intelligence. But he goes beyond that. He explains why he
didn’t believe in modern finance. And this is something that he got some credit for,
indeed should get some credit for, because, after all, the UChicago folks were even crazier.
They had this view of markets of always self-correcting and always being on the direction towards
perfection. And Larry Summers’ position was that that was wrong. But if you look back
at why, he actually said it this starkly in a meeting: there are idiots. In other words,
markets would be efficient but for idiots. And, again, this misses the entire concept
of fraud by sophisticated CEOs. So it’s consistent with his general view that IQ is what all
of this is about. And his final example is that he wants the
regulators, the financial regulators to be given the equivalent, if you think of them
as doctors, of only bone saws, things, you know, that are really rough and ready, no
precision, certainly no scalpels, and certainly no laser surgery, because regulators aren’t
very bright, whereas the industry is really bright and therefore will always be ahead
of the regulators–except that’s that’s not true. It certainly wasn’t true in the savings
and loan debacle, where the markets got it wrong consistently. It certainly wasn’t correct
in the Enron era, where they got it wrong consistently. And it wasn’t correct in this
one. Indeed, there’s testimony in front of the Financial Crisis Inquiry Commission that
the Federal Reserve economists–and these are guys who really wanted the markets to
be smarter than the regulators–did a study, and they couldn’t find a single example. There’s
also testimony from the head of the office of the comptroller of the currency, another
guy who didn’t believe in regulation, who said, well, the only guys in our shop that
got it right were the little guys, the examiners, who, of course, are closest to the facts. So Summers, with this really arrogant view
that intelligence is everything and that regulators can’t be very bright, consumers can’t be very
bright, and that the industry is composed of all geniuses, has missed every fundamental
dynamic of what’s critical to regulation, what’s critical to enforcement, and what’s
critical to preventing crimes. NOOR: And, Bill, yet it still seems like he’s
a frontrunning candidate for this position. BLACK: Yeah. I have another piece. I have
one piece on this brilliance, but another very recent piece on the fact that there’s
a steady campaign of leaks that’s trying to denigrate one of President Obama’s rare senior
women appointees, Janet Yellen. And, of course, the leaks are coming from Obama’s White House.
Why he would attack his own appointee who is getting brilliant track record, it’s beyond
me. But it turns out that Clinton–that was an
appropriate mistake–Obama’s economic team is just like Clinton’s economic team. It is
composed–the top leadership, which is six folks, is composed entirely of Rubinites,
and, of course, the leading Rubinite these days is Larry Summers. So it’s no surprise
that the White House economic team is all for Larry Summers. And, you know, they got
appointed as head because they have such a terrible track record, but they’re willing
to say whatever the administration wants said. NOOR: Bill Black, thank you so much for joining
us. BLACK: Thank you. NOOR: And thank you for joining us on The
Real News Network.