Fed Chairman Ben Bernanke will be out of a job in a couple months, and rumors have continued to swirl about who will take over the most powerful job in the world.
A few weeks back, we mentioned that Janet Yellen was poised to take control of the Bernanke Helicopter.
But news that Larry Summers has his eye on the job is now trickling out…
This would be a disaster for a number of reasons, among them being the fact that Summers was a chief architect in a piece of legislation that may have singlehandedly allowed the subprime crash.
He’s also championed dumping toxic waste in poor countries and lost a billion dollars of Harvard’s money, all the while raking in millions of dollars from Wall Street fat cats.
He’s an Insider of the highest magnitude. Republicans will have no shortage of ammo if Summers is brought in front of Congress for confirmation… in fact, Obama himself was known to refer to Summers as “Dr. Kevorkian”…
So let’s start this good, old-fashioned character assassination off in chronological order:
|Position||Chief Economist at the World Bank|
|Scandal||The “Toxic Memo”|
While serving as the chief economist of the mighty globe-dominating World Bank, Summers sent what could arguably be called the most heartless memo in history.
The now infamous “toxic memo” Summers sent to the World Bank, where he made the case that we should be migrating pollution and toxic waste to poor countries: “I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.”
Here are the memo’s most heartless points (emphasis mine):
DATE: December 12, 1991
FR: Lawrence H. Summers
‘Dirty’ Industries: Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Least Developed Countries]? I can think of three reasons:
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I’ve always thought that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City.
3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostrate[sic] cancer is obviously going to be much higher in a country where people survive to get prostrate[sic] cancer than in a country where under 5 mortality is 200 per thousand.
Essentially, Summers claims that because it’s cheap, because the people don’t live very long, and because they haven’t polluted their country as we have, we should dump all of our toxic waste on them. Very compassionate.
Summers claims the memo was meant as sarcasm.
Even if you believe him, the complete lack of empathy is startling. I love me some inappropriate humor, but sending memos on the World Bank stationary is a bit different than telling off-color jokes at the bar with your buddies.
But instead of becoming a pariah for such ridiculous comments, Bill Clinton decided to appoint him as Treasury Secretary! It was during this period that Summers did the most damage to the U.S. economy. And he acted fast…
|Scandal||Repeal of Glass-Steagall|
Summers was a major force for repealing Glass-Steagall, which stripped banking regulations and made the subprime mortgage collapse possible.
The Gramm-Leach-Bliley Act (aka the Financial Services Modernization Act) basically erased the distinctions between investment banks and commercial banks, allowing commercial banks to engage in risky investments like mortgage-backed securities and collateralized debt obligations.
He infamously trumped up the new legislation by saying: “Today, Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century. This historic legislation will better enable American companies to compete in the new economy.”
Historic is right. Thanks to the relaxed laws on what constitutes a bank, we saw it play out with banks hawking assets toxic enough that, by Summer’s own rationale, they should have been dumped in a developing country.
|Position||President of Harvard University|
|Scandal||Losing $1B of Harvard’s money|
This one is a doozy — and perhaps the main reason that Summers should not be trusted as the next Fed Chair…
Summers lost a billion dollars of Harvard’s money by betting on interest rates. And boy, was it a bad bet.
While he was the university’s president, he figured he’d engage in some esoteric interest rate swaps. In layman’s terms, Summers bet on interest rates being higher than they were forecasted to be in the early 2000s, when he made the bet.
So when interest rates were decimated after the 2008 financial meltdown (hilarious irony, considering his involvement in the collapse forced the drop in interest rates), his bet exploded, and the university was bilked of a cool billion.
From Matt Klein at Bloomberg:
The problem with Harvard was that Summers wanted to lock in interest rates for money that the university hadn’t actually borrowed and wasn’t planning on borrowing for a very long time.
There aren’t a lot of ways to interpret this exotic instrument except as a bet that the future level of interest rates would be higher than the market pricing implied at the time. That bet was wrong, and Harvard lost a billion dollars.
Not only was Summers wrong in 2004 about where interest rates would be — he was willing to bet a lot of other people’s money that he knew better than everyone else. The damage at Harvard was bad enough. Imagine what that sort of thing could do to the U.S. economy.
To make matters worse, while he wasn’t losing money, trashing poor countries, and empowering banks to overleverage like crazy, Summers was raking in mucho dinero from Wall Street consultation and speaking fees.
All told, he pulled in a grand total of $5.2 million from hedge fund D.E. Shaw alone — and another $2.7 million from speeches given to J.P Morgan, Citigroup, Goldman Sachs, and Lehman Brothers. Goldman Sachs paid him $135,000 for a single appearance.
So a guy who made millions from companies responsible for crashing our economy gets a cushy job as one of the central economic advisors to President Obama…
And now this shyster is possibly being vetted to take over as Chairman of the Fed?
This should terrify citizens of all political stripes.
Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow’s Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he’s brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor’s page.