http://chronicle.com/article/Larry-Summersthe/124790/?sid=at&utm_source=at&utm_medium=en
Larry Summers and the Subversion of Economics
By Charles Ferguson
Chronicle of Higher Education: October 3, 2010
The Obama administration recently announced that Larry Summers is resigning
as director of the National Economic Council and will return to Harvard
early next year. His imminent departure raises several questions: Who will
replace him? What will he do next? But more important, it's a chance to
consider the hugely damaging conflicts of interest of the senior academic
economists who move among universities, government, and banking.
Summers is unquestionably brilliant, as all who have dealt with him,
including myself, quickly realize. And yet rarely has one individual
embodied so much of what is wrong with economics, with academe, and indeed
with the American economy. For the past two years, I have immersed myself in
those worlds in order to make a
film,<http://www.sonyclassics.com/insidejob/>
*Inside Job,* that takes a sweeping look at the financial crisis. And I
found Summers everywhere I turned.
Consider: As a rising economist at Harvard and at the World Bank, Summers
argued for privatization and deregulation in many domains, including
finance. Later, as deputy secretary of the treasury and then treasury
secretary in the Clinton administration, he implemented those policies.
Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed
Glass-Steagall, permitted the previously illegal merger that created
Citigroup, and allowed further consolidation in the financial sector. He
also successfully fought attempts by Brooksley Born, chair of the Commodity
Futures Trading Commission in the Clinton administration, to regulate the
financial derivatives that would cause so much damage in the housing bubble
and the 2008 economic crisis. He then oversaw passage of the Commodity
Futures Modernization Act, which banned all regulation of derivatives,
including exempting them from state antigambling laws.
After Summers left the Clinton administration, his candidacy for president
of Harvard was championed by his mentor Robert Rubin, a former CEO of
Goldman Sachs, who was his boss and predecessor as treasury secretary.
Rubin, after leaving the Treasury Department-where he championed the law
that made Citigroup's creation legal-became both vice chairman of Citigroup
and a powerful member of Harvard's governing board.
Over the past decade, Summers continued to advocate financial deregulation,
both as president of Harvard and as a University Professor after being
forced out of the presidency. During this time, Summers became wealthy
through consulting and speaking engagements with financial firms. Between
2001 and his entry into the Obama administration, he made more than
$20-million from the financial-services industry. (His 2009 federal
financial-disclosure form listed his net worth as $17-million to
$39-million.)
Summers remained close to Rubin and to Alan Greenspan, a former chairman of
the Federal Reserve. When other economists began warning of abuses and
systemic risk in the financial system deriving from the environment that
Summers, Greenspan, and Rubin had created, Summers mocked and dismissed
those warnings. In 2005, at the annual Jackson Hole, Wyo., conference of the
world's leading central bankers, the chief economist of the International
Monetary Fund, Raghuram Rajan, presented a brilliant paper
<http://www.kansascityfed.org/publicat/sympos/2005/pdf/rajan2005.pdf>that
constituted the first prominent warning of the coming crisis. Rajan pointed
out that the structure of financial-sector compensation, in combination with
complex financial products, gave bankers huge cash incentives to take risks
with other people's money, while imposing no penalties for any subsequent
losses. Rajan warned that this bonus culture rewarded bankers for actions
that could destroy their own institutions, or even the entire system, and
that this could generate a "full-blown financial crisis" and a "catastrophic
meltdown."
When Rajan finished speaking, Summers rose up from the audience and attacked
him, calling him a "Luddite," dismissing his concerns, and warning that
increased regulation would reduce the productivity of the financial sector.
(Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.)
Soon after that, Summers lost his job as president of Harvard after
suggesting that women might be innately inferior to men at scientific work.
In another part of the same speech,
<http://www.president.harvard.edu/speeches/summers_2005/nber.php>he had used
laissez-faire economic theory to argue that discrimination was unlikely to
be a major cause of women's underrepresentation in either science or
business. After all, he argued, if discrimination existed, then others,
seeking a competitive advantage, would have access to a superior work force,
causing those who discriminate to fail in the marketplace. It appeared that
Summers had denied even the possibility of decades, indeed centuries, of
racial, gender, and other discrimination in America and other societies.
After the resulting outcry forced him to resign, Summers remained at Harvard
as a faculty member, and he accelerated his financial-sector activities,
receiving $135,000 for one speech at Goldman Sachs.
Then, after the 2008 financial crisis and its consequent recession, Summers
was placed in charge of coordinating U.S. economic policy, deftly
marginalizing others who challenged him. Under the stewardship of Summers,
Geithner, and Bernanke, the Obama administration adopted policies as
favorable toward the financial sector as those of the Clinton and Bush
administrations-quite a feat. Never once has Summers publicly apologized or
admitted any responsibility for causing the crisis. And now Harvard is
welcoming him back.
Summers is unique but not alone. By now we are all familiar with the role of
lobbying and campaign contributions, and with the revolving door between
industry and government. What few Americans realize is that the revolving
door is now a three-way intersection. Summers's career is the result of an
extraordinary and underappreciated scandal in American society: the
convergence of academic economics, Wall Street, and political power.
Starting in the 1980s, and heavily influenced by laissez-faire economics,
the United States began deregulating financial services. Shortly thereafter,
America began to experience financial crises for the first time since the
Great Depression. The first one arose from the savings-and-loan and
junk-bond scandals of the 1980s; then came the dot-com bubble of the late
1990s, the Asian financial crisis; the collapse of Long Term Capital
Management, in 1998; Enron; and then the housing bubble, which led to the
global financial crisis. Yet through the entire period, the U.S. financial
sector grew larger, more powerful, and enormously more profitable. By 2006,
financial services accounted for 40 percent of total American corporate
profits. In large part, this was because the financial sector was corrupting
the political system. But it was also subverting economics.
Over the past 30 years, the economics profession-in economics departments,
and in business, public policy, and law schools-has become so compromised by
conflicts of interest that it now functions almost as a support group for
financial services and other industries whose profits depend heavily on
government policy. The route to the 2008 financial crisis, and the economic
problems that still plague us, runs straight through the economics
discipline. And it's due not just to ideology; it's also about
straightforward, old-fashioned money.
Prominent academic economists (and sometimes also professors of law and
public policy) are paid by companies and interest groups to testify before
Congress, to write papers, to give speeches, to participate in conferences,
to serve on boards of directors, to write briefs in regulatory proceedings,
to defend companies in antitrust cases, and, of course, to lobby. This is
now, literally, a billion-dollar industry. The Law and Economics Consulting
Group, started 22 years ago by professors at the University of California at
Berkeley (David Teece in the business school, Thomas Jorde in the law
school, and the economists Richard Gilbert and Gordon Rausser), is now a
$300-million publicly held company. Others specializing in the sale (or
rental) of academic expertise include Competition Policy (now Compass
Lexecon), started by Richard Gilbert and Daniel Rubinfeld, both of whom
served as chief economist of the Justice Department's Antitrust Division in
the Clinton administration; the Analysis Group; and Charles River
Associates.
In my film you will see many famous economists looking very uncomfortable
when confronted with their financial-sector activities; others appear only
on archival video, because they declined to be interviewed. You'll hear
from:
Martin Feldstein, a Harvard professor, a major architect of deregulation in
the Reagan administration, president for 30 years of the National Bureau of
Economic Research, and for 20 years on the boards of directors of both AIG,
which paid him more than $6-million, and AIG Financial Products, whose
derivatives deals destroyed the company. Feldstein has written several
hundred papers, on many subjects; none of them address the dangers of
unregulated financial derivatives or financial-industry compensation.
Glenn Hubbard, chairman of the Council of Economic Advisers in the first
George W. Bush administration, dean of Columbia Business School, adviser to
many financial firms, on the board of Metropolitan Life ($250,000 per year),
and formerly on the board of Capmark, a major commercial mortgage lender,
from which he resigned shortly before its bankruptcy, in 2009. In 2004,
Hubbard wrote a paper with William C. Dudley, then chief economist of
Goldman Sachs, praising securitization and derivatives as improving the
stability of both financial markets and the wider economy.
Frederic Mishkin, a professor at the Columbia Business School, and a member
of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the
Icelandic Chamber of Commerce to write a paper praising its regulatory and
banking systems, two years before the Icelandic banks' Ponzi scheme
collapsed, causing $100-billion in losses. His 2006 federal
financial-disclosure form listed his net worth as $6-million to $17-million.
Laura Tyson, a professor at Berkeley, director of the National Economic
Council in the Clinton administration, and also on the Board of Directors of
Morgan Stanley, which pays her $350,000 per year.
Richard Portes, a professor at London Business School and founding director
of the British Centre for Economic Policy Research, paid by the Icelandic
Chamber of Commerce to write a report praising Iceland's financial system in
2007, only one year before it collapsed.
And John Campbell, chairman of Harvard's economics department, who finds it
very difficult to explain why conflicts of interest in economics should not
concern us.
But could he be right? Are these professors simply being paid to say what
they would otherwise say anyway? Unlikely. Mishkin and Portes showed no
interest whatever in Iceland until they were paid to do so, and they got it
totally wrong. Nor do all these professors seem to make policy statements
contrary to the financial interests of their clients. Even more telling,
they uniformly oppose disclosure of their financial relationships.
The universities avert their eyes and deliberately don't require faculty
members either to disclose their conflicts of interest or to report their
outside income. As you can imagine, when Larry Summers was president of
Harvard, he didn't work too hard to change this.
Now, however, as the national recovery is faltering, Summers is being eased
out while Harvard is welcoming him back. How will the academic world receive
him? The simple answer: Better than he deserves.
While making my film, we wrote to the presidents and provosts of Harvard,
Columbia, and other universities with detailed questions about their
conflict-of-interest policies, requesting interviews about the subject. None
of them replied, except to refer us to their Web sites.
Academe, heal thyself.
*Charles Ferguson is director of the new documentary *Inside Job *and the
2007 documentary *No End in Sight: The American Occupation of Iraq.
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