The Clinton and Obama policies did nothing to lessen the economic inequality that had been increasing since 1970. Their failure created a desperation in the working class that led to complete disillusionment with the Democrats and faith in an outlier as their savior. The establishment Democrats believe that this-time-will-be-different. Biden will do what Clinton and Obama could not.
At the end of this last April, however, Reuters broke the news that Larry Summers was advising Biden’s campaign.
In Part IV of his award winning documentary inside Job, Charles Ferguson exposed the rampant corruption in the prominent academic economists because of undisclosed conflicts of interest. They receive huge payments from Wall Street, don’t disclose even when Wall Street has paid for an opinion, and pose as neutral academics when they are better seen as well-paid lobbyists for bankers and businesses.
In commentary afterwards, Ferguson identified Larry Summers as the most harmful in this group of knaves:
“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, Inside Job, that takes a sweeping look at the financial crisis. And I found Summers everywhere I turned.”
What can be so disturbing. First let’s look at how much this university professor’s net worth increased after a 10 year stint in government. The Guardian quotes from Ferguson’s later book Predator Nation:
“Upon being nominated Treasury Secretary by President Clinton in 1999, Summers listed assets of about $900,000 and debts, including a mortgage, of $500,000. By the time he returned in 2009 to serve in the Obama administration, he reported a net worth between $17 million and $39 million.”
That uptake didn’t come from a university professor’s salary.
Reporters dug out some of the sources of Summers’ income in that 10 years:
Clea Benson of Bloomberg News wrote that on October 19, 2006, Summers was hired as a part-time managing director of the New York-based hedge fund D. E. Shaw & Co. for which he received $5 million in salary and other compensation over a 16-month period
According to Michelle Malkin of the New York Post, Summers earned $2.8 million in speaking fees from major financial institutions, including Goldman Sachs, JPMorgan Chase, Citigroup, Merrill Lynch and Lehman Brothers. At the same time, Summers earned $2.8 million in speaking fees from major financial institutions, including Goldman Sachs, JPMorgan Chase, Citigroup, Merrill Lynch and Lehman Brothers.
So, any doubt which master he serves better in his position as a civil servant: the American public (about $200.000/yr) or his generous benefactors on Wall Street.
Lack of a Moral Compass
It’s worth watching the YouTube clip of Ferguson’s interview of prominent economist Frederick Miskin. In 2016, Miskin had published a report praising the stability of Iceland’s economy as if it was an independent academic study. It was, to the contrary, a piece of marketing material for which the Iceland Chamber of Commerce had paid him $124,000 — what she failed to disclose in the report. Whoops!
In watching Ferguson’s small step by small step questioning as he leads Miskin to admit his serious undisclosed conflict of interest, you may well get an eerie feeling. Miskin answers with an almost child-like innocence. He doesn’t seem to have the slightest idea that he may have done something grievously wrong. Then comes a deer -in-the-headlight moment; he stutters as it dawns on him that he had just admitted a serious breach of ethics.
Now, let’s look at what Summers did to see if Ferguson’s allegation about Summers is justified.
A Greater Deregulator Than Reagan
Summers championed the ultimate deregulation achievement that even Reagan could not. He advised Clinton to repeal Glass-Steagall, a regulation put in place to limit the causes of the Great Depression — and that had produced economic prosperity with economic equality since 1933.
Prior to 1929, investment banks had owned hedge funds that had been wildly speculating in risky investments in the stock market. Then, because banks could do both functions, the creditors of the investment bank arm would have access to the savings of America in the deposit money at the commercial bank division — if their speculations went south, as they did.
But commercial banks were doing the same risky speculation in the markets. So, Glass-Steagall separated the function so that no one entity could be both investment and commercial bank. It also limited the commercial banks so that they could only speculate in the markets to the extent of 10% of their assets. After the Summer’s supported policy of repealing Glass Steagall was put into effect, the reins were off. The executives at both banks could use bank assets to speculate in the markets for profits that flowed into their bonuses putting depositor money at risk.
Now, bank executive bonuses exploded.
Worth noting: banks are not required to keep deposit money in trust for the owners, but can use that money as they wish, including playing the stock market.
Summers defends his policy to this day claiming that the Canadian banks were allowed to merge, and they did not need a bailout. That is disingenuous, for as Summers must know, if he knows anything about the financial system, Canada kept the assets of the two types of banks separate so that the creditors of the investment banks could not seize the deposit money at the commercial banks. It also did not permit banks to own insurance companies the way that Citibank had purchased Travelers heralding the demise of Glass Steagall. So, big, big differences.
After 2008, the UK adopted the Canadian regulation separating the bank assets calling it ring fencing. The US could have done this simple thing as well. Or, it could have just reinstated Glass Steagall, the time test regulation that had prevented a major bank meltdown since the 1930s. Instead: the near telephone size set of complex regulations, Dodd Frank.
A Greater Folly
Summer’s greatest error was not advising a Democrat president and Congress to out-Reagan, Reagan as mentioned above. It was silencing a woman who could have prevented the 2008 crisis altogether.
In this, Summers did not act alone. He was one of a trio honored by Time Magazine as The Committee to Save The World: Summers, then Deputy Treasury Secretary; Alan Greenspan, head of the Fed; and Robert Rubin, Treasury Secretary. Their united, anti-regulation, the markets-can -regulate-themselves stance, earned them the title, The Three Marketeers.
Rightly called the Cassandra of the Crisis, Brooksley Born was the head of an obscure government agency with the mind-numbing name of the Commodities Futures Trading Commission (CFTC). At the time, the banks were speculating with each other and the hedge funds to the tune of trillions of dollars in the shadow derivative market. It was called a shadow market because the trades were not done on a public stock exchange. but secretly in the Over the Counter market (private direct deals) that was like a highway with no dividing lines, no speed limits and no traffic cops. Only the banking community knew anything at all about this trillion dollar market.
Born had been a derivatives lawyer; she had been in the trenches with the bankers; she knew what they were capable of. Born circulated a white paper proposing that some regulations be put on this dark market especially the problematic credit default swaps (CDS). Recall that these were featured in The Big Short. The hedge funds used them to bet with the banks that the homeowners would default en masse on their mortgages. The banks bet they wouldn’t.
The CDS was, in fact, a kind of mortgage default insurance. If the home owners defaulted, the banks had to pay the full amount of the mortgages to the hedge funds. But to the benefit of bigger banker bonuses, the premiums did not have to be put in a reserve fund to pay claims, the entire amount flowed into banker pay. Among other reforms, Born wanted the CDSs to be treated like insurance with a reserve.
Our cover boys were aghast at the mere suggestion that their respected banks should be subject to any kind of government oversight. Government was the problem not the solution for the economic advisors in the Clinton administration. They responded with an immediate show of power by getting Congress to pass legislation that directly prohibited any government agency — they didn’t name Born’s agency specifically, but hers was the target — from any kind of investigation or regulation that might affect any kind of derivative transactions, camouflaged under the missing leading name of the The Commodity Futures Modernization Act.
You may never have heard of Brooke Born, and probably never will. She committed the unpardonable sin of being right when all the neoliberal economists, who hold the power and influence over government and the media, were wrong. Yet, Front Line has accurately preserved her story in a program entitled,” The Warning”, available on the Internet.
There we have it. This well rewarded friend of Wall Street, who got just about every important issue about the 2008 crisis wrong, is a Biden go to guy for future economic policy.
It’s much more serious than just Summers. He is only a representative of the corrupt neoliberal academic economists. (He likely believes it’s unfair to call taking money from Wall Street corrupt. All his buddies do it.) If Biden is unaware of, or rejects, all that Ferguson has exposed in economic academia, he will have a team of ‘Summers’ advising him during his administration should he be elected. And these neoliberal economists, with their deregulation agenda, will accept speaking engagements at ridiculously exaggerated fees from Wall Street and corporate America, their universities will receive bountiful grants, and Biden’s policies, even if he intends otherwise, will continue to preserve, completely intact, the various ways in the financial system for the upward transfer of wealth.