Let's pretend for a moment that President Barack Obama calls me because he wants the opinion of a senior economics major at DePauw University. He tells me that Ben Bernanke is stepping down from his role as chairman of the Federal Reserve Board. I cover the speaker of my iPhone so the president doesn't hear my sigh of relief. The president confesses that he's been up in alligators on the hunt for Edward Snowden and has not had much time to think about whom to appoint as the next chairman. Then, he mentions that Larry Summers is at the top of his list. I tell Obama that Larry Summers is at the top of my list too - my "shit" list.
Obama has voiced his support for Summers. A quick glance at Summers' résumé would reveal a qualified candidate. The Harvard economics professor has held some prestigious roles including chief economist for the World Bank, secretary of the U.S. Treasury, president of Harvard University, assistant to the president for economic policy, and director of the National Economic Council. In 2010, Summers left his position with the Obama administration and returned to Harvard to teach, but he has remained in close contact with the president.
I have a problem with Summers because he helped lay the tracks that led our nation and much of the globe to a severe financial crisis. Summers, along with former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin, played an integral role in passing the Gramm-Leach-Bliley Act of 1999, which repealed the BankingAct of 1933. This made it possible for investment banks, security firms, commercial banks and insurance companies to consolidate their resources.
In a Time magazine article published a week before the GLBA passed, bank analyst Lawrence Cohn said, "This is horrible legislation... It creates a huge potential obligation for U.S. taxpayers."
Cohn said the new bill will encourage concentration of financial power in a few hands, any one of which could topple the system if it failed-forcing a government bailout. Summers dismissed concerns about broader ramifications; he also shot down proposed regulation of the derivatives market, assuring those concerned that the modernized financial system would decrease risk in the economy.
Raghuram Rajan, an economist from the University of Chicago, published a paper in 2005, "Has Financial Development Made the World Riskier?" in which he raised concerns about the recent alterations in the modern financial system. In his paper, Rajan outlines potential effects.
"It is possible these developments may create more financial-sector-induced procyclicality than the past," Rajan said. "They may also create a greater, albeit still small, probability of a catastrophic meltdown."
Rajan voiced these concerns later that year at a conference for central bankers in Jackson Hole. Summers stood up at the conference and scolded Rajan, saying that his paper's "Luddite premise" was "largely misguided." In the next few years, the crisis became evident. Summers still takes zero responsibility for his negligence.
In Summers' defense, economic forecasting is like trying to predict the future - it's not exactly scientific. However, there is a difference between possessing psychic abilities and having good judgment, and Summers' judgment clearly does not reciprocate his lack of clairvoyance. I don't think someone with poor judgment is qualified to take the driver seat of the world's largest economy's central bank. If a chef were to give a whole restaurant food poisoning because he convinced the kitchen staff that it's OK to leave the meat out overnight, he would likely be fired. I highly doubt the owner would consider recommending him for a new job. I suppose things work differently in Washington.
- Freibert is a senior economics major from Lexington, Ky.
opinion@thedepauw.com