Larry Summers, a senior economic advisor to President Obama and, previously, a senior economic advisor to President Clinton, is going to leave his White House position to return to academia before next fall. Larry Summers is famous for advising President Clinton to sign the disastrous Financial Services Modernization Act, which removed the last remaining FDR era regulations that kept banks, investment houses, and Wall Street brokers from making a wreck of things, like they did in 1929.
While others saw and predicted that President Clinton's signing of the Financial Services Modernization Act would lead to economic disaster, Larry Summers rejected their concerns without seriously addressing them at the time. In fact, when he was President of Harvard University Larry Summers responded rather petulantly to a fellow academic who was critical of Summers-inspired policies, and who saw the 2008 market collapse coming:
... 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 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.)
If you want to see how Larry Summers reacted to earlier warnings on how his policy recommendations might adversely affect our economy, check out what he, Alan Greenspan, and Bob Rubin did with Brooksley Born, head of the Commodity Futures Trading Commission in the late 1990s here.
In my view, we can't get rid of Larry Summers and his laissez faire market approach fast enough.
- Mark
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