Tuesday, October 05, 2010

Ferguson, Summers and the Inside Job

Academic turned tech entrepreneur turned documentary filmmaker Charles Ferguson takes on Larry Summers and academic economists' support of corporate and financial interests in the Chronicle of Higher Education.

Larry Summers and the Subversion of Economics:

... 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.

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 Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector.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 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.) ...

I particularly like this comment on the Chronicle site:

The profession is not being hypocritical -- indeed, the problem is that the profession is not being hypocritical! These professors actually BELIEVE what they spout. It is true that they would not likely have turned their attention to Iceland without the money but if they had, they would likely have said exactly what they said. Thus the problem is not a conflict of interests but a lack of accountability -- if the economics professional wants to argue that only predictions matter, not the assumptions (the classic [tenet] of the Friedman positivist agenda), then the results better match what the theory suggests will occur. Uh oh . . . they don't.

This interview with Ferguson is also worth a look.

Q. Did it feel weird to approach, somewhat confrontationally, government, academic, and business pooh-bahs when you've been an insider yourself in each of those arenas?

A. It didn't feel weird, although it certainly wasn't enjoyable, either. I tried to keep the interviews calm and substantive even when they became extremely confrontational, and I often felt that my interviewee was being dishonest or evasive.

Here's what I wrote in a post from 2008 on Ferguson's book about his startup Vermeer (acquired by Microsoft):

The best in-depth account of a startup I've read is High Stakes, No Prisoners by Charles Ferguson, who doesn't leave out any of the key details. I read it before I started my first company, and I'm very glad I did. Ferguson is a very interesting character (Times profile); I can't wait to see his new movie on Iraq.

An investment banker I knew once offered to introduce me to Ferguson (an old friend), and I regret not taking him up on the offer!

See related posts Expert Predictions and Intellectual honesty. I've been a Raghuram Rajan fan for some time.

1 comment:

LondonYoung said...

I see a lot of commentary putting down the repeal of Glass-Steagall and other actions towards looser regulation of the derivatives markets. Such commentary then elides over into the current recession/financial-crisis. But I am always underwhelmed by any arguments which try to connect the two. Instead the public has been trained to just believe they are connected. IMHO, the only clear connection I've seen between regulatory loosening and the present crisis was Paul Volcker permitting demand deposits to pay interest after this had been forbidden in the wake of the great depression.

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