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Brilliant Mistake: Larry Summers and the Fed

Among the interesting debates of a slow summer is the argument about Ben Bernanke’s replacement as Fed chairman. The White House has not yet indicated its choice. But the main contenders are thought to be Larry Summers, the former Treasury Secretary and Harvard president, and Janet Yellen, the current vice chair of the Fed.

Both Summers and Yellen have the credentials we expect for the position. But Yellen is favored by progressives because she is seen as an advocate of softer money and stricter financial regulation. In addition, many like the idea of appointing a woman to run the Fed.

I have nothing to contribute to the technical aspects of this debate. And the gender issue has more to do with academic politics than any significant public concern.

Nevertheless, the fact that Summers is even in the running for such an important job despite a record of bad judgment tells us something important about the norms that define America’s current ruling class. While the old WASP elite justified its influence on grounds of prudence and respectability, the ostensible meritocracy that replaced it sees intellectual brilliance as the authoritative claim to rule.

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My point is not that members of the midcentury Establishment always possessed the qualities they claimed, or that our current masters are actually the smartest guys in the room. Rather, it’s that our ideas about qualifications for power have been transformed–and that Summers embodies this transformation.

Summers is a notorious jerk and slob, and has been wrong [1] about almost every major economic issue for the last twenty years. But he is, by most accounts, a bold and provocative thinker. For his supporters, that outweighs possible limitations of character or judgment.

I am not convinced of Summers’ originality. On big issues such as the repeal of Glass-Steagall or derivatives regulation, he seems  a reliable advocate of the conventional wisdom that links Ivy League economics departments to Wall Street.

Yet the novelty of Summers’ ideas isn’t the interesting thing in this debate. Rather, it’s the assumption built into his supporters’ arguments: that aptitude for politics is closely allied with academic ability. The old elite proverbially understood public service on the model of a country club. The new one sees it as a sort of massive graduate seminar.

Although they are rival conceptions of politics, these views are not absolutely opposed. In fact, both are obsessed with pedigree. They just look for different qualities in their exemplary specimens. The archetypal WASP wanted to know where a job applicant prepped; his meritocratic successor will ask where she did her Ph.D. (It is assumed that all the players in these scenarios were undergraduates at Harvard.)

Both conceptions also have blindspots. The country club model elevates superficial collegiality over actual results. The graduate school vision, by contrast, prizes abstract knowledge at the expense of practical wisdom. American history is littered with failures by each approach.

On the whole, however, the defects of gentility are less dangerous to common interests than the defects of intelligence run amok. The great problem with the application of the academic mind to politics, is that policies that work in theory are notoriously ineffective in practice. Summers is, without question, a smart man. As Fed chairman, however, he would be a brilliant mistake.

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#1 Comment By Patrick On August 5, 2013 @ 12:57 pm

I couldn’t agree more with this: “the defects of gentility are less dangerous to common interests than the defects of intelligence run amok.” A guy who is “a bold and provocative thinker” – wrong on economics but at least his failures were spectacular – isn’t the type to have where prudence and stability would be much better for everybody.

Meanwhile, this is perplexing:

“…she is seen as an advocate of softer money”

After the TARP, this appears like suggesting a shot of whiskey to the officer who has arrested you for drunk driving. Haven’t we had enough of *that* for today?

#2 Comment By Sean On August 5, 2013 @ 1:07 pm

Weird formatting issue that may just be a problem on my computer, but the hyperlink at the beginning of the 6th paragraph is wonky — everything up the the word “wrong” looks like a link, but when you move your cursor over the link you can’t click it. “Wrong” works as a link, however.

#3 Comment By KXB On August 5, 2013 @ 1:54 pm

When lampooning Communists in India, it was joked that a communist would often say, “That’s great that it works in practice, but how does it work in theory?”

The same can be said of Summers and other economists – they devise a system that has never been fully realized, yet when even attempted to a small scale, wreaks such havoc that government must step in with taxpayer money. Does that make them take a step back and reconsider their ideas? Nope, they just feel free to try again – with your money, of course.

#4 Comment By Gene Callahan On August 5, 2013 @ 2:18 pm

“After the TARP, this appears like suggesting a shot of whiskey to the officer who has arrested you for drunk driving. Haven’t we had enough of *that* for today?”

There is absolutely no sign of any inflation. Why do you think we’ve “had enough”?

#5 Comment By Johann On August 5, 2013 @ 2:59 pm

Gene,

There are signs of inflation, but not rampant inflation. That’s because much of the new money remains on bank balance sheets deposited at the Fed. The Fed is paying .25% interest on deposits. The banks have preferred to leave it there getting the risk free return rather than loaning it into the economy.

But that doesn’t change the other adverse effects of QE, such as inflating the stock market and because the Fed is also buying mortgaged back securities, re-inflating the housing market. You may think these are good things because that’s what the Fed intends to do, but this overlooks the fact that its causing resources to flow into these two markets that would have otherwise went somewhere else. You know the saying, “don’t bet against the Fed”. Its true. The Fed does move the markets. And the artificially low interest rates discourage savings and encourage debt at a time when most want to do the opposite. Finally, even the most rabid Keynesian economists agree that the more QE is done, the less effective it becomes. Many of even the mainstream normally clueless Ivy league educated economists are now getting nervous. They believe the Fed has painted itself into a corner. Even just the talk of tapering QE caused the treasury yields to go up.

And eventually, the bank deposits at the Fed may finally start leaking out into the real economy which will fuel inflation. Of course the Fed still claims they can soak that money back up by re-selling the treasuries and trash securities they have bought, but there’s no doubt they could not come close to selling them for what they paid, and so the banks will eventually use that money for other things.

Finally, QE has resulted in significant inflationary pressures in the developing countries.

What we need is a Fed with a much narrower mandate, or no Fed at all. We do not need any more monetary activism. It hasn’t worked, and never has. Not ever.

#6 Comment By Daniel DiFabio On August 5, 2013 @ 3:30 pm

President Obama makes his appointments by referring to a very short list of potential appointees. It is amazing how President Obama choses Keynesians that served in other capacities in the past. Larry Summers was one of the people that engineered the TARP bail-out, and he was one of the people that fought hard for the Financial Services Modernization Act which repealed the Glass-Steagall Act. As the Assistant Secretary of the Treasury and as the Secretary of the Treasury under President Clinton he refused to regulate mortgage derivatives. Summers was partially responsible for the stock market crash of 2008. I would rather see someone who advocates a gold or silver standard as the new Federal Reserve Chairman, but that will not happen.

#7 Comment By tz On August 5, 2013 @ 3:58 pm

It isn’t academic or theoretical knowledge per-se, but credential-ism itself. That which is necessary to get a degree (today) has been dumbed down and made narrow. But even the “country club membership” is a credential. I’m not sure I’d extend it to the presence or lack of a Y chromosome.

Several days ago was a link to CS Lewis lecture on “Bulverism” from God in the Dock

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I had not thought of what he said other than in negative terms, yet here it is again, only used to select and laud people – not because they actually have done or can do something, but because of some unrelated attributes which are the decisive criteria.

Although I have differences with the works of Ayn Rand, she always held that reality be the ultimate arbiter of truth. Not credentials, not connections, not genetics, but does it work or is it right?

#8 Comment By Michael N Moore On August 5, 2013 @ 3:59 pm

What I have noticed about Obama’s appointments is that many to have made huge sums from hedge funds prior to their appointments. Summers got $5.2 million for year-long, part-time job, Rahm Emmanuel worked for 3-years at Wasserstein & Perella, and the new FBI nominee, James B. Comey, appears to also come pre-bribed. He will get a $3 million kiss from Bridgewater Associates if he is confirmed.

I really don’t think that the interests of international hedge funds coincide with those of the average American.

#9 Comment By Patrick On August 5, 2013 @ 6:12 pm

“Why do you think we’ve “had enough”?”

Because “soft money” caused us to have to bail out banks and I forgot to add, pass the buck (or “print the buck”) in order to finance yearly deficits that, absent one year of the Clinton administration, go back decades. I don’t like the idea of papering over (haha) this forever, personally, and the fact that there is no threat of inflation now doesn’t mean the next time it blows up – because this was based solely on an emergency *trillion dollar* loan and not real changes – doesn’t mean the next time won’t be a cataclysmic disaster.

Anyway, I like my bankers *really* risk averse, and Summers isn’t like that no matter how brilliant the man is.

(By the way – I meant “I couldn’t agree *MORE*” with this column above, not “I couldn’t agree with it.)

#10 Comment By Fran Macadam On August 5, 2013 @ 7:06 pm

Of the elites, by, the elites, for the elites. Whose interests are not those of 99%of Americans, which is obvious from the skewed results.

#11 Comment By Fran Macadam On August 5, 2013 @ 7:11 pm

“There are signs of inflation, but not rampant inflation. That’s because much of the new money remains on bank balance sheets deposited at the Fed. The Fed is paying .25% interest on deposits. The banks have preferred to leave it there getting the risk free return rather than loaning it into the economy.”

The banks are using it to gamble, to re-inflate bad assets and to buy up non-financial aseets, such as farmlnad, which has seen a 1000% bubble inflate.

The first people to benefit wildly from inflation, are those to whom the money is doled out, before prices increase as it diffuses throughout the economy.

Prices are rising on a wide swathe of items several times the official annual inflation rate, wiping out savings inexorably.

#12 Comment By EliteCommInc. On August 5, 2013 @ 9:37 pm

” In addition, many like the idea of appointing a woman to run the Fed.”

I have watched with great expectations the advent of women in every area of life and have found the significant difference wanting. Woman has proven to be no better than manhood.

In education have our public school systems improved?

Did women executives say, “Whoa, let’s not sell worthless stock products?”

Did women in Real Estate, blow and horns about over appraising, no income purchases?

Did women in Congress engage their more collegial attitudes or feminine mystique to check torure or the war itself — onn no just the opposite — let’s go to war to set women free. Really, the women of Iraq and Afgahnistan free?

Frankly, it seems a bit of a wash and a lot more of disappointment.

And as predcitable as voting for a man who claims to black, but who’s mother was so afraid for his survival she took him out of the country —-

The back stabbing and back biting among women in academia as well as the complaints of fears and tears among women trained to think has just become a nauseating mess — clank.

Perhaps, in the rush to having to avoid dealing with black men by circumventing affirmative action — not as practiced by businesses and elite colleges — but as desirgned — was a bargain with fraud.

Either she is capable or she is not — but as for her womanhood — blah and blah

#13 Comment By david helveticka On August 7, 2013 @ 11:49 am

During the Mexican peso crisis in 1994, Summers helped to negotiate a deal that protected big investors in Mexico’s debt, like Goldman Sachs. Mexico suffered a severe downturn in the immediate aftermath of the crisis and has had the slowest per capita GDP growth of any country in Latin America in the two decades since the crisis. That one doesn’t look like much of a success story.

One result no one has pointed out is the huge economic refugee problem that Summers’ action created. We now call it “illegal immigration”..So Goldman Sachs got rewarded for it’s bad investments, and the result was an invasion by the economic refugees from Mexico that is changing the very nature of our national identity.

What a horrible cost America is paid for this man’s arrogance and the corruption of our monetary system.

#14 Comment By EliteCommInc. On August 7, 2013 @ 3:50 pm

I hate to break the news to you, but Mexico has never needed an economic downturn to send their citizens across the border.

For those south of border The Mexican American War never ended.

#15 Comment By EliteCommInc. On August 7, 2013 @ 3:57 pm

Every executive and corporate entity has been softballing the border issue. Even after 9/11, wasn’t anyone curious why that border was not shut down even for a day?

As Dr. Summers, on the issue of immigration he is going to rest where most of the economic forces rest — pro-immigration. That an excutive or an administration would appoint a Chairman to do otherwise seems an impossibility.

Is Dr. Summers ay more likely to reign in over hedging against what institutions have available?

Is going to reexamine the valkue of Basil I and II? Which is the mechanism by which the Europeans, Asians, and Latin American countries are undermining US wealth and gradually downgrading our worth to be equal with their own?

Any affirmative to any of the above is doubtful.

#16 Comment By Anon On August 8, 2013 @ 9:04 pm

Interesting piece. Thanks very much for tagging identifying the credential-ism, one of Obama’s more acute weaknesses in choosing candidates. The article may overestimate progressive enthusiasm for easy money, except as an inferior alternative to tighter fiscal policy. (I know, I know, record spending, just far tighter relative to prior recessions. Which begs the question of stocks vs. flows, but it’s still the best basis for comparison.)

Johann: several good points, but please don’t dismiss monetary policy and it’s economic consequences outright. Ignoring the thornier precedents during the great depression, I hope you’ll acknowledge Volcker beat inflation with monetary policy. And frankly, tight money would have compounded the recent downturn. Greenspan successfully postponed the bulk of Bush 43’s economic downturn through monetary policy. I’m no defender of QE, largely for the reasons you’ve enumerated, but I don’t think we should trash everything Bernanke’s managed to do. The better solutions are on the legislative and fiscal sides, particularly with respect to tax policy and trade.

#17 Comment By RE Mant On August 9, 2013 @ 2:11 am

The “WASP elite” expected rule by the best, and would not deign to canvass, though they might provide refreshments at the polls. The Democracy, in contrast, promised patronage and largess and used the media to sell themselves, and still is. Hence Vidal’s (and Adlai’s) quip that merely running for office should be disqualifying. That said, Summers and Greenspan (and Rubin) tried to untether the market, while allowing banking to subvert the market’s discipline. The result was a string of financial crises culminating in the collapse of Mexico and Japan, and now the world’s. The choice, in any case, will undoubtedly be Yellen or some other Obamian, tho it ought to be Volcker.

#18 Comment By Rambler88 On August 9, 2013 @ 5:09 am

Yet the novelty of Summers’ ideas isn’t the interesting thing in this debate. Rather, it’s the assumption built into his supporters’ arguments: that aptitude for politics is closely allied with academic ability.

As anyone with experience of academia knows, aptitude for politics is most often in inverse proportion to academic ability. (There have been notable exceptions, of course.) But rephrase that assumption to read “aptitude for (academic) politics is closely allied with academic success” and you have a widely acknowledged characteristic of academia and its elites. That’s naturally true to some extent in all ages, but it’s gotten a lot worse in the last generation or so. I’m no fan of the old country-club elite, but Mr. Goldman is right about gentility–and academic standards were also a lot higher in that elite’s day, especially at Harvard and especially at the graduate level. So much of what academics write and say today is just the continuation of grantsmanship by other means.

By the way, The Wise Men, by Walter Isaacson and Evan Thomas (1986), is a fascinating portrait of the old country-club elite–both their genuinely exceptional ability (and integrity, for the best of them) and their clannishness and the blind spots that clannishness entailed. Throughout the long book, I couldn’t help but wonder how many people of equal ability and integrity were thwarted by them, and would have found them impossible to work with in any case–George Kennan being the example among the “wise men” themselves.

#19 Comment By Stephen Webster On August 10, 2013 @ 8:20 am

Summers and his close friends had a good time in Russian in the 1990s though. So is it really “brilliance” if one is wrong constantly? Remember how very intelligent Adlaid Stevenson was, and how woefully ordinary Eisenhower?

#20 Comment By Johann On August 10, 2013 @ 10:56 pm

Anon, you are correct about Volker’s cure of inflation. One of the few success stories of the Fed. And his tight money policy was not very popular at the time. Politicians tend to like easy money in good times and bad.

#21 Comment By Michael N Moore On August 11, 2013 @ 4:56 pm

The Sunday New York Times has a front page report on Larry Summers and his brilliant career accepting large sums of money for doing very little.