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March 22, 2009
David Warsh, Proprietor


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Is Physiognomy Destiny?

Bonus-payment fury took center stage in Washington last week. The fever goaded Congress to a terrifying mood, the House and Senate competing to punish someone, never mind the Constitution. A classic Washington power-struggle unfolded in the background, a reminder of the closing days of the administration of George H.W. Bush, when budget chief Richard Darman and Treasury Secretary Nicholas Brady traded potshots on the front page of The Washington Post in the run-up to the ’92 election.

 

Treasury Secretary Timothy Geithner, 47, was under fire again, some of it clearly fratricidal.  Meanwhile, a talented and complaisant reporter, Noam Scheiber of The New Republic, rolled out a 6,000-word cover story assembled with the full cooperation of National Economic Council chair Lawrence Summers, 54: Springtime for Summers?  Why the White House Needs to Unleash Him.

 

Unleash him? Presumably he had in mind sending Summers back to the Treasury Department, which he had served for eight years during the Clinton Administration, the last eighteen months as Secretary. There, in theory at least, according to Scheiber, he could bring “far more infrastructure to bear on the economic crisis than NEC.”

 

“Maybe the issue isn’t whether Summers plays well with others, but whether Obama’s economics effort should be led by an ensemble cast or a single virtuoso performer,” Scheiber concluded.

 

An unfortunate coincidence?  Perhaps.

 

It’s as good a time as any, though, to review why Geithner is at the Treasury and Summers is not.

 

Exhibit A is the Harvard Russia scandal – a chain of events that played a key role in Summers’ dismissal from the Harvard presidency. It is a black mark that, for some reason, rarely is taken into account when relating the key events of his career. It hasn’t become part of the record. It’s not mentioned in Scheiber’s New Republic piece, for example. But then neither did it come up in the Newsweek or Time accounts of Summers’ return to Washington, either. Not even David Leonhardt, economics columnist of The New York Times, brought it up when he explained The Return of Larry Summers last fall, though he had to ignore his newspaper’s own clips. (Registration required.)

 

And yet it did happen – a story straight out of a Tom Clancy novel. EP readers don’t need to be reminded of how Summers’ protégé, Andrei Shleifer, was hired by the US Agency for International Development to head a Harvard mission to provide advice to the Russian government of Boris Yeltsin, but quietly went into business for himself in violation of his contract, got caught and fired, but retained the sympathy and protection of his mentor, even as Summers served as Treasury Secretary and president of Harvard. A US District Court judge ultimately found Shleifer and Harvard to have committed fraud. The episode has become a standard item in Russia’s anti-American lore.

 

Exhibit B is what happened at Harvard during and after Summers’ five years as president there – not so much the well-publicized friction over his blunt manners as the outcome of his business plan for the university. Many of the details have just begun to emerge:  the big-bang expansion of the university’s campus into the Allston neighborhood of Boston; the heavy hiring of administrative staff; the recruitment of his former boss, Robert Rubin, to Harvard’s governing Corporation; the running-off of legendary Harvard endowment manager Jack Meyer and much of his senior staff, and his short-lived replacement by Mohamed El-Erian; and some costly endowment bets made on Summers’ watch. Summers probably feels he could have handled the downturn if he had been permitted to stay.  But a substantial reinterpretation of the overall story is underway.

 

Exhibit C is Summers’ role in overseeing the Clinton-era deregulation of the banking industry. He was Secretary when the Glass-Steagall Act separating banking from commerce was repealed by a Republican Congress in 2000, and his 1998 dressing-down of Commodity Futures Trading Commission chairman Brooksley Born when she sought regulatory authority over derivatives trading has become a focal point in reconstructions of the period. Nor is it clear what Summers did or how much he earned as a part-time managing director of a leading hedge fund/venture capital firm, D.E. Shaw, after leaving the Harvard presidency.

 

Which, at least in the conventional wisdom of Washington, is why Obama chose to nominate the younger and less-experienced Geithner to the post of Treasury Secretary – he feared Summers’ nomination could bring about a lengthy confirmation hearing. (He also is said to have simply liked the younger man, whose youth and background overseas are similar to his own; in fact Geithner’s father apparently oversaw the Ford Foundation program that took Obama’s mother and her young son to Indonesia.)

 

Then Geithner himself ran into confirmation problems – those $40,000 in underpaid taxes in the years when he was moving from Washington to New York – and barely squeaked through on a 60-34 vote. His first tentative plans to restore banking stability underwhelmed markets; his role in the initial AIG bailout (when he was president of the Federal Reserve Bank of New York) came under fire; Democrats criticized his communication skills; and last week he was caught in a wicked crossfire over those bonuses. Both the President and Sen. John McCain went out of their way to defend him. That set the stage for this week, when Geithner will unveil a more detailed version of a $1 trillion plan to cleanse bank balance sheets of their questionable assets. It may work, but there is blood in the water. He will not survive another prolonged bout of market despair.

 

After the election, Summers made no secret of preferring an appointment as Treasury Secretary. When that didn’t materialize, he bruited it about that he would be available to replace Ben Bernanke at the Federal Reserve Bank when his term as chairman expires in January.  The job as chair of the National Economic Council made sense not just because he briefed the president every day, but because it was from that position that Summers’ mentor, former Goldman Sachs co-chair Robert Rubin, ascended to the Treasury under Bill Clinton.

 

No doubt that Summers possesses the skills to be a highly effective finance chief, beginning with the fact that he grew up as an economist in an intensely competitive arena, the quasi-official non-governmental policy institute that is the National Bureau of Economic Research. Since moving to Cambridge, Mass., from Manhattan, in 1973 – and especially after Harvard professor Martin Feldstein (Summers’ thesis adviser) became its president, in 1978 – the NBER has become policy economists’ West Point, a highly-selective academy in which future leaders of the profession from all over the world meet, match wits,  and learn to assess each others’ strengths and weaknesses.

 

Indeed, much of  the aura of unquestioned deference that Summers enjoys among his policy-circle peers derives from having successfully persuaded others of his credentials as an alpha male in innumerable late-night bull sessions in the early 1980s in the NBER offices, located midway between Harvard and the Massachusetts Institute of Technology. He has been remarkably good at forging alliances as well. Since entering the political world full-time, in 1990, as chief economist for the World Bank, he has honed a second array of skills, including a deliberate manner of speech that conveys gravitas, disarming humor, a comfortable girth, and a baleful glare.

 

Geithner, on the other hand, has no such base among an academic discipline. Nor do his boyish face, runner’s frame, or matter-of-fact delivery convey authority through a microphone (he has plenty of power in a conference room). A Dartmouth College graduate with a degree in international studies from the Johns Hopkins University, he has made his career in civil service, as a regulator rather than an economist. One of his principle recommendations all along, from Rubin and others, has been that he is one of the few persons in Treasury circles to have been able to say “no” to Larry – precisely because he is not a member of the guild. If Geithner goes, it is crucial to find him a position of relative independence, in the likelihood that future government service will be required. (Each time Paul Volcker left government service, he sheltered at the then-thoroughly-respectable Chase Manhattan Bank.)

 

Would the country be better off in the current emergency if Summers were somehow or other “unleashed”? Would the Senate go for it?  As a long-time enthusiast of Summers, I have to say: it beats me. (I wince when I remember the newspaper column I wrote touting his candidacy for the Harvard job: “By temperament and training, he is uniquely suited to this momentous task.”)

Certainly he is a man who knows the plays and wants the ball. And I’m pretty certain that Noam Scheiber is dead right about one thing: an ensemble cast of economic advisers simply won’t work in the current circumstances. Tim Geithner? Larry Summers? My bet is that one or the other will be gone by the first of June.

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