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January 3, 2010
David Warsh, Proprietor


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Best and Highest Use

“Tim Geithner? Larry Summers? My bet is that one or the other will be gone by the first of June.” Those are the rashest lines I wrote last year. It would have been fine if only I’d had the presence of mind to add, “that is, if this unseemly jostling continues.”

It was March. The New Republic had run a cover story,Springtime for Summers? Why the White House Needs to Unleash Him, the sort of story that one-time New Republic editor Michael Kinsley, of The Washington Post, soon would label a “source-greaser.” In Is Physiognomy Destiny?, I discussed Summers’ alpha male tendencies and the possibility that, having bulled his way into an office in the west wing of White House, he soon would bull his way out again, one way or another. The friendly stories hinting at his willingness to replace Ben Bernanke at the Federal Reserve Board or Geithner at the Treasury that had begun days after the election continued periodically until summer.

And then they stopped.

In August President Obama reappointed Bernanke to a second term. In the autumn, stories began appearing regularly on how Geithner had gained his sea-legs at the Treasury Department. Ebullient Christina Romer won top marks as chair of the Council of Economic Advisers. Budget director Peter Orszag remained atop the turbulent wave of health care legislation. Campaign economist Austan Goolsbee waited patiently in the wings as a member of the CEA. Even the vice president’s chief economist, Jared Bernstein, formerly of the Economic Policy Institute, made his way into the picture when The New Yorker photographed the White House team in October — all but Goolsbee, that is.

And last week, Summers remained unchallenged and serene as director of the National Economic Council, the president’s top economic adviser – his office, as the source-greasers inevitably point out, “two short flights of steps above the Oval Office.”

What happened?

Obviously, someone in the White House hierarchy – perhaps chief of staff Rahm Emanuel – talked to Summers. What would he have said?

It must have gone something like this: Look, Larry, even if the president wanted to, which he apparently doesn’t, we couldn’t take you to the Senate for confirmation, certainly not now, probably never. The Brooksley Born business was the last straw.[It was Born whom Summers, then Deputy Treasury Secretary, squelched in 1998 when, as Commissioner of the Commodity Futures Trading Commission, she proposed to regulate the issue of derivative securities.] The Harvard mess doesn’t look good, and neither does the Russian scandal. Nobody is going to put you semi-independently in charge of the US economy after all that. But you are doing an enormous service to the country, right where you are.

Whatever was said, it worked. The stories stopped. Summers settled down to the job of running the president’s daily economic briefing – serving as a senior strategist at a time when US global interests were being challenged in almost every direction. A little further reflection would have persuaded Summers that the path from the White House, whenever he chose to leave, could lead as easily to a partnership at a big private equity firm like Carlyle Group or Blackstone Group, or to an independent consulting business modeled on Kissinger Associates. More to the point, in staying put and succeeding at the daunting challenge lay his one best chance to redeem his reputation.

For many years, Summers had a hard time knowing what he wanted to do – what might be, in the parlance of the law, his best and highest use to take a prominent place in the world by his father and mother, each of them eclipsed by a more celebrated sib (Paul Samuelson and Kenneth Arrow respectively). Ferociously bright, Summers made clear early in his academic career that his intellect was more nimble than deep. Even before winning the John Bates Clark Medal, he abandoned research for policy advising in Washington, and, during the Clinton administration, advanced by giant steps under Robert Rubin to become Treasury Secretary during Clinton’s final eighteen months. When George W. Bush wrested the presidency from Al Gore in 2001, Summers was named president of Harvard University. During his turbulent five- year tenure, he proved spectacularly unsuited to the job. Not until the Financial Times and hedge-fund operator David Shaw put him on his feet (as columnist and managing director, respectively) did he begin to assume his present Kissinger-like aura.

Summers has always been an easy target. The criticism goes back to a World Bank memo prepared under his direction in 1991 (for which he took the rap) suggesting that African nations might be expected to specialize in intrinsically dirty manufacturing industries because they paid low wages and were “vastly under-polluted.” It continued when, as president of Harvard, he speculated during a lunchtime talk to economists that variability of aptitude among men and women might account for the underrepresentation of women in engineering and science positions in universities, more than historic patterns of socialization and discrimination. Recently his stewardship of Harvard’s finances has been under fire. A somewhat careless blow struck by Bloomberg News last month made me go back and take a look.

For the overall predicament, Summers clearly bears heavy responsibility. He put into effect a major expansion into the Allston neighborhood of Boston, across the Charles River from Harvard’s Cambridge campus, to be financed by extensive borrowing – overlooking the powerful forces that were being unleashed by Federal Reserve chair Alan Greenspan. (As a former member of the “Committee to Save the World,” as a famous Time magazine cover story described the triumvirate of Greenspan, Treasury Secretary Robert Rubin and Summers, the Harvard president was no better able to foresee the gathering storm than his mates. Nor was Rubin, by now of Citicorp., who had become a fellow of  the Harvard Corporation at the invitation of his former deputy.

At the same time Summers ran off Jack Meyer, the highly successful longtime manager of the university’s enormous endowment – and then for ten months failed to name a successor, until two weeks after Meyer actually left Harvard Management for Convexity Capital Management, the institutional asset management firm he had founded across town. Meanwhile, Harvard’s veteran hands-on treasurer, former McKinsey & Co. managing partner R. Ronald Daniel, a member of the university’s seven-member governing corporation, retired after fifteen years. He was replaced by James Rothenberg, president of a major West Coast investment management firm who has continued to live in Los Angeles. Summers himself is reported to have dabbled in the endowment’s hedging strategies. And he consulted to Taconic Capital Partners, a hedge fund, while serving as Harvard’s president.

But for what happened after he left office, in 2006, Summers bears relatively little blame. Mohamed El-Erian, the executive Summers hired from Pacific Investment Management Co. (PIMCO) to replace Meyer, quit Harvard to return to California a little more than a year after Summers resigned – a month after financial markets grew ominous when a pair of Bear Stearns sub-prime mortgage funds went broke. (Jane Mendillo, a Meyer protégé who had been managing Wellesley College’s endowment, succeeded him in July 2008.) Harvard churned its financial vice president, the so-called “chief financial officer” in Massachusetts Hall who reports directly to the president. Ann Berman, whom Summers appointed, stepped down in early 2006; Elizabeth Mora, who replaced her, left hurriedly, more or less without explanation, in May 2008; Daniel Shore, who stepped up to the job, remains in it.

Meanwhile, though, Harvard President Drew Faust, who replaced Summers (former Harvard president Derek Bok held the fort for an interim year), created a new executive vice president position to oversee, among other things, financial affairs. Edward Forst, global head of investment management for Goldman Sachs, was appointed in June 2008. He stayed less than a year before returning to New York. Katherine Lapp, chief executive officer of New York City’s Metropolitan Transit Authority, was named last fall to replace him.

It was during an anxious couple of months in the autumn of 2008, following the Lehman Brothers crisis, that Harvard decided to liquidate a series of financial positions known as interest rate swaps that had been entered into four years before in hopes of locking in favorable rates for the Allston project. The decision turned out to be very expensive: something like $500 million apparently was lost. It was for this – for bailing out at the worst possible moment, rather than sooner (which would have been much better) or later –that the Bloomberg report excoriated Harvard. (An extensive discussion sparked by the Bloomberg story can be found here on Richard Bradley’s blog. Bradley is author of Harvard Rules: Lawrence Summers and the Battle for the World’s Most Powerful University.)

Clearly none of this is Summers’ proximate fault. The officials who bear the greatest responsibility may be those furthest removed from the various decisions themselves – treasurer Rothenberg, who, despite frequent trips to from Los Angeles to Cambridge, was clearly a long way from the developing situation; and, alas, President Faust herself. A historian of the US civil war, she had little preparation for the trials she has faced. If anyone owed the university a heads-up over the dangerous hedging strategy into which Summers had entered in the autumn of 2004, it was Mohamed El-Erian, now back at PIMCO, and swanning about as author of When Markets Collide:Investment Strategies for the Age of Global Economic Change.

For all the litany of trial and error, it may seem strange to conclude that it’s a good thing that Summers has got his current job. In fact his understanding of the real economy and historical perspective have only begun to be tested. But recession, long-term fiscal imbalances, two foreign wars, health care reform, climate change, banking re-regulation, an automotive crisis and, above all, the rise of China in global markets, with the various imbalances it entails are challenges on an unprecedented scale. Summers talks to everyone about everything. He doesn’t tune out opinions he doesn’t want to hear. He has a terrific spreadsheet mind. He is a man of progressive convictions. He has every reason to want to succeed.

As the first speaker on an economic team of rivals, he reports to a man who has much better political judgment than Summers possesses – Barack Obama.  Now that he has settled into the National Economic Council office, let’s hope that he remains there for many years to come. Larry Summers at last has found his best and highest use.

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3 Trackbacks/Pingbacks

  1. Obama's Crony Capitalism - Reason.com on Monday, January 7, 2013 at 9:34 pm

    [...] tour—parts of 2006 and 2007—as the manager of Harvard University’s endowment, leaving it ill-prepared for the economic downturn that ensued shortly [...]

  2. Obama’s Crony Capitalism | Anything Voluntary on Monday, January 7, 2013 at 10:17 pm

    [...] tour—parts of 2006 and 2007—as the manager of Harvard University’s endowment, leaving it ill-prepared for the economic downturn that ensued shortly [...]

  3. President Partners With Pimco - Unofficial Network on Tuesday, January 8, 2013 at 1:37 am

    [...] tour—parts of 2006 and 2007—as the manager of Harvard University’s endowment, leaving it ill-prepared for the economic downturn that ensued shortly [...]


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