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August 25, 2013
David Warsh, Proprietor

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Summers: A (Mildly) Exculpatory Note

Larry Summers is leaning in – he badly wants that job as chairman of the Fed. Many find his candidacy hard to fathom. To understand Summers’s motivation, it helps to know something about the career of E. Gerald Corrigan.  Just as Jerry Corrigan., now 72, was the greatest US crisis manager of his generation, so Summers, 58, was the greatest crisis manager of his own – that is, until Ben Bernanke came along. No wonder then that Summers wants a second chance.  Arrogant and ambitious he may be.  But as a veteran player, he knows the game.

To this point, very little attention has been paid to what is required of a central banker. Gillian Tett, of the Financial Times, citing Binghamton University anthropologist Douglas Holmes, thinks they need to be storytellers. But that’s more her job and mine, and, before us, that of the community of economists on whom all journalists depend. Central bankers really have just two jobs, the conduct of monetary policy and crisis management.

Monetary policy – the management of money, credit and interest rates – is a collegial, cerebral business. Managers of the US Federal Reserve System mostly think about whether the economy is overheating or not, or assuming a distended shape, and, if so, what can be done about it, chiefly by manipulating the banking system via the market for the US Treasury debt, but sometimes, as in the present case, by entering broader financial markets (quantitative easing).

Crisis management is something else again. Here are Milton Friedman and Anna Schwartz on the topic, from A Monetary History of the United States: 1867-1960:

The detailed history of every banking crisis in our history shows how much depends on the presence of one or more outstanding individuals willing to assume responsibility and leadership….. Economic collapse often has the characteristics of a cumulative process.  Let it go beyond a certain point, and it will tend for a time to gain strength from its own development.  Because no great strength would be required to hold back the rock that starts a landslide, it does not follow that the landslide will not be of major proportions.

(There are those who think banking is like any other industry, and that if some simple measure were adopted, crises would disappear. This is wishful thinking. (The latest example is The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It , by Anat Admati, of Stanford’s Graduate School of Business, and Martin Hellwig, of the Max Planck Institute for Research on Collective Goods.) It’s not that banking regulation doesn’t need to be carefully thought-out; rather, it’s that bank-like innovators can be expected to devises ways to wire around it.  In Shadowy Banking, Edward Kane, of Boston College describes the latest maneuvering. “Shadowy banking is the inevitable yin to regulation’s yang…,” he writes. “Financial crises are a fact of life.”)

The inevitability of crises puts a premium on experience. Bernanke and Alan Greenspan showed that there are other ways to lead the Fed.  But the path that Summers traveled, like that of Corrigan, is a more traditional one, namely by working for a time as understudy to a master craftsman.

Corrigan, a career Federal Reserve employee, apprenticed to Paul Volcker. The two met in 1975 when Volcker was president of the Federal Reserve Bank of New York and Corrigan a vice president. After Volcker became Fed chairman, in 1979, Corrigan served briefly as his special assistant, overseeing the aftermath of the Hunt bothers; unsuccessful 1980 attempt to corner the silver market, before becoming president of the Federal Reserve Bank of Minneapolis. From there he oversaw the rescue of Drysdale Securities, in 1982,and Continental Illinois National Bank and Trust Co., the nation’s seventh largest bank, in 1984, before returning to head the New York Fed, in 1985. He staunched potential panic in October 1987, when the Dow Jones Industrial average lost nearly 23 percent in a single day.

Summers, a Harvard University economist, served as an assistant to former Goldman Sachs co-chair Robert Rubin in the days before the Clinton administration took office, devising details of the of the budget agreement of 1993. He then signed on as Undersecretary for International Economic Affairs in Secretary Lloyd Bentsen’s Treasury Department, and advanced to Deputy Secretary when National Economic council director Rubin replaced Bentsen.  He was deeply involved in the serial financial crises of the 1990s:  Mexico, in 1994, the Asia economies, in 1997, and Russia, in 1998.  Between 1998 and 2001, he, Rubin and Alan Greenspan presided over the climactic phase of the vast deregulation of the US financial industry that had begun twenty-five years before under Richard Nixon. When Summers returned to Washington in 2009 as director of the National Economic Council for President Obama, he played a key role in the decision to keep the US auto industry afloat.

Both men are the product of strong value systems: Corrigan in the Jesuit traditions of Fordham University, where he was an undergraduate and earned his PhD; Summers in the commitment to open give-and-take of big-league technical economics.  Both men have become supremely well-connected over the years. And both understood from the start of their careers that force of will, and even physical mien, have much to do with successful crisis management. Thus the command manner that each learned to wear as if it were a power suit. Corrigan, lumberjack large, shaggy, gravel-voiced, physically intimidating; Summers intellectually nimble, scowling, speaking hyper-deliberately, as if he were delivering blank? verse: in each case the manner is calculated to elicit obedience.  These are men who repeatedly have been in battle and who each time have held the line.

(There is no tradition of heroic fiction set in the world of central banking as there is of, say, naval leadership.  Even so, financial crises have their fans.  The late Charles P. Kindleberger made something of a hobby of them, at one point compiling an annotated fifty-book list of Retirement Reading for Bankers; at another, boiling it all down in his classic Manias, Panics, and Crashes: A History of Financial Crises. And David Landes, of Harvard University, who died earlier this month, at 89, l in Bankers and Pashas: International Finance and Economic Imperialism in Egypt, made something of a thriller out of the story of the building of the Suez Canal.)

But there are some important differences between the men as well.

Corrigan was a favorite to succeed Alan Greenspan in 1995 when, in January 1993, he unexpectedly resigned from the New York Fed.  A year later, he joined Goldman, Sachs. What happened?  Signs now point to a personal crisis of sorts. Several bad habits, chain-smoking among them, he put behind him. A few years later, he married the woman who had been first vice president of the New York Fed, Cathy Minehan, by then president of the Federal Reserve Bank of Boston,.  The prior marriages of both had dissolved. Corrigan told The New York Times that the romance began in 1995. Minehan served until 2007. Today she is Dean of the School of Management of Simmons College.

Summers, whose meteoric rise commenced just as Corrigan’s ended,  also separated, and later divorced, as he was leaving Washington, D .C, for the presidency of Harvard University in 2001.  Several years later, he, too, remarried to good effect. But where Corrigan enjoyed twenty years of quiet life since leaving government, Summers walked into a buzz saw. A series of missteps led to his being forced out of office after five years by Harvard’s governing corporation.  None was more costly than his handling of Harvard’s Russia scandal, in which Summers’s close friend and collaborator Andre Shleifer was found to have attempted to muscle into the mutual fund business for himself while advising his Russian enablers on behalf of the US State Department.

The closer you look at Summers’s not-so-tacit approval of the affair, the more appalling it becomes. That fact that no one in economics has mounted a defense of Shleifer’s and Summers’s conduct – not Andrei, not Larry, not any of their numerous seconds – should tell you all you need to know: their actions were indefensible. All the more alarming has been Summers’s ability to suppress criticism.  Taken altogether, my hunch is that the story is more than enough to put the kibosh on his appointment.  He can make money, give advice, mentor students, but no more running for high office.

So who should be chair? If the otherwise highly-regarded Fed vice chair Janet Yellen is considered by insiders to lack this rally-to-me taste for crisis action, it should come as no surprise.  It is not the part of the job for which she has prepared. Yellen has a splendid record as a forecaster, analyst, and colleague, both as president of the San Francisco Fed and of the seven governors of the system.  But that constellation of gifts for monetary policy is almost the opposite of the visceral instinct required to take charge in when circumstances suddenly darken. Among her colleagues, Eric Rosengren of the Boston bank, James Bullard of the St. Louis Fed, and governor Jeremy Stein, are better suited to the master and commander role.  It is time for President Obama to end his indecision.

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One Comment

  1. William Zame wrote:

    This and the following week’s post are really excellent. Not nearly enough attention has been paid to Summers’ role in the Russia affair, which is truly scandalous. His nomination as Chair of the Fed would likely provoke scandal and his appointment would likely be a disaster. I think Yellen would make an excellent choice, as would Romer; I cannot comment on Rosengren, Bullard or Stein.

    Monday, September 9, 2013 at 4:47 pm | Permalink

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