I do not know anything about Janet Yellen. And truth be told, I really do not know who would be the best candidate for the job.
I can already hear the howls of protest. I know Larry's history, the warts and all. I have read the diatribes of those outraged by the prospect of his selection, and the fawning commentaries of those lobbying for him. And I have marveled at the fact that this is about the position of Chairman (sic) of the Board of Governors of the Federal Reserve Bank. This is not a position that generally garners much commentary outside of Wall Street and the financial community. And if Larry Summers were not a prospective nominee, no doubt the topic would once again recede to the back pages of the New York Times, if not the front pages of the Journal.
My motivation is different. I just want to watch the confirmation hearings.
It is now a half a decade since the 2008 financial crisis shook the world economy, and a half a decade since the head of the U.S. Federal Reserve Bank effectively became the central banker for the world. Perhaps that is why more people should care about who is appointed to lead the Fed this time around. In a world where DC politics have ground to a dysfunctional halt, where the Euro continues to struggle on the precipice of failure, and where the growth rate of China is grinding downward, the head of the Fed has become a figure of global importance. Perhaps in some respects eclipsing that of the President.
And surely no person views himself as more prepared to step out onto that stage, and lead the world through a precarious financial future than Larry Summers.
But it is not the future that concerns me, but rather the past.
A half a decade after the global financial collapse, the causes and the lessons remain opaque. This week, the Securities and Exchange Commission succeeded in winning a guilty verdict of fraud against Fabrice Tourre, a mid-level mortgage trader at Goldman Sachs. By all accounts, M. Tourre is the first employee of a major Wall Street firm found culpable of any crime related to the financial collapse. Even as the SEC is now pursuing a charge of "Failure to Supervise" against hedge fund trader extraordinaire Steve Cohen, no such charge has been brought against any of the doyens of Wall Street who were driving the train at the time it drove off the tracks. Neither the CEO nor members of the Board of Directors of AIG were sanctioned, much less prosecuted, for their lack of considered oversight of that firm's massive unhedged and unreserved credit default swap business. No doubt some of the urgency suggested by SEC comments reflected public frustration that no senior executives on Wall Street have been prosecuted for culpability in the events that transpired over the course of the 2008 collapse.
M. Tourre did not present a defense. His attorneys felt the onus was on the SEC to prove culpability, and that it would have a difficult time doing so. In essence M. Tourre's was a modern spin on the Nurenberg defense. Not that he was ordered to defraud investors, but rather that to do so was part of the business, that trading by definition involves two parties with diametrically opposed interests, and that the culture and purpose of his job was to win at that game.
That the jury found against M. Tourre was not as notable as the comments of the jurors afterward. M. Tourre was, in their minds, a pawn of sorts, a scapegoat that was the focus of SEC attention because getting him was the best they could do. After all, Goldman Sachs had already settled with the SEC for its corporate culpability for the tidy sum of $550 million, a payment made contingent on no admission of guilt. Essentially, and to the chagrin of Tourre's counsel, the juror's overlooked the trees and focused on the forest. The decision of the jury, it seems, revolved around revulsion at what they saw when they looked under the hood at the engine that drives Wall Street and the financial markets: Greed.
Of course, that is the way it is supposed to work. Going back to Adam Smith's Wealth of Nations, the central force that drives the efficient allocation of scarce resources in a capitalist economy is the collective actions of self-interested participants coming together in free markets. Or it is supposed to work. But in the words of one juror, He [M. Tourre] is what Wall Street is all about and it scared me.
Which brings us back to Larry Summers.
In the wake of the 2008 collapse, many books have been published about what happened, about who did what to whom, and about who was at fault. But within the public square we have made little or no progress in coming to grips with the significant changes that have taken place in the structure and regulation of our financial markets. By and large, people have taken sides and gone to their corners. For Democrats, deregulation was the culprit, Goldman Sachs was the face of the villain, and Dodd-Frank was the solution. For Republicans, regulation was the culprit, Fannie and Freddie were the faces of the villains, and getting rid of Dodd-Frank is the solution. Both sides say they are opposed to further bailouts. Both sides say they oppose too big to fail.
And both sides take massive amounts of money from the financial services industry to fund their political campaigns.
Right now, things are not working. We have taken few lessons from the turmoil of the past few years, and we still face significant challenges. We need a very public airing of the events of the past quarter century, of the massive expansion and deregulation of our financial markets, and of the nuances of what has evolved. We need to look at both the forest and the trees. We need an open discussion of the rationale behind financial deregulation in the 1990s. We need an open discussion of the cost and benefits of the evolution of the derivatives markets. We need a reasoned debate over the implications of the events of the past several decades before we can hope to set rational policies and chart a path forward. And we need to have Republicans and Democrats debate their perspectives in a forum that will not allow unsupported statements to be held forth as facts.
The traditional confirmation hearings for a new Fed Chairman would involve Senators putting on their erudite best as they asked questions prepared for them by their staff. And if Janet Yellen is nominated, I expect that is what we will get. Senators will pointedly ask how and when quantitative easing would wind down, and smartly throw out the term tapering. Democrats would press her on the conflicting priorities of controlling inflation and stemming unemployment. Republicans would ask her about the inflationary implications of the Fed balance sheet. And Rand Paul and Ted Cruz would throw out derisive and conspiratorial questions about fiat currency.
But in my imagination, confirmation hearings for Chairman Summers would take on a different tone and tack. Unlike Alan Greenspan, whose comments were unintelligible to the average American, or Ben Bernanke whose demeanor is polite and deferential, Larry Summers has never been inclined to shy away from intellectual debate or political combat. He was a central figure in the course of events that got us to where we are today, and all of the questions that need to be asked would be asked. Like the Clarence Thomas nomination hearings, the Summers nomination would be a prime time event, and America would tune in.
Conservative Fed Governor Richard Fisher would participate, and a present his arguments for the urgency of downsizing the largest banks. MIT professor and former IMF chief economist Simon Johnson would present data suggesting that a $300 billion annual subsidy is now being provided to the largest banks in the world. Former Fed Chairman Paul Volcker would make his case that the innovations spurred by deregulation have produced little of material value to the real economy and undermined the essential functions of the commercial banking system. And Jamie Dimon and Lloyd Blankfein would present the case that too much was already being done, that complex derivatives have already been eliminated, and that if anything the regulatory shackles and new capital requirements are dangerously holding back our economic recovery.
And in the center of it all would sit Larry Summers, uniquely qualified to engage each argument, in the role of a lifetime. Playing on the biggest stage of his life, he would separate fact from fiction, real argument from politics, and data from distortion. He would ask for data to support arguments, from whatever direction. He would engage the arguments of economists and lobbyists, of conservatives and liberals and conspiracy theorists alike, and perhaps, finally, we could have a real and vibrant discussion based on real historical data to illuminate our collective path forward.