Tuesday, November 24, 2009

Summers Dead Wrong on Cause of Crisis

This from Vanity Fair:
Summers has plenty of other things figured out as well, including the origins of the current financial crisis, for which he has crafted a cogent explanation worthy of his reputation as a policy wonk and his days as a college debating champion at M.I.T. “I think crises like this get made by multiple cascading misjudgments,” he explains, and then catalogues them: too much government spending, not enough private-sector saving, too much dependence on foreign debt, too much demand for “riskless” financial instruments that weren’t, in fact, riskless …

The first three of these were, at best, only tangentially related. As much as I think the Bush tax cuts were a mistake, Republican inability to balance the budget really did not have anything to do with the crisis. Ditto for Private-sector saving (even though i think saving is good, generally...) Dependence on foreign debt had nothing to do with the crisis.

Then there is this:
There were also charges of betrayal from Iris Mack, a former derivatives specialist at the Harvard Management Company (responsible for investing Harvard’s endowment) and the second black woman to receive a doctorate in applied mathematics at Harvard. Mack claims that soon after she started working at Harvard Management, in early 2002—after a stint at Enron—she became uncomfortable with the lack of understanding she thought her colleagues had with the risky derivatives they were investing in. (She was proved correct in the past fiscal year, when the endowment dropped 27.3 percent.) On May 12, 2002, she wrote an e-mail to Summers, alerting him to her concerns: “As a proud Harvard alum I am deeply troubled and surprised by what I have been exposed to thus far at HMC, and the potential consequences for my alma mater’s endowment. In addition, I strongly believe that if my fellow alum[s] knew how the endowment is being managed and the caliber of some of the portfolio managers, they probably would not give another dime to our endowment.”

She asked Summers for a meeting and that he keep the correspondence between them confidential, “especially due to th[e] fact that several individuals have been terminated from HMC when they raised concerns about such issues.” Nine days later, Mack got an e-mail from Marne Levine, Summers’s chief of staff at Harvard (and now his chief of staff at the National Economic Council), asking Mack to contact her and assuring her that the initial e-mail “remains confidential.”

But not for long. A month later, she was confronted by Jack Meyer, then head of H.M.C., who had copies of her correspondence with Summers and Levine. Meyer fired her the next day. She has since reached a confidential settlement with Harvard that she won’t discuss. But she is unequivocal about one thing. “I would say that there is 99.9999999999999999 percent probability that Summers had a hand in my departure,” she wrote me in an e-mail. (Summers replies he had nothing to do with her firing and could not, because she did not work for or report to him. “[Mack’s] allegations were the subject of thorough internal and external reviews and found to be without merit,” says a Harvard spokesman.)

I'd already heard (and posted) about this, but don't remember posting this part of the story... The rest of the Vanity Fair piece is garbage, as you would expect.


  1. Summers is a credentialed stooge stuck in a FIRE economy world-view. Larry, if you’re reading, here are some other things you might want to consider.

    1) Introduction of Japanese ZIRP in the mid-90’s starting a massive carry trade; this set a lot of things in motion. Mercantilist currency policies in the Far East - dollar pegs, managed currency rates, etc.

    2) The Fed orchestrating a bailing out LTCM and providing monetary conditions supporting the late 90’s stock bubble. Too low interest rates for too long after the 2000 bust driving, among other things, a reach for yield (and risk).

    3) A pathological fear of recessions on the part of this country’s leadership. Let’s guarantee further imbalances and deeper hole for the future to avoid some pain now. Recessions are part of a capitalist system – get over it.

    4) A government sanctioned push for home ownership. Many new entrants did not know what they were getting into and were not ready. GSE standards were altered (lowered) to facilitate purchases by otherwise unqualified buyers.

    5) A failure of effective financial regulation. Too much to elaborate on here.

    6) Conflicted ratings from Moody’s, S&P and Fitch.

  2. Finally, a site-specific discussion about a key figure, whose footprints can be traced back to the beginning. His handprints were on the back of Brooksley Born when she raised concerns about derivatives, too. Is he a misogynist?

  3. Thank you and Thank you! Don't let up on the chief perpetrators/enablers of this historic theft!

  4. The Fed is trying to increase the money supply, they just don't know how it's done. The money multiplier is supposed to mean that capital in the banks splits 8-to-1. Instead capital in the banks has been building up.

    I believe it is true that M0 is actually greater than M1 at this time. Absent action on incomes, it's all downhill from here.

  5. Finally! A website devoted to a cause I can support with all my heart.

    The first year of the Obambi presidency can never be reclaimed, but getting rid of this stooge would be an excellent step for the new year!

  6. Hey, don't forget about his paper while he was at harvard many years ago wherein he solved Gibson's Paradox regarding gold and interest rates. This paper details the reason for the suppression of gold to keep real rates lower than would otherwise be required by the market. He proved that rising real rates correlate with a rising gold price - and conversely dropping gold and a lowering of the real rate.

  7. What does Obama's submissiveness toward Summers say about Obama?

    And yes,that woman was probably fired as being too "uppity."

  8. I hadn't known about Summer's Gibson's Paradox paper. I definitely need to read more of Summers' "hundreds of academic papers"...

    Thanks for the tip.


  9. In a recent paper, Vernon Smith and I discuss the conflict that the CFTC had with the Treasury (Rubin and Summers), the Fed (Greenspan), the SEC (a now repentant Arthur Levitt). Rather than rewriting our argument that Summers played a pivotal role in creating the crisis, I'll just point to pages 285-287 in the article, which is available at http://www.chapman.edu/images/userImages/mattmill/Page_12352/GjerstadSmith_CR_2009.pdf