In mid-2009, I went on a search for apologies, from the people who laid the intellectual and regulatory foundations for the financial crisis. I wondered whether and when Larry Summers, in particular, would apologize for what he did at Treasury, and I was heartened when Bill Clinton came out and said that, with hindsight, he was wrong about derivatives regulation.
Then, in 2010, Inside Job came out, and demonstrated the need for the likes of Summers to be asked direct questions about their culpability on the record, on-camera. But Summers refused to be interviewed for that film, despite having known its director, Charles Ferguson, for many years. And when he does sit down for a rare on-the-record video interview, these questions never seem to get asked.
So I was very happy to see that Krishnan Guru-Murthy at least tried to ask Summers these questions earlier this week. Krishnan starts off with standard Summers-interview questions, asking him what he thinks about UK fiscal policy, and Summers gives his standard wise-man answers. But then Krishan gets steadily tougher, asking Summers about the advice he gave the president-elect in 2008, and eventually about his deregulatory tenure at Treasury.
And Summers doesn’t even come close to apologizing, or admitting that he made any kind of mistake at all. Quite the opposite: he starts getting very touchy, telling Krishnan that he’s reducing complex questions to overly simplistic black-and-white narratives. Halfway through the interview, Krishnan asks Summers whether laissez-faire capitalism isn’t working for the middle classes. And Summers pushes back. “I’m a Democrat,” he says, adding that “I’ve long been someone who favored significant interventions to protect the environment.”
“Protect the environment?” responds Krishnan. “Didn’t you advise the president not to sign up to Kyoto?”
“No, no,” replies Summers.
“You didn’t?”
“No. I advised that an agreement be designed in order to protect the American economy, and the United States not take on obligations that would render its businesses uncompetitive.”
Summers never explains how this differs from advice not to sign up to Kyoto, nor does he give an example of any “significant interventions” he pushed for to protect the environment. Because the interview soon moves on to the subject of deregulation, with Summers saying that he “was for moving derivatives to exchanges” — something Krishnan lets stand — and deciding to pick the ground of Glass-Steagal on which to fight, saying that Lehman and Bear Stearns might have survived had they been part of bigger banks.
Well, yes, they might — but then again, they might also have just created another Citigroup, requiring massive bailouts from the government. Personally, I don’t think that repealing Glass-Steagal was in and of itself a major cause of the financial crisis, but Summers goes further, saying that huge financial supermarkets are a good thing (he holds up Canada as a model).
Krishnan continues to push. “Even Bill Clinton says that he was wrong to listen to the wrong advice when it came to derivatives. And that was your advice.” (Has Summers ever been asked questions like this, on camera, by an American reporter?)
Summers responds, again, that “it’s complicated”, and then builds up to attacking Krishnan:
Would it have been better if the whole of the 2010 financial reform legislation had passed in 1999 or 1998 or 1992? Yes, of course it would have been better. But at the time Bill Clinton was president, there essentially were no credit default swaps. So the issue that became a serious problem really wasn’t an issue that was on the horizon… If you want to assign responsibility, If you take a market that essentially didn’t exist in the 1990s, that grew for eight years from 2001 to 2008, and then brought on a major collapse, if you were looking to hold people responsible, you would look to… officials of the Bush Administration. I’m not going to tell you that I foresaw this crisis in all its dimensions, but without sounding like Newt Gingrich here, for you to read two articles that a researcher handed you and sling this stuff is not really to give your viewers a very clear chance.
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Summers did not say credit derivatives didn't exist in the 1990s, he said credit default swaps didn't exist then. I don't know when CDS's started, but the fact that a magazine talked about credit derivatives is no evidence that they CDS's were around then. Credit derivatives have existed since the 1980's at least, and involve things as simple as separating the coupons from the principle of a t-bill, and selling one without the other. The two pieces are derived from the T-Bill. Credit default swaps are a particularly hazardous kind of insurance - where someone who might or might not own a bond gets insurance against it's default. That's what drove the consequences of the slump in housing prices into overdrive. If you're going to point out a mistake in Summers' statements, find a better one. Don't equate credit default swaps with credit derivatives.
#1 Posted by Ken, CJR on Fri 27 Jan 2012 at 11:10 AM
erm, I believe it was Charles Smithson who disclosed that Credit Default Swaps were conceived by Bankers Trust and traded beginning in 1991. (there's a wonky paper, written circa 2005, floating around on the innertubes. Might have been Gillian Tett in Fool's Gold.
But, right Ken, the important thing is to split hairs here. CDS is not "derivatives," per-se. And then too, naked CDS didn't come until later. So it's obvious that lack of regulation in general, and Larry Summers' willful blindness in particular, had nothing whatsoever to do with any world financial collapse--if such a thing actually happened.
Salmon: you earned it today. Good find.
#2 Posted by Edward Ericson Jr., CJR on Fri 27 Jan 2012 at 02:16 PM
Edward, I agree that Summers' willful blindness, and ideology, contributed to the financial collapse. But I do however think that good journalists do "split hairs" and report with precision, and don't confuse financial terms.
#3 Posted by Ken, CJR on Fri 27 Jan 2012 at 02:30 PM
Would the more important hair to split, then, not be that Summer's statement that credit default swaps "did not exist" in the 1990s is wrong? Last I checked, 1991 was near the beginning of the 1990s.
#4 Posted by Edward Ericson Jr., CJR on Fri 27 Jan 2012 at 04:38 PM
If there has ever been a more destructive toad visited upon a democracy, I've not met it - though Paul Wolfowitz comes close.
This is the guy who ridiculed Raghuram Rajan as a luddite when he presented a paper on how improper financial risk assessment was being used to inflate profits (and bonuses) in good years only to provoke collapse in bad.
This is the guy who hated infrastructure and pushed out Romer and Volcker during the Obama stimulus debate.
This is the guy who, with Andrei Schleifer, advised the policies that blew up Russia under Yeltsin.
This is the guy who blew up Harvard's Endowment on crap similar to what blew up municipalities like Jefferson County, not to mention his role in blowing up Harvard's faculty.
And there is that whole Brooksley Born thing. All in all, it's quite a rap sheet.
The guy is poison. Why do people keep letting the little creep in to manage their affairs? Does no-one recognize that he's an awful, if not corrupt, manager?
And I love that his response to "Inside Job" is to get huffy and pull rank. If you look at the Inet interview with Charles Ferguson, that seems to be the response of all these ivory tower, economy wrecking, economists. "How dare you question me! I am an authority!"
Whatever you say, Jabba.
#5 Posted by Thimbles, CJR on Sun 29 Jan 2012 at 03:24 PM
"he said credit default swaps didn't exist then"
Credit Default Swaps maybe didn't exist, but insurance has existed for a long time. Insurance is a well known product with all sorts of rules to prevent abuses which Alan Greenspan, Robert Rubin, and Larry Summers decided didn't need to apply to this kind of insurance product. They thought it better that it operate in secret and without the rules that foster integrity in the insurance market.
They were either willful idiots or corrupt ones. Either way, they were captured by the banks.
#6 Posted by Thimbles, CJR on Sun 29 Jan 2012 at 03:33 PM
CJR's take on the crash reminds me of the guy who strikes out with two out in the ninth, after his two predecessors had also struck out. The third out 'caused' the loss, you see. Financial misdeeds can cause bubbles and temporary setbacks. But they do not cause prolonged slumps - it takes deeper factors. In Europe, the 'bad bankers' narrative is unavailable to the apologists for more 'controls', since it is so obvious that the political sector has caused the crisis. But here in the states, the advocates of a public administrative elite making all decisions can still cherry-pick the factors that strengthen their self-interested case, since an economic event such as the 2008 meltdown is so complex. The 1929 crash was caused by some dodgy banking techniques, but they did not 'cause' the prolonged slump that followed - it took the Fed to do that with poor monetary policies. At that, the '29 crash was brought on by Fed actions. It was the political sector's response to the crash that prolonged the Depression. Same story in Japan following its banking crisis in the late 1980s.
Paul Krugman has sensibly warned of a generation-long sluggishness similar to that of Japan. But Japan has tried any number of fiscal stabs at 'austerity' and 'stimulous' over the past two decades without recapturing its earlier growth. Since long-term economic trends are more cultural than anything else, it is possible that Japan's aging population has something to do with this. But to argue that if Brooksley Born or some other paid-up member of the permanent Washington establishment had gotten her way in the late 1990s, everything would have been fine in 2009, well, that strikes me as simple-minded beyond anything I see in the Wall Street Journal's editorial page.
#7 Posted by Mark Richard, CJR on Sun 29 Jan 2012 at 05:14 PM
"But to argue that if Brooksley Born or some other paid-up member of the permanent Washington establishment had gotten her way in the late 1990s, everything would have been fine in 2009, well, that strikes me as simple-minded beyond anything I see in the Wall Street Journal's editorial page."
Mark, from the 1940's to the 1980's, the financial sector was a source of stable growth without the financial disruptions we've seen over the last 3 decades. We had regulation that worked, and then we got rid of it.
In places where they didn't get rid of it, they did not suffer the recent catastrophic collapses - specifically Canada and Texas - the reason being that they tightened up financial regulation after they suffered real estate bubbles in the 80's and 90's.
There's a simple reason for the recent collapse, as William Greider put it decades ago:
http://www.pbs.org/wgbh/pages/frontline/shows/crash/interviews/greider.html
"The core problem is that the world system, led by the United States, has pursued what is really a utopian idea. The idea that self-regulating markets, cut free from any moderating controls and regulations, will always correct themselves. That's a very alluring idea put out by the classical, neoclassical economists.
History has demonstrated repeatedly over 300 or 400 years of capitalism that it's wrong. That that's not what happens. Unregulated markets--their idea of equilibrium may be to swing widely back and forth at extremes. Sooner or later, they'll get caught in a period of wishful thinking or over investment, use whatever term you like. That illusion, bubble collapses and you've got ruin. General ruin.Then governments have to step in after the fact and say, "Well, we'll pick up the pieces because somebody's got to put the system back together again." That's the fallacy of the sort of liberalized system we've been pursuing. It's centrally about the global financial system, but it also is trading rules or the absence of trading rules. It's about labor rights. It's about social conditions, safety nets in poorer countries, as well as wealthy countries."
What lead to this crisis were several deregulatory steps:
1: The wall of separation between financial entities was torn down. This allowed companies to create complex financial products which were too complex to figure out and too complex companies to effectively regulate. Since many of these companies consolidated into super banks, this was where we got TBTF - and the implicit guarantee of government rescue that faux conservatives complain about when it's applied to freddy and fannie, but not the super banks.
2: Super banks were given increased leverage limits under the Consolidated Supervised Entity program.
3: The unregulated CDS product allowed companies to replace underwriting standards with insurance - which meant companies could take on built-to-fail activities, book the profits, and pass on the risk to insurers (AIG) like it was a hot potato.
4: There was nobody properly rating this crap. When these awful loan products and the awful underwriting standards they were given under were sold on the secondary market, everybody was pretending that the unthinkable failure of all protected against the failure of some/many/most. The SEC and the Fed decided they weren't going to bother with fraud and the ratings agencies were on the take. Risk was passed on to investors (and then the highly leveraged super banks once investors dried up) like a hot potato.
You have an industry which is charging rents based on the dark unregulated nature of their business. Competition does not lower price in a dark market. Risk cannot be assessed in a dark market. Fix it.
#8 Posted by Thimbles, CJR on Sun 29 Jan 2012 at 11:55 PM
To Thimbles, I don't have time for a detailed response to your thoughtful post, but from the 1940s to the 1980s all was not beer and skittles. The 1957-58 recession was bitter and biting, and by the 1970s we had entered into the period of hyper-inflation that prompted some of the reforms of the 1980s and after.
As to longer-term trends, I'll stick with my notion that they are cultural rather than 'policy' driven. There is a general consensus on the Left that the 'golden era' of the US economy - the one with good jobs for unskilled but hard-working labor - was roughly 1947 to 1972. These thinkers believe that the reason was relatively high marginal tax rates and strong unions. I believe that by 1972 a lot of the cultural changes indicating less interest in economic growth for its own sake had kicked in. Usually regulation is the result, not the cause of cultural/economic change, and it usually signals a hostility to economic growth.
So I don't believe market-based solutions are a panacea by themselves. Markets can fail, too. But the market is held to much higher standards than is the public sector by the chattering classes. Greider and others believe that 'regulation' is the answer, and I'm sorry, but I don't. Regulators almost always end up in bed with the industries they are regulating, since the two have a symbiotic relationship. Those who reflexively think 'regulations' are the answer seem to hold that belief on the unconscious assumption that they, or people like them, will be doing the regulating.
I don't read much explanation of why the pendulum swung toward deregulation in the 1980s. American liberals have trouble explaining why there might be hostility to more layers of regulation over time - for one thing, on what grounds 'the regulators' have superior knowledge of an industry. In spite of the emotional anti-market sentiments of so many jaded members of the chattering classes, the most dynamic economies in the world today, in Asia, took off when barriers and permits and rules were reduced. Anti-marketeers have no answer to this circumstance, so they focus on the costs of growth. The Left has strong 'anti-growth elements' in its constituency, so I wonder of it isn't material growth that the regulation lobby wants to control - because markets are so successful at it.
Gotta run.
#9 Posted by Mark Richard, CJR on Mon 30 Jan 2012 at 11:38 AM
"but from the 1940s to the 1980s all was not beer and skittles."
Never said it was, but it was without the financial crashes which have become routine in late decades.
"The 1957-58 recession was bitter and biting"
Yes, probably because of the adjustment of European economies from Marshall Plan dependancy to independency which led to an over supply of manufactured goods.
But a two year recession is mild compared to what we've seen in late decades as a result of financial collapses.
"by the1970s we had entered into the period of hyper-inflation"
Hyper inflation? Let's not throw around those terms lightly. There was inflation due to successful labor negotiation, oil price shocks, and the aftermath of a guns and butter war in Asia.
That there were bumps in the economy unrelated to the financial sector is not an indictment of the financial regulation with kept those markets stable and functioning for 40 years.
"Usually regulation is the result, not the cause of cultural/economic change, and it usually signals a hostility to economic growth."
But why is there a hostility to economic growth? What kind of economic growth are you talking about which provokes regulatory backlash? We're not talking about people who object to a definition of "progress" because they want to live in the past - leftists aren't the ones wearing the tri-cornered hats and talking about how the "founding fathers" viewed civil rights. We're talking about a type of economic growth which harms the interests, if not the health, of the greater society.
"But the market is held to much higher standards than is the public sector by the chattering classes."
Is it really. After 2007, you're going to say that?
"Regulators almost always end up in bed with the industries they are regulating"
When governmental culture has shifted from being an oppositional force to business to being an enabler, yes, that happens. One would think that would make one question the relationship between government and business.
"I don't read much explanation of why the pendulum swung toward deregulation in the 1980s."
The Powell memos. The break between the new left and unions and the realignment of democratic party funding with big business and wall street. The stuff is out there to read.
"in Asia, took off when barriers and permits and rules were reduced."
Actually, there was that Asian collapse.
"The Left has strong 'anti-growth elements' in its constituency"
Maybe if it were just Leftist anti-growth people pushing for financial re-regulation and pointing to deregulation as the culprit in the last collapse, you'd have a point. But it's people like John Reed, the guy who lead citigroup (citicorp back then) when it and Robert Rubin were putting a wrecking ball through Glass Steagal.
http://billmoyers.com/segment/john-reed-on-big-banks-power-and-influence/
JOHN REED: If you say to a businessman, "What is your objective?" and he says, "My objective is to make money," there are no boundaries on that...all of a sudden, we changed to, "Hey, I'm not totally sure what we're doing here. Maybe it's not right. But you know what, I'm getting paid my commission." And that mindset took over...
I used to tell my kids, "Why do you think a car has brakes?" And they all would say, "To stop." And I'd say, "No, a car has brakes so that you can drive fast. If you got into a car that had no brakes and you knew it, how fast do you think you would drive?..." And that's the same reason we have rules."
#10 Posted by Thimbles, CJR on Tue 31 Jan 2012 at 02:30 AM
Thimbles wrote: "When governmental culture has shifted from being an oppositional force to business to being an enabler, yes, that happens."
padikiller responds: And there you have it, in black and white....
The standard position of the those who can no longer be called "commies" under Pravda's... er, I mean CJR's new comment censorship policy.
The Gubmint's job, according to these leftists, is not to foster economic growth, but to actually inhibit it.
Now THERE'S a recipe for prosperity and happiness!
#11 Posted by padikiller, CJR on Tue 31 Jan 2012 at 08:56 AM
Yeah, some people want to inhibit criminal behavior, others want to pretend it doesn't exist.
And, according to some, those people are communists.
A word that now has no meaning except in so far as it signifies "something not desirable."
#12 Posted by Thimbles, CJR on Tue 31 Jan 2012 at 11:10 AM
And in other news:
http://www.mcclatchydc.com/2012/01/30/137029/commentary-three-female-regulators.html
"More people in positions of power — government regulators, especially — should have foreseen the subprime financial crisis coming.
They could have saved us from this mess.
But wait …
Three regulators did indeed ring warning bells — at the right time, in the right places, and loud enough for other banking and financial system overseers.
All three were women: Brooksley Born, Sheila Bair and Susan Bies.
All three were ignored.
You may have heard before about the warnings issued by Born, the head of the Commodity Futures Trading Commission in the 1990s, and Bair, the chairwoman of the Federal Deposit Insurance Corp. from 2006 to 2011.
Bies’ concerns, however, came to light recently when the Federal Reserve released transcripts of its policy meetings from 2006, a full two years before the crisis exploded."
Don't exactly buy the whole sexism argument, Ed Gramlich wasn't a woman and he was ignored, and 'Wall Street is our Main Street' Kathryn Wilde is a good example of how capture can affect both sexes, but yeah, these jerks in charge of our financial system and its regulation do seem to exhibit some nasty masculine qualities.
#13 Posted by Thimbles, CJR on Tue 31 Jan 2012 at 11:30 AM
Man, Thimbles is really coming clean in this thread!
So now "business" = "criminal behavior" that must be "opposed" by the Gubmint...
Yeah... That kind of philosophy makes a nice society, alright. No chance of any oppression or economic stagnation or misery in running a country on the basis of this belief! It's not like we could end up with gulags or famines or anything, right?
This screwy Marxist nonsense has never worked anywhere its been tried. Ever.
#14 Posted by padikiller, CJR on Tue 31 Jan 2012 at 11:51 AM
"Business" and "Growth" that wipe 3 years of GDP growth off the global economy aren't the kind of things mature civilizations should enable.
But I wasn't expecting maturity from you so I'll just leave it at that.
#15 Posted by Thimbles, CJR on Tue 31 Jan 2012 at 04:21 PM
I can appreciate the Old School Commie mentality...
The one that advocates government intervention into the economy but acknowledges the plain, ECON 101 reality that such intervention is inefficient
What I doesn't make sense is this misguided new-fangled commie belief that the government can do business BETTER than the private sector can.
These people honestly think that the government's job is to hinder people in their effort to create wealth. They think (as witnessed in Thimble's plainly stated opinion) that anyone in business should be presumed to be engaged in some sort of criminal activity and thus subject to opposition by the full force of the law.
But there's no criminal activity or corruption in government, of course.... Or wait... Well there is, but the solution is to have more of it, or so says the left. More regulation. More regulators.
This attitude belies a fundamental ignorance of the very nature of regulation.
Regulation exists because society has decided to tolerate or support something instead of criminalizing it. We don't regulate meth labs. We do regulate distilleries.
And inherent in toleration or support is the need to foster or direct the regulated industry to achieve some desirable end. And inherent in the need to foster the industry is the need to enact regulations based on specialized, insider knowledge. And this is the root of the inherently incestuous nature of regulation.
We have the SEC because we have decided that exchanges of securities are good things.. We have the FCC because we've decided that broadcasting is a good thing. We have the FDA because we've decided that developing new drugs is a good thing.
And so the notion that the Gubmint's job is to "oppose" business is contrary to the very nature of regulation - its very raison d'etre.
Regulation is not designed to stop criminals. It's designed to provide civil oversight. Prosecution is designed to stop criminals.
You find a financial scandal in the last 50 years, and you'll find that the regulations and criminal statutes were already in place to stop it, and that the regulators either knew about the malfeasance and did nothing, or should have known about it and were asleep at the switch.
And despite this plain reality, the leftists insist that the solution is always more and bigger government.
This blind and ignorant faith in government - taken in the face of an abysmal track record - is just asinine.
#16 Posted by padikiller, CJR on Tue 31 Jan 2012 at 11:55 PM