Larry Summers Lectures Bernie Sanders on Financial and Monetary Policy

By Pam Martens and Russ Martens: December 30, 2015 

Larry Summers Testifying Before the Senate Budget Committee, June 4, 2013

Larry Summers Testifying Before the Senate Budget Committee, June 4, 2013

Yesterday Larry Summers penned an opinion piece for the Washington Post, lecturing Senator Bernie Sanders of Vermont, a Presidential candidate, on what Sanders should actually be saying in his own op-eds about reforming the Federal Reserve. 

No one will ever accuse Larry Summers of being short on arrogance. After promising the American people in 1999, as Treasury Secretary in the Bill Clinton administration, that pushing through the repeal of the Glass-Steagall Act would be “the right framework for America’s future financial system,” then watching that system collapse as a result of that repeal just nine years later in the worst economic upheaval since the Great Depression, one would think Summers would find some obscure hole in academia and crawl into it.

Instead, Summers went on to become President of Harvard where, in 2005, he suggested at an economics conference that women might lack an innate aptitude for math and science, serving up a potential explanation for women’s low numbers as scientists at elite universities. This produced world-wide notoriety for Summers and a vote of no-confidence by the Faculty of Arts and Sciences at Harvard. A year later, facing a likely second no-confidence vote from the same body, Summers resigned his post as President of Harvard.

In an article explaining his resignation at Harvard, the New York Times wrote that Summers “alienated professors with a personal style that many saw as bullying and arrogant,” adding that he had created “the intense ill will and even loathing toward him within the Faculty of Arts and Sciences, the university’s largest unit.”

With that heady reference in his vitae, President Obama decided in 2013 that Summers was ready to assume the second most important post in the U.S. government as Chair of the Federal Reserve Board of Governors – a post requiring consensus and respect for the views of fellow members of the Federal Open Market Committee.

At the time Summers was salivating for this new role, the Fed was mired in its zero bound interest rate policy and the disgrace of secretly funneling a cumulative $16 trillion in below-market rate loans to U.S. and foreign banks to prop them up – all because of the repeal of the Glass-Steagall Act bullied through by Summers and his fellow Clintonites.

The country was saved by saner Democratic minds than the President. A significant number of Democrats wrote to Obama urging him to nominate Janet Yellen, then Vice Chair of the Fed. According to Bloomberg News, the letter stated that “Our nation badly needs a chairman with a solid record as a bank regulator,” noting that Yellen, as a former president of the San Francisco Fed, had “identified the impending threats that both the housing bubble and the shadow banking sector posed to our entire economy.” The letter also noted Yellen’s “willingness to challenge conventional wisdom regarding deregulation,” clearly something that Summers had failed to do in 1999.

When Democrats on the Senate Banking Committee made it publicly known that they would not vote for Summers’ confirmation, Summers was forced to notify the President that he was withdrawing his name from consideration for Fed Chair.

None of this hubris, however, has dampened Summers’ ego or his willingness to blot out the disastrous economic consequences of his bad judgment calls on deregulation. In yesterday’s opinion piece at the Washington Post (which sounds like he is still campaigning for the post of Fed Chair, hoping that perhaps a new Clinton administration might lead to that eventuality) Summers chides Sanders that reforming the Federal Reserve “requires careful reflection if it is not to be counterproductive.”

Summers also uses the opinion piece to bolster both his and Hillary Clinton’s self-serving view that the repeal of the Glass-Steagall Act was not responsible for the financial crisis in 2008 and ensuing economic collapse that caused millions of foreclosures and job losses. Summers writes:

“Sanders asserts, as many do, that Glass Stegall’s [sic] repeal contributed to the crisis. I may not be objective, as I supported this measure as Treasury Secretary, but I do not see a basis for this assertion. Virtually everything that contributed to the crisis was not affected by Glass Steagall even in its purest form. Think of pure investment banks Bear Stearns and Lehman Brothers, or the government-sponsored enterprises Fannie Mae and Freddie Mac, or the banks Washington Mutual and Wachovia or American International Group or the growth of the shadow banking system. Nor were the principle lending activities that got Citi and Bank of America in trouble implicated by Glass Stegall [sic].”

Aside from the fact that “Steagall” is misspelled twice in the three times it is used in the above paragraph, Summers is dead wrong on every other premise as well.

First of all, Bear Stearns and Lehman Brothers were not “pure investment banks.” Bear Stearns owned Bear Stearns Bank Ireland, which became part of JPMorgan after the collapse of Bear Stearns. In 2012,  JPMorgan wrote that this bank “is the only EU passported bank in the non-bank chain of JPMorgan and provides the firm with direct access to the European Central Bank repo window. It has also been added to the JPMorgan Jumbo issuance programs to issue structured securities for distribution outside the United States.”

As we have previously reported on multiple occasions, Lehman Brothers owned two FDIC insured banks, Lehman Brothers Bank, FSB and Lehman Brothers Commercial Bank, which together held $17.2 billion in assets as of June 30, 2008, 75 days before Lehman went belly up. That was only possible because of the repeal of Glass-Steagall and allowed Lehman to dramatically leverage up its balance sheet.

Thanks to Summers and his Wall Street sycophants, the Glass-Steagall Act, passed in 1933, which had barred investment banks and securities dealers from merging with FDIC-insured deposit taking banks, thus protecting the U.S. financial system for 66 years, was not around to stop the explosive mixture of securities gambling with deposit-taking.

The Gramm-Leach-Bliley Act which was the legislation Clinton signed in 1999 to repeal Glass-Steagall, also voided portions of the 1956 Banking Holding Company Act, allowing insurance companies and securities firms to be housed under the same umbrella in financial holding companies. This is how AIG blew itself up. As we previously reported:

“AIG owned, in 2008 at the time of the crisis, the FDIC insured AIG Federal Savings Bank. On June 30, 2008, it held $1 billion in assets. AIG also owned 71 U.S.-based insurance entities and 176 other financial services companies throughout the world, including AIG Financial Products which blew up the whole company selling credit default derivatives.”

As for Fannie Mae and Freddie Mac, they were buried under derivatives and toxic mortgage products sold to them by the Frankenbanks on Wall Street – which would not have been able to accumulate that level of toxic sludge without the repeal of the Glass-Steagall Act.

Notably, Summers gives short shrift to Citigroup’s (Citi’s) role in the financial crash. It was a toxic blend of investment bank, brokerage firm, insurance company, and FDIC-insured bank only because of the repeal of Glass-Steagall. And, it received the largest taxpayer bailout during the crash than anything remotely akin to it in U.S. history: $45 billion in equity infusions, over $300 billion in asset guarantees, and more than $2 trillion cumulatively in below-market rate loans from 2007 through 2010, despite the fact that it was insolvent much of that time.

One wonders if the revisionist history on Citigroup might have something to do with the fact that Summers’ former boss in the Clinton administration, former U.S. Treasury Secretary Robert Rubin, went directly from that post to Citigroup where he received more than $120 million in compensation over the next decade as the bank’s stock price went from $55 to 99 cents. Summers himself was a paid consultant to Citigroup for a period of time according to Bloomberg News.

Senator Bernie Sanders

Senator Bernie Sanders

Senator Bernie Sanders, the man to whom Summers feels it necessary to lecture on the finer points of Federal Reserve and financial policy, is the Senator who forced the Federal Reserve to reveal the trillions in loans it had made to Wall Street and foreign banks by placing an amendment in the financial reform legislation.

Sanders was also one of only 57 members of the House of Representatives (he was in the House prior to the Senate) who voted against the Gramm-Leach-Bliley Act that repealed Glass-Steagall. From the floor of the House during the legislative debate, Sanders said the revocation of Glass-Steagall “will lead to fewer banks and financial service providers; increased charges and fees for individual consumers and small businesses; diminished credit for rural America; and taxpayer exposure to potential losses should a financial conglomerate fail. It will lead to more mega-mergers; a small number of corporations dominating the financial service industry; and further concentration of economic power in our country.”

Every prediction that Sanders made became a reality while Summers’ prediction that the repeal would be “the right framework for America’s future financial system” was disastrously dead wrong. Viewed in that light, should Larry Summers simply STFU?

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