Lawrence Summers Needs to Retool his Wall Street Tilt


lawrence summers wef.jpgWhen Senator Jeff Bingaman was working diligently in the mid-1990s to get not only the White House but also Republican and Democratic Senators and House Members to focus on the large scale, structural deficits that were building between the United States on one hand and Japan and China on the other, he tasked his team with smartening up on what leading economists of the day were saying about global imbalances but also about the dynamics of a turbo-charged, stock churning equities market. Not only were policy makers on the whole not paying attention to trade and current account deficits, they were also ignoring the impact of hot, impatient money on the domestic sector.
Bingaman, via his staff including yours truly and his then chief of staff Patrick von Bargen, began quoting economists Joseph Stiglitz and Lawrence Summers on their groundbreaking, compelling work on financial equities transaction taxes — minor taxes on major equities churning that could both help promote longer term decisions in the equities markets but which also could generate revenue to fund portable educational benefits for workers and investments in high tech R&D. Stiglitz and Summers both felt that such taxes would not only not hurt markets but could help prevent excesses.
I remember getting a phone call from an Assistant Secretary of Treasury on some of Jeff Bingaman’s quotes of then Deputy Secretary of the Treasury Lawrence Summers and was told “Dr. Summers changed his mind on those excise taxes when he joined the Treasury Department.”
Lawrence Summers has largely been a Wall Street-tilting force ever since.

And today in the Washington Post, Summers is again referenced as now opposing taxes on various financial transactions as a way to possibly generate revenue to work on global climate change challenges. One friend wrote to me and said “once bought by the financial industry, always bought.”
The report:

A new dispute could flare up at the end of the week, when an international task force charged with showing how rich nations can mobilize $100 billion by 2020 for climate assistance will outline options for generating that money. Lawrence H. Summers, who chairs the White House National Economic Council, has served in the group and questioned some of the proposals, including imposing a new fee on some financial transactions.

Perhaps there is more to this story than we are getting — and perhaps the particular framework for taxation in this case is a bad one.
But what we aren’t getting to see much of is the Lawrence Summers who recognizes that reforms and change are needed in an economy that over-kowtows to the financial sector.
Summers, no matter what some critics say, is a formidable intellectual heavyweight on economics policy — and will continue to be, long after he leaves the White House.
However, he needs to retool.
Films like Charles Ferguson’s Inside Job and important chronicles of DC-NY financial sector structural corruption with Summers as a lead protagonist like Michael Hirsh’s Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street are going to define him if he doesn’t begin to recognize what George Soros, Joseph Stiglitz, Nouriel Roubini, and others have long understood — that this country will be ruined by further obsequiousness to “market fundamentalism.”
Summers needs to get on the side where he can get back to what he believed ‘before’ he joined the Department of Treasury.
— Steve Clemons


15 comments on “Lawrence Summers Needs to Retool his Wall Street Tilt

  1. DakotabornKansan says:

    All those ass-busting American workers must be too dumb to “compete”


  2. Dan Kervick says:

    Thanks for that link John Waring!
    The class warfare that we are hearing from the professional smart class is reaching disturbing proportions, with their endless blaming of ordinary Americans for their own predicament, their endless excuses for avoiding dealing with fundamental social and economic imbalances, their endless reluctance to rock the neoliberal boat, and their endless recommendations for a new austerity and long-term digging out that punishes the middle class for not having the same sweet jobs they do. There have been silly articles by Zakaria, Friedman and Bernard Avishai in the past couple of weeks along these lines. These cats look out at America, notice that they, themselves are well-off while everybody else is not so well off, and thing the problem is that all those ass-busting American workers must be too dumb to “compete”. Assholes.


  3. John Waring says:
    According to Yves Smith, “The Interantional Monetary Fund found that the persistently high unemployment in the United Sates is largely the result of foreclosure and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.”
    The opinion column is entitled, “How the Banks Put the Economy Underwater,” It’s worth a read.


  4. questions says:

    With the income tax thing, it’s always so slippery the space between rates/percentages and dollar amounts, between the amount of the national income a particular segment grabs (earns?) and the amount of tax money paid back.
    If you earn 75% of the income, then maybe you need to be paying say, 85% of the taxes. (The disproportion comes from the declining marginal value of all those higher end dollars.)
    Aristotle wonders about just how much food various people should bring to common meals — same thing as a tax. If we all bring the same amount (we’re all equal), there’s one kind of fairness. But that same amount means completely different things to different people based on what they can manage.
    The top 25 hedge fund managers made a billion a piece or so in 2007 (I think it was), and kos has a diary up about the gain in wealth at the top of the income scale as compared to the total amount of wealth ever from the dawn of humanity til 1980:
    It’s a David Stockman quote according to what I just looked at.
    So I think there’s a lot of room for moving that money away from the top. I think we need to rethink our ideas about wealth, concentration of wealth, inheritance, mutual care, responsibility for one another’s good.
    And I’d add that in my limited understanding of the buying and selling that happens in the financial markets, what they really do is take bets (read, they take money from some people) and they give money to others. In the process, they skim some off the top. There’s nothing created here, no improved lives, additional comforts, no spreading of improved health or welfare. Rather, the very bottom of the society borrows and pays fees it can barely afford to larger entities, the middling levels pay fees and save and scrape what they can sort of manage, and the part above saves pension money and invests small amounts…. Out of this collective saving and scraping and debt-creation financial companies skim fees and take bets with other financiers. The money moves up the ladder like a bunch of dying salmon, and the hedge fund people make out like bandits.
    What has been taken away from low income communities and from middle income communities, and even from just above middle income communities, is the localization of the wealth they have generated. It all gets swallowed and sent upward a nickel or a dime or a dollar at a time.
    The people at the bottom end up worse off from lousy credit terms, the people in the middle hang on for dear life and are ok if times stay good, and the people just above will do ok under more circumstances, but not under all circumstances. they look up for comparative standards of living and they feel Mankiewed and angry law prof-ed. They feel precarious, overextended, and unsafe at any speed.
    I don’t think we have a good equilibrium right now and I think that death spiral structures are not unlikely if we don’t recalibrate.
    The problem though comes from the very deep love of vastness and the profound hatred of loss that we feel.
    And according to one of the TPM Cafe people, the other problem is that higher paying professional jobs have been insulated from foreign competition so we really have a professional class that hasn’t been hit by massive income loss. Maybe there’s something to say for getting the lawyers, doctors, and anyone else in the mid to high 6-figure class to face some steep competition — maybe they won’t align with the oligarchs….
    We need non-bubbly labor, we need public support for the very most expensive parts of life (insurance and health, education, and pension) so that incomes can drop some without the infliction of horrific suffering. You don’t need anywhere near as much money if there’s cost sharing for these very expensive parts of life. Perhaps there are better structures for all of them.
    We’re not going to find out for a while though, assuming the Republicans get their 48-53 seats.
    I would guess we’ll find out a whole bunch more about elderly poverty, privatized public functions, and the loss of a collective sense of responsibility.
    In place, we’ll get a strong push towards ending moral hazard for those lower on the income scale, with a concomitant push for subsidizing the higher incomes.
    Ugh. We’re really gonna need some serious charity soon enough.
    As for the general pushback against the whole oligarchic structure, I’m probably in the middle between the what you advocate and what others do. I don’t think it’s a particularly easy push, but I do think it needs to happen. I’m not convinced that hedge fund money is a social good, and I’m not convinced that the upward sucking of wealth and the out-of-community sucking of wealth are at all good for us.
    Some concentration of wealth is good for large projects, but too much concentration is deeply problematic. Right now, I think there’s way too much concentration, and the problems this concentration of wealth creates are felt most by those with no extra money for any more fees.


  5. Dan Kervick says:

    Wigwag, we don’t live in a steady-state industrial economy where some people are permanently consigned to the low-skill sector. We live in a creatively destructive capitalist economy. As jobs requiring one set of skills are shipped abroad where they can be performed more efficiently and cheaply, the human and material resources that were employed in those enterprises are freed up to be invested in other areas where the country maintains advantages. Capital is supposed to flow to other opportunities to seek a profitable return on investment through real wealth creation, and those flows should create the new jobs to replace the jobs lost. There is always much work to be done and much advantage to be gained from work of almost every kind, so there is never a reason for persistent “structural” unemployment. Where such persistent unemployment exists, there is some dysfunction in the economy’s mechanisms for allocating capital.
    The current self-congratulatory story being told among the nation’s smart set is that the stagnation problem with our economy is due to the fact that while these pundits and professionals are personally so very clever and globally “competitive”, everyone else is too dumb to compete – or else they are lacking in industry or entrepreneurial spirit. (As if most workers in most industries played an “entrepreneurial” role!) But Americans are among the hardest working people in the world, and people are much more easily retrained for different kinds of work than this story admits. If work is not being created for the unemployed, there is some other dysfunction at work. It’s not like millions of entrepreneurs in America are sitting around saying, “I have these great plans for a great and dynamic new business. If only there were more skilled workers available!” There are plenty of workers with perfectly adequate skills available. That’s not why the US economy is standing still. The problem is that we are not getting adequate national investment in the areas that would be most profitable for the nation in the long term.
    We also allowed the financial industry to act like a drug cartel, explode household debt. I understand that this flies in the face of the national religions of self-reliance and caveat emptor, but you can’t permit a system in which people are permitted to mail out credit cards like just so much Halloween candy or meth, and then trust to the recipients to “just say no.” Hopefully the new Consumer Finacial Protection Agency will help with this problem
    At the same time the professional class is pooh-poohing the smarts and work ethic of their inferiors, we have seen that professional industries are among those most shielded from global competition. One reason it is hard to hire workers, for example, is that the health insurance costs for these workers are extremely high. And one reason they are so high is because the nation’s doctors operate a cartel to keep the supply of doctors artificially low and their wages artificially high. And yet I’m sure these doctors are telling themselves is that the reason they are so rich is that they are so freakin’ smart, and so globally competitive. Another reason health care costs so much is that the iron triangle of suppliers, insurers and employers is operating a wealth-sharing racket in which they collude to extract needlessly high payments from subscribers. This racket keeps workers indentured to their jobs, and squeezes bonus dollars from the sick and dying, as well as the healthy, to satisfy the greed and high lifestyles of the racket’s beneficiaries. The operators of this racket won the health care debate, which is why Obama ended up doing little to cut into health care costs, and had to pay for the progressive measures in the plan with what are likely to be increasingly rising premiums on ordinary insured Americans.
    The chief economic problem we have in our country, the source of our stagnation, is decades of political failure to fulfill what Adam Smith called the “third duty of the sovereign”:
    “The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain. The performance of this duty requires, too, very different degrees of expence in the different
    periods of society.”
    The fulfillment of this duty requires the purposeful, intentional activity of rational human beings acting in accordance with an organized plan, and cannot be left to a naive and superstitious faith in the all-knowing Providence of the invisible hand. Unfortunately, Americans have been encouraged in recent decades to believe, like poor young Isaac, that so long as private entrepreneurs climb the mountain with their surplus dollar in hand, and a heart full of industry and faith, then “God will provide the sacrifice” in terms of the infrastructural tools they need to work their productive investment magic.
    It hasn’t worked out that way. Without periodic national mobilization on big ticket strategic investments such as we had in WWII, the national economy stagnates and productive opportunities hit a ceiling. With fewer opportunities left for real wealth creation, people accustomed to growing their own personal wealth turn to a variety of individual and cooperative schemes for cutting themselves larger pieces of a pie that isn’t getting any bigger. Asset values can be inflated, increasing the velocity of funds moving around in an enthusiastic search of speculative and ponzi profits. With a little bit of clever mathematics, people can figure out how to take enormous cuts form this moving money. The moving money, which comes from all of us – from our bank accounts, insurance premiums, mortgage payments and pension plans – never did the capitalist productive magic it was supposed to do. But a precious few got spectacularly rich on it nevertheless.
    In other words, it’s been a lot of financial hole-gigging – a “New Deal” for the barons of the financial sector; a WPA of money markets. With an awful combination of weak regulation, distorted incentives and an absent national economic plan, we saw a lot of meaningless “make-work” financial lending for lending’s sake, without the growth in national wealth we were encouraged to believe would result from it. The rest of us got relatively little healthy payoff from these financial meth labs.
    Without some national strategic direction-setting and control to promote savings, allocate profit more rationally and push capital into areas that actually build real long-term wealth and the foundations, a lot of it is pissed away. Unregulated laizzez faire capitalism is like a lazy trust fund baby surrounded with a parasitical entourage. The money is frittered away; the parasite “quants” figure out clever ways of grabbing their piece of some other sugar daddy’s lucre as the movable feast rolls on. Short run information-asymmetry scams operated by the clever are always more rewarding and attractive for them than years of honest toil.
    It’s all been based on a naive theory of invisible hand investment magic, the belief that the optimal allocation of capital for the society is the one that “emerges” when you leave every one free to act as an atomized individual agent. Even before this was proven false in practice, it was already known to be false in theory, with only a few zealots still believing it. Yet some American notables pretend to believe in it because widespread social acceptance of the fundamentalist dogma is advantageous for these notables personally. Large amounts of our nation’s capital have been wasted on high-end profiteering, over-compensation, over-consumption and waste when it should have been poured back into building our future.
    The new wave in elite thinking these days seems to be terror about “state capitalism” and new Cold War-style fears about the need to roll back and contain the “Chinese model.” You can see what is happening: all of the world’s private owners, who have enjoyed a holiday of unregulated transnational liberty and free-wheeling statelessness, are now terrified that their respective commonwealths are poised to re-subjugate these outlaw freebooters to the sovereign power of national governments,lay claim to some of the wayward and wasted funds that have been used mainly to make the rich richer, and use these funds to carry out the acutely needed productive national investments that market fundamentalist theory said were supposed to occur on their own, but which have been neglected.
    We need to redistribute wealth in this country. The wealth distributions produced by laissez faire economic libertinage have proved wasteful and uneconomical, and are undermining the future and productive potential of our nation.


  6. WigWag says:

    “Not to be too snarky, but the real problem is that the wealth is simply too concentrated…” (Questions)
    Wealth may or may not be too concentrated, but if it is, the hedge fund industry is hardly to blame. Yes, it’s true that the industry is usually highly profitable and it is also true that employees in the hedge fund industry typically make alot of money; but is that the reason why income inequality is increasing in the United States?
    I don’t think so.
    Income inequality in the U.S. is growing because low skilled work, conducted primarily by less educated workers, is leaving the United States and migrating to Asia and to a lesser extent South America. Low skilled workers in what we used to call the Third World, simply work harder, longer and for significantly less money than their American counterparts. This segment of the American workforce just can’t compete and as a result these American workers are being economically marginalized. The overall effect that this phenomenon has on the American economy is debatable. The loss of low-skilled jobs has to be balanced off against the benefit of lower priced products and the simulative effect this has on the American economy.
    The hedge fund industry has almost nothing to do with this. If anything, the hedge fund industry is an industry where the United States holds a tremendous comparative advantage over its economic competitors. American (and British) hedge fund managers thrive because they are smarter, more adept and more successful than their foreign competitors (at least for now).
    Paul Krugman and others frequently make the argument that one of the problems with the Hedge Fund industry is that the enormous salaries made by hedge funds workers (and other sectors of the financial industry) siphon off the best and the brightest Americans who would otherwise ply their talents in other sectors of the American economy. Let


  7. John Waring says:

    Larry Summers represents everything that’s wrong with the democratic party.
    The President had a golden opportunity to do an FDR to Wall Street, but, instead, he puts Summers and Geithner in charge.
    And he wonders why he’s going to get his clock cleaned tomorrow.
    Barack, you didn’t fight for us. You rolled over.


  8. questions says:

    I didn’t see anything from them regarding paying off mortgages the securities on which have generated billions for the fund managers.
    And I didn’t really see much in the way of simply providing paying jobs. Lots of retraining and social service stuff. But retraining to become, say, a nurse’s aid doesn’t help unless, say, the health care reform act covers lots and lots of nurse’s aids. And now that Wall St. is back on the Repub side, what’s to happen to all those nurse’s aids they’ve been training?
    Not to be too snarky, but the real problem is that the wealth is simply too concentrated, and the spending ends up being that which someone thinks is good for someone else. Yes, training is a good thing, and subsidized training is even better. But best would be a whole lot less socio-economic dislocation stemming from the wealth and income disparities.
    So even if the secretaries and janitors in the hedge fund world are well-paid, the fact is that the hedge fund world is too large a part of our economy and too much in control of far too much investment capital. Far better to have that money circulating more broadly.
    It’d be nice to see Calpers and TIAA/CREF and the rest of the big pension funds invest a little differently. It’d be nice if Harvard did something else with some of its money, too, come to think of it.
    We so value turning money into more money that we lose sight of turning money into salaries so that people can live well enough.
    When the money is concentrated in a single sector, broad social good is harmed. Even when those same insanely wealthy people decide to get all charitable, they still pick their own charities and they don’t necessarily spread the wealth in the best ways.
    Why not just push for higher tax rates, a tax on hedge fund gains as salary and not as gains tax, and let the very broad US collective decide via voters and the democratic process what works regarding redistribution?
    It won’t happen because it’s not very gratifying or ego stroking.
    So I guess we should all train as nurse’s aids until the Repubs find a way to defund the Affordable Care Act. Then we can be unemployed nurse’s aids! And get retrained for something else that the Robin Hood people think is good.
    I don’t want to be overly snarky, but there’s a growing sense I have that charity is the wrong way to go. Sustainable PUBLIC institutions, open to the democratic process, are more what we need more of.


  9. WigWag says:

    “Make your next “charity” project be a facility in a city where people need jobs.” (Questions)
    Actually, while Ground Zero for the Hedge Fund business is New York City, Westchester County and Southern Connecticut (hardly impoverished areas), there is no industry in America that treats its employees better than the finanical industry. Even the secretaries and mail room clerks are paid far better by their hedge fund employers than similar employees in other industries.
    It’s also fair to say that the Hedge Fund industry is far and away the most generous and philanthopic industry in the United States; no other industry even comes close.
    The industry’s official charity, the Robin Hood Foundation, raises and disburses tens of millions of dollars every year for people in the New York area who are badly in need of help.
    What’s great about the Robin Hood Foundation is that it is supported by Hedge Fund types of all different political stripes. Leftist hedge fund guys like George Soros donate millions every year but so do right wing hedge fund guys like Steve Schwartzman and his now retired partner, Pete Peterson (Blackstone Group).
    The organization was founded by Paul Tudor Jones, a legend in the hedge fund business; he has personally donated tens of millions but he has raised billions from his colleagues. The organization’s Executive Director, David Saltzman, is a legend in the world of philanthropy and gladly earns only 1 or 2 percent of what he would earn if he took a different job.
    The Robin Hood Foundation holds an Annual Gala every year that raises tenso f millions of dollars for the Foundation’s charitable purposes;it is an extraordinary and cost effective organization. I had the privilege of attending the gala a few years back; it’s not like anything that I’ve ever seen. If he’s never attended the gala, Steve should ask his friend George Soros to take him; it’s a mind-blowing experience.
    More on the Foundation can be found here,
    and here,
    If other industries were as philanthropic as the Hedge Fund industry, things in this country might just be somewhat better.


  10. David says:

    Very well put, Steve. Lord I hope Larry Summers is listening, or at least people close to him who understand and can embrace this.


  11. DakotabornKansan says:

    “Heckuva Job Larry!” Yes, President Obama really said that Larry Summers “did a heckuva job.”
    Then there is this,


  12. questions says:

    Actually, on further thinking, if the dems and reps sometimes switch places on policy (the dem ends welfare, the dem agrees to individual 2nd amendment rights, the repub goes to China, the Repub gives us drug benefits), then maybe the capitalists and the government should be switching places as well.
    After all, Obama took huge amounts of public money and turned it all over to banks, car companies, and more banks. Maybe it’s time for the capitalists to get all left wing-y and turn a vast sum of money over to public purpose. It’s not like that sector of the economy isn’t bursting with bucks.
    They could return the favor — hyper capitalist government aided by socialist corporations and hedgefund managers.
    Yeah, right.


  13. questions says:

    My offhand guess is that when you can’t take their money, you can offer them a good return instead.
    Harness the money to public purpose and private return.
    It’s sort of the opposite of capitalized profits and socialized losses.
    The hedgefund types who are bankrolling lousy school reform via endless charter schools that do less than they seem could perhaps be encouraged to something with a little more public purpose.
    Perhaps they can understand the “oblige” part of that old phrase?
    And maybe a few of them could even shed their egos long enough to let actual expertise determine how their money gets spent. No more “small schools projects” thank you very much Mr. Gates.
    It’s actually kind of funny to think about. The chief good of capitalism, when it is properly maintained, is that it lets the most local sources of information guide action via supply and demand, price and discount, purchase and rot. So why do these hyper-fucking-capitalists think that they can, by fiat, determine what a good institution is? They get no information, but they bankroll junk schools or junk projects in top-down, ego-driven fashion. They seem to act like the caricature of governments (which actually often do get all sorts of feedback about programs.)
    Wouldn’t it be better to start where the expertise is, with, say, the users of the services and wouldn’t it be better to let them make more free decisions, by, I don’t know, giving them jobs and steady incomes, and then they can buy their own educations and their own groceries and their own gym memberships….
    So, if you want to make the world better, hire a thousand people at a decent salary and let the dollars and bits of information flow.
    Make your next “charity” project be a facility in a city where people need jobs.


  14. WigWag says:

    I don’t get this post; who cares what Summers thinks; he’s leaving the Administration.
    The chances that a financial equites transaction tax will be enacted is zero. The hedge fund and financial types who have punished the Democrats by abandoning their fundraising events in favor of Republican fundraising events don’t want it; Chuck Schumer (who needs to spend the next two years figuring out how to win these guys back; especially if he’s the Democratic Leader) doesn’t want it and surely the new Republican Majority in the House won’t vote for it. Does Steve really think that 60 votes could be rounded up in the next Senate to impose a transaction tax?
    Steve, even one of your new favorite politicians, Mike Bloomberg, opposes a tax on financial transactions (New York City’s fiscal bread is buttered by the newly prosperous financial industry).
    With all due respect, Steve, do you really want us to think that there’s any chance at all that a financial transactions tax could pass while there’s no chance at all that Charles Schumer (because he dissed the President’s Middle East policy), could become Democratic Leader?
    Frankly, in light of what’s probably going to happen tomorrow, this all seems delusional to me.


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