|"Only dull people are brilliant at breakfast"
|"The liberal soul shall be made fat, and he that watereth, shall be watered also himself."
-- Proverbs 11:25
For Lawrence H. Summers, President Obama’s preferred candidate to lead the Federal Reserve, the messy debate over a military attack in Syria was the final sign. After weeks of opposition to his candidacy from an array of progressives, the president’s inability to rally Congressional Democrats on Syria persuaded Mr. Summers that his most important audience — the Senate, which must confirm a Fed chairman — probably could not be won over. He concluded that the White House was also unlikely to overcome opposition to his candidacy from many of the same Democrats, who view him as an opponent of stronger financial regulation, according to supporters who insisted on anonymity to describe confidential conversations with him. “Clearly Obama couldn’t bring his own most enthusiastic supporters to back him on an issue of national security,” one supporter said. “How was he going to corral them for Larry?”
As a Treasury Department official during the Clinton administration, Mr. Summers supported banking deregulation, including the repeal of the Glass-Steagall Act, which was pivotal in America’s financial crisis. His great “achievement” as secretary of the Treasury, from 1999 to 2001, was passage of the law that ensured that derivatives would not be regulated — a decision that helped blow up the financial markets. (Warren E. Buffett was right to call these derivatives “financial weapons of mass financial destruction.” Some of those who were responsible for these key policy mistakes have admitted the fundamental “flaws” in their analyses. Mr. Summers, to my knowledge, has not.)
Regulatory failures have been at the center of previous crises as well. At Treasury in the 1990s, Mr. Summers encouraged countries to quickly liberalize their capital markets, to allow capital to flow in and out without restrictions — indeed insisted that they do so — against the advice of the White House Council of Economic Advisers (which I led from 1995 to 1997), and this more than anything else led to the Asian financial crisis. Few policies or actions have greater culpability for that Asian crisis and the global financial crisis of 2008 than the deregulatory policies that Mr. Summers advocated.
Supporters of Mr. Summers argue that he is exceptionally qualified to manage crises — and that, while we hope that there won’t be a crisis in the next four years, prudence requires someone who excels at those critical moments. To be fair, Mr. Summers has been involved in several crises. What matters, however, is not just “being there” during a crisis, but showing good judgment in its management. Even more important is a commitment to taking actions to make another crisis less likely — in sharp contrast to measures that almost ensure the inevitability of another one.
Mr. Summers’s conduct and judgment in the crises was as flawed as his lack of commitment in that regard. In both Asia and the United States, he seemed to me to underestimate the severity of the downturns, and with forecasts that were so off, it was not a surprise that the policies were inappropriate. The performance of those in the Treasury who were responsible for managing the Asian crisis was, to say the least, disappointing — converting downturns into recessions and recessions into depressions. So, too, while the banking system was saved, and the United States avoided another depression, those responsible for managing the 2008 crisis cannot be credited with creating a robust, inclusive recovery.