5 Powerful Men Who Were Catastrophically Wrong About the Economy—But Reaped Rewards Anyway
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The boards are lighting up with consternation at the notion that Lawrence Summers might be rewarded for his vital role in triggering the 2008 financial crisis by being given the chairmanship of the Federal Reserve. Summers is reportedly lobbying hard for the job, along with many of his powerful Washington friends. (He has a lot of those.) There have been no denials from the White House, which may be treating these stories as a trial balloon—and a test of our national economic amnesia.
Larry Summers at the Fed? It sounds like madness—and it is. Summers epitomizes the old, misguided model of the economist as Washington power player and Wall Street money maker, ever willing to retrofit theories, assumptions and models to benefit those they serve.
This behavior doesn’t even have to be deliberate and cynical. Robert Johnson of the Institute for New Economic Thinking, a group which is dedicated to creating new and more effective economic paradigms, told AlterNet he believes economists in this mold internalize their beliefs and are sincere when they express them.
Cynical or not—and there are probably plenty of people in both camps—the economics field is filled with people whose erroneous thinking and conflicts of interest have been rewarded with ascendancy to ever-higher positions. In fact, if recent history is any example, moral probity and clear-headed analysis are obstacles to advancement.
Sound harsh? Here are five examples of financial forecasting failure as a career-enhancing technique.
1. Lawrence Summers. Economist Dean Baker has the lowdown on Summers. Bill Clinton’s former Treasury Secretary is well-known in economic circles for such accomplishments as his brutal hectoring of Brooksley Born over her prophetic warnings about mortgages, and his open mockery of IMF chief economist Raghuram Rajan financial reform as a “Luddite” because Rajan was—oh, what’s that word again?—oh, yes: correct.
That story is instructive. At a 2005 conference, Rajan dared to question the “financial innovation” which Summers and his crowd had both celebrated and made possible under Bill Clinton. Rajan suggested that the proliferation of risky instruments like mortgage-backed securities, together with the perverse incentives built into banker bonuses, could lead to a “full-blown financial crisis” and a “catastrophic meltdown.”
In response, Summers stood up in the audience and launched a tirade against Rajan. Summers argued strongly against increased regulation, claiming it would decrease Wall Street’s “productivity.
Rajan, was absolutely right, as we now know, while Summers was wrong. And he wasn’t just wrong as in “he made a bad call” wrong. He was wrong as in “He fought aggressively to deregulate Wall Street, ran roughshod over anyone who raised legitimate concerns, bullied anyone who tried to prevent the tragic events of 2008, took big fees from banking firms, and was nastily and abusively wrong, over and over and over.”
Larry Summers was that kind of wrong. Now he’s seriously being discussed as head of the Federal Reserve. Not to put too fine a point on it, but this country seems to have completely lost its mind.
In lobbying for this job, Summers and his allies are trying to elbow out the highly qualified Janet Yellen for the position. She has a much better track record, and would be the first woman to lead the Fed.
Sure, Summers has said the right things about job creation lately. Now we know why: he’s angling for a new gig. But he’s still the wrong person or the job. He’s demonstrated a propensity for spectacularly aggressive erroneousness. He’s made millions from the bankers he’d supposedly be regulating. (As the Washington Post reported in 2009, in a single year Summers made $5.2 million in fees from a hedge fund and $2.7 in Wall Street speaking fees.) And, as Baker points out, he’d be displacing a highly talented woman who would be perfect for the job.