He's Come A Long Way: Summers Attacks 'Bloated Financial System'

Showing just how far his previous economic ideology has fallen from grace, White House senior economics adviser Larry Summers went on to CNBC Tuesday morning and sounded off against a "bloated financial system" while offering a ringing endorsement for the president's effort to regulate Wall Street.

Once a cheerleader for Wall Street immoderacy, Summers decried a "system that is based on massive borrowing, intermediated through a bloated financial system, in order to support excessive consumption."

Presented with Wall Street's longtime goals of slashing Medicare and Social Security, Summers refused to swoop down for the deficit hawk bait thrown out by CNBC co-anchor Erin Burnett:

"In the longer term, are you willing to stand up and say, 'Hey, America, your pensions are going to be smaller, your Medicare benefits are going to be lower, your Social Security retirement age is going to go way up and your benefits are going to go lower even if you paid in?'" Burnett asked. "Are we at the point where the government has to say, 'These are painful facts, and we might lose re-election by telling you, but we're going to telling you the truth?'"

"Erin," replied Summers, "listening to you, it sounds like it's an exercise in sadism, who can cause the most pain."

Summers, in sparring with the CNBC hosts, repeatedly called for tough regulation. "The president has been emphatic on what have been the excesses of the financial sector: irresponsibility, innovation that served no real purpose, except the exploitation of customers. And that is why the president has pushed so hard for strength in financial regulation," said Summers.

As Treasury Secretary under Clinton, Summers advocated for the passage of the Gramm-Leach-Bliley Act, which in 1999 repealed key portions of the Glass-Steagall Act and helped create the bloated system propped up by massive borrowing that he decries today.

When the question of regulating derivatives contracts came up in the late '90s, Summers asserted that his faith in the sophistication of the market participants made such rules unnecessary. Summers has since learned that it was that very sophistication that created the problems, rather than prevented them, as banks and traders used their asymmetrical access to market knowledge and information to game the system - what Summers now calls "innovation that served no real purpose, except the exploitation of customers."

His arguments at the time show just how far the ground has shifted. "The parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies," Summers told Congress in the late '90s. "To date there has been no clear evidence of a need for additional regulation of the institutional OTC derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need."

Summers was wrong. It would be Wall Street itself, rather than proponents of reform, that would end up demonstrating that need. Whether Congress acts on that demonstration remains to be seen.