Larry Summers as Ineffectual Regulator: Tall Tales From the White House

Summers had ample opportunity in his prior jobs to demonstrate a commitment to rein in the financial sector. All the evidence shows he pushed in the opposite direction. The Obama administration's effort to portray him as the frustrated regulator should not be taken seriously.
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The Obama administration's push to get Larry Summers as Federal Reserve Board Chair is moving into overdrive as opposition based on Summers' record seems to be growing. Last week they gave the public the story of Larry Summers as a prescient but frustrated regulator. Summers saw the problems in the subprime housing market way back in 2000, but couldn't get anything through an obstructionist Republican Congress.

Exhibit A in this story is a joint report on predatory lending by the Treasury Department and the Department of Housing and Urban Development (HUD) that was issued in June of 2000, back when Larry Summers was Treasury Secretary. The report lists many of the abuses that underlie the explosion of bad loans in the housing bubble years. Unfortunately the report's recommendations were blocked.

The New York Times (NYT) article that uncovered the report told readers:

"The report recommended modest changes in federal law but Congress, then controlled by Republicans, made none. The Fed and other banking regulators also ignored the findings."

There you have it. Larry Summers was ahead of the curve trying to clamp down on abuses in the mortgage industry, but other regulators and the Republican Congress just wouldn't go along.

If this story doesn't sound quite right, that's because it isn't. The one thing about Larry Summers on which his supporters and his opponents agree is that he is not timid. If Summers had been seriously pushing for increased regulation in the subprime market back in 2000, we can be sure that his efforts would have gotten considerable attention, even if they didn't succeed. People who follow the issue would remember Summers as a champion for the cause. They don't, and that's because he was on the other side.

Here's what the June 2000 Washington Post story on the famous joint Treasury-HUD report had to say:

"An administration report on abusive mortgage lending practices that is due to be released today has raised concerns from consumer groups and key congressional Democrats. ...

"Complaints that the report and the legislation it proposes will not go far enough to protect consumers and would 'undercut' a bill by Sen. Paul S. Sarbanes (D-Md.) and Rep. John J. LaFalce (D-N.Y.) could even block the report's release, several consumer groups and congressional sources predicted."

Contrary to the line being pitched by the Obama administration, Summers was not a lone voice in the wilderness arguing for a crackdown on bad lending practices. He was trying to put a break on efforts by consumer groups and their allies in Congress to rein in these practices.

Furthermore, the abuses in the subprime market were being widely discussed at the time by both Democrats and Republicans. An NYT article from April of 2000 told readers that Jim Leach, the Republican chairman of the House Banking Committee, planned to push for increased enforcement of laws against abusive lending practices.

The article went on to tell readers that all four major federal banking regulatory agencies agreed on the need to clamp down on abuses. It even included quotes from then Federal Reserve Board Chairman Alan Greenspan on the need to better police lending in the subprime market.

There is yet another aspect about this report that is worth noting. It was the product of a task force on predatory lending that was started by HUD Secretary Andrew Cuomo. According to the text of the report (p 13), Cuomo invited Summers to join the task force recognizing that the Treasury Department would have to be involved in designing any new regulations of the financial sector. In other words, this report was not even begun at Summers' initiative.

This effort to rewrite history, turning Summers into a leading proponent of mortgage regulation, is a sign of the White House's increasingly desperate attempts to appease those within the Democratic Party who oppose his appointment. That is a tough job.

The opponents of Summers appointment recognize him for who he is, one of the leading architects of the bubble driven growth that has given the country the worst downturn since the Great Depression. In addition to being a leading proponent of financial deregulation in the 1990s, Summers was also an architect of the failed East Asian bailout that led to the over-valued dollar and massive trade deficits of the last 15 years.

The gap in demand created by these trade deficits was filled by the demand generated by the stock bubble in the 1990s and the housing bubble in the last decade. Summers apparently considered the bubble driven demand to be a healthy growth path. It's possible he still does.

Even after the collapse in 2008, and the subsequent Dodd-Frank reforms, there are few qualitative changes in the financial industry. The big banks are bigger and more profitable than ever. They are also engaging in the same sort of risky and speculative practices as they did in the pre-crisis years.

Summers has to be held largely responsible for this situation also. He was President Obama's top economic adviser at a time when the administration could have dismantled the major banks since they were insolvent. The Obama administration also could have pushed Congress for stronger measures in Dodd-Frank.

Summers had ample opportunity in his prior jobs to demonstrate a commitment to rein in the financial sector. All the evidence shows he pushed in the opposite direction. The Obama administration's effort to portray Summers as the frustrated regulator is cute, but not the sort of thing that deserves to be taken seriously.

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