In a 2006 speech, then-Senator Barack Obama observed that "If the people cannot trust their government to do the job for which it exists -- to protect them and to promote the common welfare -- all else is lost." Obama will soon make a choice -- the selection of the next chairperson of the Federal Reserve -- that will tell us whether he means what he says. His choice of the chair of the Fed, considered by many the second most powerful position in the United States, will do much either to further undermine the public's sagging trust in government or to begin the slow process of regaining the confidence of a public increasingly convinced that the government serves the interests not of ordinary people, but of the wealthy and the well-connected. And if the president appoints Lawrence Summers, now reported by White House sources to be the likely choice, he will decisively reinforce the widespread view that in Washington the common good is no match for the magnetic pull of big money.
Just how drastic has been the public's decline of trust in government? In the mid-1960s, three people in four said that you could "trust the government in Washington to do what is right all or most of the time"; by June 2009, just under 23 percent answered in the affirmative. Today, five years into Obama's presidency, the situation has gotten slightly worse; only 20 percent of Americans believe that the government can be trusted.
Accompanying this general decline in trust, there is a growing concern that the government is far more responsive to Wall Street than to Main Street. In late 2011, an NBC/Wall Street Journal poll asked whether "the current economic structure favors a very small proportion of the rich over the rest of the country" and "if America needs to reduce the power of major banks and corporations"; more than three quarters of Americans agreed. This erosion of trust in major institutions undermines not only the legitimacy of government, but also the social fabric itself.
With public suspicion growing that the federal government is unduly responsive to the needs of bankers and financiers and that public servants too often use their government positions as launching pads for lucrative post-government careers serving the interests of big business, the choice of the next chair of the Fed carries special weight. This is especially so because the head of the Fed, in addition to being the world's most powerful central banker is, in the words of a recent Wall Street Journal article, "a financial regulator" with "more direct oversight of and authority over big banks... than any other regulator." Raising the stakes even higher, the 2010 Dodd-Frank Act gave the Fed enhanced powers, including the power to write major new regulations.
Given the enormous power of the Fed, it is critical that the chair be above suspicion -- that he or she, in addition to possessing deep expertise in economics and extensive experience in economic policy-making, be immune to charges of conflict-of-interest and far removed from the notorious revolving door between Washington and Wall Street. By any measure, Lawrence Summers -- now said to be Obama's choice to lead the Fed -- is not that person. On the contrary, Summers is the living embodiment of the excessively cozy relationship between the federal government and the nation's major financial institutions. A brief review of the record makes clear why the appointment of Summers would have a corrosive effect on the public's already waning trust in government. A few highlights:
Summers capitalized upon his time in the Clinton Administration as Deputy Secretary and then Secretary of Treasury to build a considerable personal fortune. When Clinton nominated Summers to be Treasury Secretary in 1999, he listed assets of $900,000 and debts (including a mortgage) of $500,000; by the time Obama appointed him in 2009 as Director of the National Economic Council, he reported a net worth somewhere between $17 million and $39 million. In the year prior to joining the Obama Administration, Summers received $5.2 million from hedge fund DE Shaw. During the same period, he received $2.77 million in fees for 40 speaking appearances. One of these speeches garnered a fee of $135,000 from Goldman Sachs -- more than twice the median household income.
After serving in the Obama Administration as Director of the National Economic Council, Summers again went through the revolving door to Wall Street, serving as a highly paid consultant to numerous financial institutions. Since leaving the government at the end of 2010, Summers' clients have included NASDAQ OMX Group, DE Shaw, Silicon Valley venture capital firm Andreesen Horowitz, asset management firm Alliance Partners, and Citigroup. Mr. Summers' work for Citigroup is particularly problematic because Citigroup was the beneficiary of several federal bailouts during 2008-2009 financial crisis despite having been fined $70 million by the Fed in 2004 for allegedly abusive consumer-lending practices. Summers' mentor and predecessor as Secretary of the Treasury, Robert Rubin, had followed the same path to Citigroup after leaving office, earning more than $100 million in the process.
Through personal friendships and institutional ties, Summers is now part of the very social group that he would be called upon to regulate as Chair of the Fed. Summers' personal connections to people in key positions on Wall Street run long and deep. Apart from Robert Rubin, who played a pivotal role in helping Summers become president of Harvard in 2001 (he resigned the Harvard presidency in 2006 under intense pressure), he has many friends on Wall Street, some of them going back to his days as a Harvard professor. One of the most noteworthy of these friendships is with Darcy Bradbury, a former student who is now chairwoman of the Managed Funds Association -- the lobbying group for the powerful hedge fund industry.
Mr. Summers' defenders -- and there are many in high places -- claim that these connections are not a problem. Professor Robert Z. Lawrence (who taught a course with Summers at Harvard), put it this way: "when it comes to Larry Summers, for good or bad, he's uncontrollable when it comes to the positions he takes," implying that he is such a maverick that his stances have nothing to do with any consulting or speech fees he may have received. Yet it is also undeniable that Summers' cavalier and seamless passages though the revolving door, his close personal connections to bankers and financiers, and the large personal fortune that he has accumulated are guaranteed to arouse widespread public suspicion. In this context, it is impossible to believe that Summers is the best person to oversee his friends and former colleagues, and to preside over the writing of regulations that, if designed with integrity, are certain to arouse howls of indignation and outrage on Wall Street.
Obama's choice of Summers as chair of the Fed would deal a devastating -- and totally unnecessary -- blow to what little is left of the public's faith that the government will serve the common good and not the ultra-rich. For Summers is the perfect symbol of the insider's game that now dominates Washington. At the very time that he was amassing personal assets that placed him in the top one percent of the wealth distribution, the standard of living of average Americans continued to decline, with current median household income more than six percent below what it was in 2007. Appointing Summers would be a flagrant betrayal of the president's conviction that all is indeed lost if the people cannot trust their government.