The Summers Conundrum
We all know in the backs of our minds that Barack Obama's incredible victory will eventually be followed by disappointment. But does it have to come so soon, and hit so hard? The answer will be yes, if Lawrence Summers is named treasury secretary in the president-elect's cabinet, as many observers believe will be the case. Summers was one of the key architects of our financial crisis--hiring him to fix the economy makes as much sense as appointing Paul Wolfowitz to oversee the Iraq withdrawal. And when you look at the trail of economic destruction Summers left behind in other crisis-stricken countries who sought his advice in the past, then "terror" might be a more appropriate word than "disappointment."
From the start, Summers has been on the wrong side of Obama's supporters. In 1982, while still a graduate student at Harvard, Summers was brought to Washington by his dissertation advisor Martin Feldstein, the supply-side economist, to serve on Ronald Reagan's Council of Economic Advisors. Those first years in the Reagan administration were crucial in the right-wing war against New Deal regulation of the banking system and financial markets--a war that Reagan's team won, and that we're all paying for today. Although Summers eventually identified himself with the Democratic Party--albeit the right wing of that party--nevertheless, as the New York Times's Peter T. Kilborn wrote in 1988:
He worked for 10 months as a top analyst in President Reagan's Council of Economic Advisers when his mentor, Martin S. Feldstein, was running it, and his colleagues don't recall him venting anti-Reagan heresies then....
"One of the ironies of this business is that Summers's economics are quite close to Feldstein's," said William A. Niskanen, who was a member of the Feldstein council.
It's ironic if you expected Summers to be a liberal Democrat--but par for the course in the context of Summers's real record. Some fifteen years after Summers's stint in the Reaganomics war room, he reappears as one of the key villains fighting to suppress the regulatory efforts of a top official, Brooksley Born, who was trying to call attention to the dangers of the unregulated derivatives, such as credit swap defaults, which today are considered the key to the current economic crisis.
But let's return to the Summers timeline. After his stint in the Reaganomics brain trust, he returned to Harvard to serve as one of the university's youngest professors. In 1988, he was Michael Dukakis's chief economic advisor, but when that campaign failed to bring Summers to power, he turned to America's great rival, the former Soviet Union, to try out his economic experiments. In 1990, Lithuania, a restive Soviet republic seeking independence, hired Summers to advise on that country's economic transformation. Poor Lithuania had no idea what it got itself into. This was Summers's first opportunity to tackle a country in economic crisis and put his wunderkind theories into practice. The results were literally suicidal: in 1990, when Summers first arrived, Lithuania's suicide rate was 26.1 per 100,000 and falling. Just five years after Summers got his hands on Lithuania's economy, life became so unbearable under the economic transition that the suicide rate nearly doubled to 45.6 per 100,000, worse than any other ex-Soviet republic in transition. In fact, it was the highest suicide rate in the world, suggesting something particularly harsh and brutal about the economic transition in that country as opposed to the others, where suffering and pain were common. Things got so bad that in 1992, after just two years of Summers-nomics, the traumatized Lithuanians voted the communist party back into power, the first East European nation to do so--even though just a year earlier Lithuanians actually died on the streets fighting communism.
Fresh off his success in Lithuania, Summers moved to the World Bank, where he was named the chief economist in 1991, the year he issued his famous let's-pollute-Africa memo. It was also the year that Summers, and his Harvard protégé Andrei Schleifer (who worked with Summers on the Lithuania economic transformation), began their catastrophic "rescue" of Russia's crisis-ridden economy. It's a complicated story involving corruption, cronyism and economic devastation. But by the end of the 1990s, Russia's GDP had collapsed by more than 60 percent, its population was suffering the worst death-to-birth ratio of any industrialized nation in the twentieth century, and the financial markets that Summers and Schleifer helped create had collapsed in what was then the world's biggest debt default ever. The result was the rise of Vladmir Putin and a national aversion to free markets and anything associated with Western liberalism.
But that's not all. Summers, through Schleifer, was also tainted with some of that country's corruption, which resulted in a US Justice Department lawsuit against Schleifer and others. While Schleifer was being paid by US taxpayers to advise the Russians on capital markets in the 1990s, his wife, Nancy Zimmerman, bought and traded Russian equities for a Boston hedge fund she ran--they even used Schleifer's US taxpayer-funded offices to run Zimmerman's Moscow-based hedge fund operations.
How close were Larry Summers and Andrei Schleifer? According to former Boston Globe economics correspondent David Warsh, Summers and Schleifer "were among each other's best friends," and Summers taught Schleifer "as an undergraduate, sent him on to MIT for his PhD, took him along on an advisory mission to Lithuania in 1990, and in 1991, shepherded his return to Harvard as full professor, where he was regarded, after Martin Feldstein and Summers, as the leader of the next generation."
In 2000, the Justice Department sought $102 million in damages from Schleifer, one of Schleifer's Harvard associates and Harvard University in a conflict-of-interest suit resulting from Schleifer's role as the lead US adviser to Russia's economic reforms--questioning the way Schleifer and his wife profited from his position. Schleifer's Harvard team in Moscow was funded by USAID in a no-bid contract, and supported by Summers as soon as he moved into the Treasury Department in 1993. So Schleifer benefited from his relationship with Summers twice: first, by getting a choice contract as the US government's man in Moscow in the 1990s when Summers was in power in the US government, one that benefited his wife's hedge fund (earlier this year, Portfolio suggested that the Schleifers' hedge funds made them billionaires ). Then after Schleifer returned to Harvard to face the lawsuit, Summers, now president of Harvard, presided over a controversial settlement that all but let his protégé off the hook. Thanks to pressure by Summers, Schleifer kept his chair at Harvard, where he continues to teach today.
Summers's other favorite man in Russia was Anatoly Chubais--who consistently ranks at the top of Russia's " most hated man" polls. Chubais was executor of the Russian government's privatization program, in which state companies worth tens of billions of dollars were handed over to insiders for a fraction of their worth in blatantly rigged auctions. Summers praised Chubais as a "demigod" and called Chubais and his free-market cohorts "the dream team." In September 1998, after Russia's capital markets collapsed, along with billions in US-taxpayer-backed loans, Chubais boasted to a Russian newspaper, "We swindled them." By "them," he meant the Western and American aid institutions that funded his reforms.
In light of all of the corruption, cronyism and devastation that have marked his career, Summers' statements about an under-polluted Africa or intellectually-inferior women no longer seem like provocative eccentricities but part and parcel of the Summers shtick. And now there's talk that President-elect Obama may hand the keys to national treasury to Summers--meaning that he'll be in charge of overseeing a trillion-dollar taxpayer bailout of the entire financial industry, a process already rife with conflicts of interest, cronyism and corruption--as detailed by Naomi Klein.
The bailout, as currently implemented, threatens to devastate America's economy much as Russia's and Lithuania's were devastated before. The idea that this is exactly the right time and place to put Larry Summers in charge of our economy's future is so frightening that it makes the Sarah Palin vice presidential choice seem almost quaint by comparison. Let's hope the rumors are wrong.
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I am very concerned about the possibility of Summers as Treasury Secretary. This man has done enough Economic damage and I am terrified by the possible experiments that he has planned for the American economy. His record speaks for itself and I am surprised that more people are not getting access to the same information that you have posted here. I will be sending this link to all of my friends.
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Posted by: cavegal | November 15, 2008 at 09:10 PM
I just retired after practicing law for 45 years. I just finished a 3 year case in the bankruptcy court in New Mexico. The present Code was written by the lobbies for the credit card and banking industries. Are you aware of the fact that if a man lives in one house and owns and rents a house to a third party he can file Chapter 11 and cram down his mortgage on the house he rents but not the house he lives in. Did you know that the leading sponsor of the 2005 amendment to the Bankruptcy Code was Joe Biden because of the fact that most of the credit card and banks are incorporated in Delaware? The "means" test is so discriminatory and mean spirited that an individual cannot discharge a credit card debt in chapter 7 because he is forced to file a Chapter 13, and pay off his credit card creditors 100% over his lifetime. The constitution expressly empowered Congress to pass legislation regarding bankruptcy. Even Scalia the mean spirited original intent Justice would have to agree with this proposition. Before our founding fathers wrote the Constitution, England was jailing debtors or shipping them off to prison camps in Australia or indenturing debtors for 7 years in America until the debt was paid off. Slavery was king and even white human beings were made slaves to pay off debt. The purpose of bankruptcy was to enable an honest debtor to discharge ordinary debt to receive a fresh start in life. That purpose has been perverted by the perverted Bush administration and the perverted Republican Congress. This piece of legislation was vetoed several times by Clinton but was signed into law by Bush. Why are we bailing out banks and not humans trying to live human lives? Where is the compassion that this born again drunken Christian promised to the people in the year 2000? All of these bible thumpers believe that educated people are elitist while the "know nothings" i.e., the Joe six pack sports oriented jerks elect our President and our Congress. All of the financial geniuses who produce nothing except money for themselves should be forced into Chapter 11 with a Trustee appointed to bring transparency and fairness back to America. These executives who banked billions through their slicing and dicing should be forced to paint the letter B on their forehead to show the world that they were bankrupt. The Puritans in New England forced women who committed adultery to paint a red A on their forehead. This is religion brought to absurdity, but aren't our religious bible thumpers in our country perverse? I watch the hearings before the House on C. Span and discover that even the experts were swindled and that even the experts cannot find a solution to the problem that they created in order to get rich quick without producing or making anything of value. There is a solution and that is Bankruptcy to take control away from the money lenders and financiers who bankrupted this country. If we taxpayers must pay then these manipulators must pay the Bankruptcy piper.
Spread my newsletter around. We need a revolt from the common man.
Best Regards,
Martin S. Friedlander, Esq.
Atorney-Client Privileged under Federal and State Law.
Tel. 310 435 1519
Fax 310 278 7330
www.freedompost.typepad.com
Posted by: Martin Friedlander | November 16, 2008 at 03:31 PM