Letter 2 America for August 2, 2013

Dear America,

It seems that Larry Summers' star is on the rise again.  You may recall that he was one of President Clinton's primary economic advisors during the 1990's, eventually rising to the position of Secretary of the Treasury in 1999 where he remained into the Bush administration, and he later became president of Harvard University where all those financiers who rape our economy get their MBA's.  He lasted at Harvard until he was accused of some financial conflicts of interest and indicated in a speech his belief that women were not better represented among the ranks of certain professions for want of acumen as a function of gender related deficiency.  A faculty vote of "no confidence" spawned by his conflict with a popular African-American Studies professor forced him to resign, though he continued to be a financial industry star, and is to this day.  But while his contra temps at Harvard may make him a troglodyte when it comes to modern thought on the subjects of gender and race, that is among the lesser foibles that disqualify him to re-ascend as an economic leading light, this time to the Fed chairmanship when Ben Bernanke's term ends.  I'm surprised that President Obama has allowed Summers' name to be linked with his administration--which it has been in an advisory capacity and is again as the list of potential Bernanke successors gets shorter--in light of those other profound shortcomings that he has demonstrated and failed to disavow in light of the economic collapse that is largely attributable to them.  But that The President would consider him for anything that involves more than catching dogs is not just a sign of imprudence; it is incomprehensible.

After the collapse of our finance industry on account of its manipulations and contrivances to create wealth out of the illusion of it, congress passed the Dodd-Frank Act to reign the industry in.  But Dodd-Frank is a pale imitation of the Glass-Steagall Act that was passed in 1933, the last time we suffered a financial debacle of the magnitude of the crisis of 2008 in consequence of corporate inveigling.  Glass-Steagall effectively separated banks into two categories.  There were commercial banks--what we laymen know as banks, where we keep our money and borrow to buy our homes--and there were investment banks, which were essentially like brokerage houses except that they invested in everything, not just stocks and bonds, and they also sold financial products of their own as they do today.  That's where derivatives came from.  Banks began to sell not things themselves, but promises to buy and sell things as well, and in the case of "credit default swaps" to insure against the failure of things too.  That is more or less what the derivatives that caused our current crisis were: credit default swaps and variations of them.  They were not mortgages, but rather promises to make good on mortgages if they failed, which they did...in droves.  And because there were individual investors involved in that market since the repeal of Glass-Steagall had allowed commercial banks to do investment business and vice versa, thus mixing the fiduciary function of commercial banks with the self-interest of investment banking houses, the federal government had to get involve because in the course of investing for themselves, the banks had gotten very over extended with risk that was becoming reality, and you know the rest.  But it is notable that there were some in the financial industry who saw the risks involved in the derivatives markets and tried to get the federal government to regulate them before the collapse of that market, though they were thwarted, and even discredited for their efforts.  Guess who opposed those regulations?  And it gets even worse.

The only thing that was keeping the financial industry from running amok with those derivatives was  the then seventy-odd year old Glass-Steagall Act, and the moneyed class wanted to change that because amok is where the big money is.  So it marshaled a conservative movement--led prominently by Summers and Alan Greenspan--against The Act and eventually, the Republican controlled congress sent a repeal bill up to President Clinton for his signature.  He was reluctant, to his credit, but Larry Summers persuaded Clinton to sign the repeal.  None of what we are suffering economically today would have happened if Larry Summers hadn't been in the White House buzzing in Bill Clinton's ear, because Glass-Steagall would have prevented it, and you needn't take my word for it.  President emeritus Clinton himself characterizes letting Summers talk him into it as one of the greatest mistakes of his presidency...along with failure to intervene to prevent the slaughter of 350,000 people in Rwanda.  That's who is in line to be chairman of the agency that controls our banking industry today: a guy who professed to believe that Wall Street didn't need regulation because it would police itself.  He believes in laissez-faire based on the premise that what is good for the wealthy is good for everyone...a premise that has been demonstrated go be false time and time again since the beginning of feudalism.  The only benefit that inures to serfs as a function of fealty to their liege is the right to continue to be serfs, and that principle continues to operate today from the counter at McDonalds to the boardroom at Jamie Dimon's J.P. Morgan-Chase.  A person who believes that such is how economies should run is not a person whom I want to see in charge of regulating our economy through the financial sector, which is in control of the economy today, and I am surprised to hear that President Obama feels otherwise.  Either The President believes in the middle class or he doesn't, and this nomination for Chairman of the Federal Reserve may be the test.

Your friend,

Mike