Larry Summers: “Senator Kaufman is exactly right”

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

Senator Ted Kaufman (D., DE) has given three blistering speeches recently, individually and collectively cutting to the heart of the financial reform matter: the deregulation of finance has gone too far and big banks now need to be reined in; the continued prevalence of fraud among Wall Street’s biggest bankers; and why the administration’s proposed “resolution authority” would do nothing at all to end the problems associated with Too Big To Fail financial institutions.

You might think no one listens to Senate floor speeches, but you’d be wrong.  Yesterday, on “This Week” (ABC), Jake Tapper asked Larry Summers – head of the White House National Economic Council and key strategist on financial reform – point blank about one of Senator Kaufman’s most important points.

Summers started this part of the interview with a fiery anti-finance industry moment, citing their lobbying spending against financial reform (“$1 million per congressman”) and arguing that the legislation currently before Congress will provide basic consumer protection, more effective regulation, and the ability to handle the failure of large financial firms.  “How can anyone take the position … that we don’t need comprehensive financial reform?”

To which, Jake Tapper responded,

“TAPPER: Some Democrats say it doesn’t go far enough. Here’s Delaware Democrat Ted Kaufman talking about the Dodd bill.”


(BEGIN VIDEO CLIP: in this version, the question is asked around the 1:50 mark; note, the transcript below includes a few important sentences at the end that are not in the clip)

“KAUFMAN: Unless Congress breaks up the mega-banks that are too big to fail, the American taxpayer will remain the ultimate guarantor of an almost certain to repeat itself cycle of boom, bust and bailout.”


 “TAPPER: Senator Kaufman is saying that there isn’t being — enough being done about too big to fail. In 2000, you said, quote, “It is certain that a healthy financial system cannot be built on the expectation of bailouts.” Can you honestly say that the Dodd bill changes that?”

 “SUMMERS: Yes, I can. It changes — it reduces the expectation of bailouts by insisting that institutions have much more capital so they won’t need to be bailed out. It eliminates the prospect of bailout by creating a framework in which a failure can be managed with creditors taking responsibility.”

 “It restricts — and this was the important point that former Fed Chairman Paul Volcker has stressed — it restricts the so-called proprietary trading activities, some of the most risky activities of these institutions. So, yes, this bill is a direct attack on too large to fail by making failure a possibility, as it has to be in a market system, and by making these institutions much safer and much sounder. Senator Kaufman is exactly right.”

Larry Summers is incorrect on three important dimensions of the Dodd legislation: it doesn’t “insist institutions have much more” capital requirements, it doesn’t “restrict proprietary trading activities” in any meaningful fashion, and it doesn’t “eliminate the prospect” of a bailout.  For the details on all these issues, review the three Kaufman speeches linked above – these are now essential reading for anyone who wants to grasp what really needs to happen.

The White House rhetoric on financial reform is moving in the right direction.  But there is growing dissonance between what the White House says it is supporting and what is really in the legislation.

Mr. Summers and other leading representatives of the administration should move to recognize and correct this dissonance.  Either they should work hard to strengthen the legal provisions, along the lines stressed by Senator Kaufman, or they should be more honest – i.e., they do not think that “too big to fail” is really such an important problem, or they are afraid that big banks would react by contracting credit (this is essentially what Jamie Dimon threatens at the end of his letter to shareholders last week).

If the White House continues down the path of endorsing reform while not really pushing for meaningful change, the financial reform conversation will become increasingly uncomfortable for them.

Passing a bill that contains mostly mush is not a good idea – it would only further the perception (and the reality) that this administration is far too close to certain “savvy businessmen” on Wall Street

The coming legislative debate will clearly divide people into “for” and “against” our massive global banks that have so manifestly gone bad.  For the last time: Which side does the president really want to be on?

Note: Jake Tapper was quoting from Larry Summers’s 2000 Ely Lecture to the American Economic Association is available to buy through JSTOR – or you can ask your favorite library to obtain this.  See my review of Summers’ thinking from the 1990s on crises and financial reform here – we also cover this in more detail in chapter 2 of 13 Bankers.  While some specific actions of Treasury during the 1990s were controversial and even regrettable, Summers’ Ely Lecture was right on target.  The administration, however, has not found itself able to apply the principles outlined in Summers’ Lecture – 13 Bankers, in part, explains why.

47 thoughts on “Larry Summers: “Senator Kaufman is exactly right”

  1. I just read today’s Krugman session in trying to back everyone off the idea of breaking up the banks.

    I’m still refining my perception of what this guy does. Today’s column seems want to take you down a set of stairs.

    (First he assures us that only Republicans oppose “real reform”, while we can rest assured Democrats are acting in “good faith”.)

    1. He denies the TBTF structural problem, and by sleight-of-hand switches in a lesser depiction of the problem (“shadow banks”), declares that to be the real problem, and that in principle it can be solved by “regulation”.

    So he smuggles in the alleged law of nature that we have to endure the existing system, as it is, and can only hope to “regulate” it more or less well. Getting rid of the rackets completely is, as Obama hacks like him love to say, “off the table.”

    2. He says the Dodd bill is good in principle, but faulty in the proposed execution.

    3. He pretends to make a vague stab at what the specifics should be, but limits himself to the House bill’s 15-to-1 leverage (already way too high) and rehashes the resolution authority nonsense which already failed with the PCA law.

    That’s today’s column. So what comes next?

    4. The final step will be to declare that the final bill, whatever’s in it, does meet his exacting standards. (All this time he was convincing us of how exacting his standards are.)

    So he’ll declare Obama’s bill, however bad it is, “real reform”, and insist that all decent people support it, or else…

    It’ll be just like with the health racketeering bill.

  2. Simon, maybe you are too young to remember John Mitchell, Nixon’s Attorney General and someone at the heart of the Watergate scandal. He once said, “You will be better advised to watch what we do instead of what we say.” This has been described as the height of political cynicism and deceptiveness, but some claim that Mitchell was counseling Black-Americans to have confidence in the Nixon Administration’s quiet efforts to advance civil rights.

    Whatever the justification for Mitchell’s comments, I can’t help but think that Larry Summers might be turning Mitchell’s syntax around: Namely, Summers is counseling us, “You would be better advised to watch what we say instead of what we do.” That could become the motto for the Obama Administration and, perhaps, its epitaph.

  3. Simon: They have been “endorsing reform while not really pushing for meaningful change” for months. And the “dissonance” that you complain of is a carefully crafted strategy to spin the Dodd bill has strong reform. The Obama Administration would be very comfortable with any reform bill that they can sell to the American public.

    It seems to me that the Administration approach is, in part, a fallout from the introduction of the Volcker Rule, which caused a surprising (to the Administration) backlash from the financial industry – which wants to be sure that they control the debate.

  4. Krugman’s column is a LITTLE better today. But he is still awfully vague. Like vague enough to be Senator Dodd’s chief of staff. Like for instance, does Krugman support REGISTERED EXCHANGES FOR DERIVATIVES/SWAPS??? He conveniently tiptoes around the topic, not spelling out what needs to be done. Yes, Krugman is an Econ guy, not a finance guy, but I would think a Nobel winner might stick his neck out a little further on what he EXACTLY means by transparency for derivatives trading. Many people can throw the word transparency around, but what does it mean as far as the policy/law??? Krugman certainly doesn’t say in today’s column

    If Krugman wants guys like Senator Dodd to be courageous in writing legislation, Krugman can be courageous and tell us exactly what his prescription is.

  5. PS The Republicans would be happy to nix any reform altogether so as to deny Obama an opportunity to claim an accomplishment. The “political realities” constrain what Obama can get and he will spin whatever he does get.

    The alternative is to take the debate to the people. Obama doesn’t seem to want to that risk, and his financial advisors (Geithner, Summers) would likely not be on board.

  6. Summers is a big, fat, arrogant clown.

    I was watching Candy Crowley interview him on CNN Suday and all he could do is talk over her every time she asked a question. For all his erudition, he has zero powers of insight, much like his buddies at the Fed and treasury…all members of the Wall Street bitches club.

    What’s more, everything he touches loses money. From the billion-dollar bath Harvard took on his interest rate swaps to the endless taxpayer bailouts of his Wall Street masters, this guy is the very embodiment of bafoonery.

  7. Anyone who followed closer to the politics knows that President Obama channeled (or aspired to channel) Lincoln and Kennedy (JFK), not FDR or TR. Although, the learning curve continues – the last few paragraphs of “13 Bankers” was rather awesome Simon, channeling the spirit of Jefferson and the democratic ideas of our founding fathers.

  8. P.S. Please excuse my typos. The very mention of Summers’ name sends me into a rapid (and rabid) tirade.

  9. I think Krugman is simply underestimating the power of executives at TBTF institutions. He’s slowly come around.

    And keep in mind that academics like Krugman are usually very reticent to opine on issues where they feel they don’t have much expertise. They worry a lot about saying something stupid.

  10. I don’t quite get the Krugman-bashing here.

    Simon’s position seems to be: we need TBTF legislation, because regulation always fails. But what is size, exactly? It’s not headcount. LTCM didn’t have much headcount. The subsidiary of AIG that created its financial black hole was a few hundred people in a London office.

    Ultimately, when you talk about limiting *size*, you’re really talking about limiting exposure, leverage, opacity, complexity, horizontal integration …. or, to collect all those under a rubric: you’re talking about a kind of regulation.

    Krugman’s position seems to be: size doesn’t matter, because the Depression involved the failure of many small banks while the big ones circled the wagons and weathered it out; and in our day, Canada had only five big banks, but because it was traditionally regulated, it had no financial crisis. At the same time, Krugman *also* admits that no financial regulatory system is fool-proof. He’s only looking for “fool-resistant”.

    I’d say Simon and Krugman actually agree in principle — i.e., they both agree that regulation is in order, even if it can’t ever be perfect — but differ in the details and emphasis. Simon wants institutions that aren’t “too big”, but that will require working with a definition of “size” that amounts to regulating a number of variable institutional parameters, as various metric thresholds of “size” are reached. Well, that’s the core strategy of the Dodd bill, as I’ve heard it described. Krugman just wants things to be simpler, as they were before repeal of Glass-Steagall, and with reasonable precedents, and under a “self-enforcing contract” so that regulation doesn’t fall prey to bad judgment calls made by groupthinking elite committees who might not act unless they are not bound by law to act.

    You don’t need to know all the details that fall out of what Krugman would require to believe that it’s a defensible approach, while breaking up TBTF outfits in some ways just begs the question: how do you do that? and, if it’s in accordance with law, why isn’t that law necessarily a kind of regulation as well?

    Jamie Dimon’s head rolling in the gutter would be a fine sight. But I’d settle for seeing his clipped wings adorning the entrance of the SEC headquarters.

  11. Russ, Ted K, et alii, do you even read this blog before spewing forth your bile? Johnson and Kwak have repeatedly praised Krugman, and both “sides” on the TBTF issue make it clear that this is a difference of opinion, not a matter of “coopting”. Like it or not, Krugman is the principal representative of a credible economic alternative in the US mediasphere today. Baseless scandal-mangers on his case like you are simply trolls

  12. He sure wasn’t worried about that regarding health insurance.

    Actually, he’s never been the least bit hesitant to write about anything he wanted, like Iraq. His generalist fame is based upon that, as is much of the controversy about him, at least from conservatives. They always said, “tell him to shut up about non-economic stuff”.

  13. Just an arithmetical refresher: 59 > 41.

    Just for all the people who keep saying Obama and the Democrats haven’t been able to do anything they want, at will, right from the start, while the Republicans have been utterly helpless to do anything the Dems don’t allow them (and therefore want them) to do.

    59 > 41.

    (Oh yeah, and 60 was > 40, too. Even “filibuster-proof”, not that that makes any difference.)

  14. Krugman is the principal representative of the Democratic faction of the kleptocracy tyrannizing and looting this country.

    The tyranny and the looting is the greatest economic crime in history, so yes, it is a scandal, and I suppose I am a “monger” of it.

    Why not call me a muckraker, too? That was originally a term of abuse, you know. Maybe it already is again. How about a filthy peasant?

    Coming from a snivelling little hack like you, it’s the highest compliment.

  15. Yeah, I thought about his loud silence on derivatives too.

    Well, he did say he thinks the House bill’s acceptable. So there’s our answer – the phony charade of pseudo-reform.

    Just like he’ll try to get people to swallow with the final bill.

  16. Obama at the crossroad. Is he a stand-up guy, willing to fight for the right things in spite of the lobbies, and the contributions, and the short-term politics, or is he just another FOS democrat politician?
    I’m becoming pessimistic. I think there are many who allowed themselves to be a little idealistic and believe in him, and if he screws those who voted for him on this basis, they will turn on him with a vengence.

  17. The essence here, is that we need regulation, Krugman or Simon, however, we do not have enforcement. Without enforcement, we are no where but a measly little talking point for the politicians.

    Krugman has changed over the past year. I followed him and his advice for years, but today, he’s one of the yes crowd. We must have reregulation, break up the TBTF, enforce the laws and not have potential again for bailouts.

  18. Made the mistake of buying one of his books several years ago. It’s a collection of his ‘writings’ during the Bush years, and is simply unreadable.

    Celebrity corrupts. There is a reason the Romans would not allow actors into the Colesseum.

  19. We were doomed in March ’09 when he told a gathering of bankers, “We’re going to let you do what you do”.

    Will leave the implication..

  20. I still can’t figure out why Simon even mentions Summers in any respect. Can’t he figure out that Summers is completely untrustworthy & not believable?

    I suggest Simon treat Summers as if doesn’t exist.

  21. I suppose it’s not becoming, but imagine being insulted for fighting back against a powerful flack shilling for a cabal which has stolen $14 trillion and counting. Not to mention democracy itself.

  22. Michael Turner wrote:

    “Krugman’s position seems to be: size doesn’t matter, because the Depression involved the failure of many small banks while the big ones circled the wagons and weathered it out; and in our day, Canada had only five big banks, but because it was traditionally regulated, it had no financial crisis.”

    Agreed about Krugman, he ain’t the Great Satan, others are more worthy of that distinction.

    Here in Canada home prices continue their jaw-dropping climb. Banks recently increased their fixed-term 3 & 5 year rates, up about .6% , unfortunately this is causing me to experience cognitive dissonance. :-O

    “At the same time, Krugman *also* admits that no financial regulatory system is fool-proof. He’s only looking for “fool-resistant……Jamie Dimon’s head rolling in the gutter would be a fine sight. But I’d settle for seeing his clipped wings adorning the entrance of the SEC headquarters.”

    Metaphorically speaking, the sight of any culpable person’s financial-head rolling in the gutter, would be appreciated :-)

  23. 59 > 41. Yes.

    My point is similar. Whatever resistance there may be COULD be overcome by taking the issue public. Obama has the bully pulpit. It was the same with health care. He doesn’t want to put his own political capital on the line – he’d rather play it safe and work behind the scenes, then spin passage of a bill as proof of results instead of push hard for real reforms that will be termed “socialist,” “elitist,” etc.

  24. “For the last time: Which side does the president really want to be on?”

    He’s on *your* side, of course. Whoever you happen to be. For the time that he’s talking to you.

    In a strange way, the hardcore right-wing does the Administration, and Democrats in general, a great favor in this regard. There is *nothing* that they could say or do that the right would not paint as the worst most horrible thing ever, and that over-the-top demonization is guaranteed to get plenty of air time thanks to Fox & Friends.

    So Obama and Summers and Dodd et al are free to legislate garbage and call it ice cream. Anyone who tries to point out that, no, actually that’s just garbage, is lost in the general noise. In a political sense, I mean. It’s like a live vaccine.

  25. Size helps greatly if you want to throw your weight around capital hill and work toward regulatory capture.

    Smaller size is less risky for the economy as well as our democratic republic.

  26. “if he screws those who voted for him on this basis”

    He already has, on the bank bailout, health care, the Iraq and Afghan wars, executive power, off-shore oil, etc.

  27. Whether financial reform is passed or not, weak or not, I think the Republicans win either way – but win MORE if reform is not passed.

    If passed, they will paint reform as weak and the Obama Administration as banker friendly holding up Geithner and Summers as poster children for Administration’s connection to the bankers.

    If not passed, they will say that Obama failed to reign in the banks AT ALL, and is either incompetent or bank-friendly.

    In either case, the role that Repubs played in weakening or defeating financial reform won’t stop them from pinning all the problems on the Administration, and they’ll loudly point out that 59>41.

  28. Russ wrote:

    “The tyranny and the looting is the greatest economic crime in history, so yes, it is a scandal…”

    Crime? Yes. Greatest? Hmmm….

  29. This is so true! The rantings of the far right, so amplified in the media, have been so ridiculous but so raucous that they make it impossible to be heard with intelligent objections to administration policies. If I were more conspiratorially minded I would think that the Dems and Reps are collaborating on this. I cannot recall a more frustrating time for political discussion.

  30. “Size helps greatly if you want to throw your weight around capital hill and work toward regulatory capture.”

    With 50 smaller banks instead of 13 big ones, the industry would probably still be able to afford $1m per congresscritter per year for lobbying.

  31. Krugman is a “flack” and a “shill” for the financial sector? Next: “Krugman is just a false-flag ‘liberal’, really a Rupert Murdoch puppet!” That modest apartment in NYC? That small family home in Princeton? That little Caribbean get-away bungalow he and Robin have? Those are all just components of an elaborate front. Actually he’s got a huge mansion on Long Island, a villa in Monte Carlo, a home in the Hamptons and another in Palm Springs.

    Russ, you know that funny sound under your bed? Don’t look: it’s Paul Krugman. Try not to stir him, as you creep away and load up your car with bottled water and canned food. Because all it takes is one bite from PK, and you soon join the ravening horde of financial-sector-kleptocrat-sellouts, running around, chasing and biting everyone in sight.

  32. Please, please don’t break my hearing, I’m old and maybe a bit deaf, but anyone who actually believe Larry Summers when he opens his mouth is practicing more self-deception than Tiger Woods. Larry is one of them, and never, never will be one of us. Was there ever a question that he would mischaracterize anything which he feels threatens his buds on Wall Street? No, period!!

  33. I think here and in other threads I laid out the evidence clearly.

    The fact that you’re sticking up for him proves where you stand on this crime.

    “False-flag liberal” – by now that’s practically redundant, just like “corporate liberal”. If there was any doubt at all, the health racketeering bill proved it once and for all.

    We now see the full array of liberal criminals, an exact mirror image of the Bush criminals. Right down to the brainless hacks on comment threads.

    Looks like it’s time to revive the old term, “social fascist”, for the likes of you.

    Corporatism vs. anti-corporatism is the defining issue of the age, and one’s stand on it very starkly defines one’s stand on pretty much every issue, whether one seeks the real solution to any problem or only seeks to make the problem worse (again health racketeering being exemplary), rule of law vs. kleptocracy, freedom vs. tyranny, and very simply good vs. evil.

    Krugman’s entire career has been devoted to aggressive neoliberalism, as a partisan of a particular gang, the Democratic party. That’s the only reason he pretended to oppose evil policy during Bush. As we see if we look back to the 90s, or if we look to his Pied Piping for the Democrats’ reactionary policies today, or his serving as chorusmaster for the new China-bashing (the age-old appeal to xenophobia to distract from domestic government crimes), his real role is to be a top propagandist for corporatism when the Dems are in power (but outside of official power).

    That’s all it is.

    That modest apartment in NYC? That small family home in Princeton? That little Caribbean get-away bungalow he and Robin have? Those are all just components of an elaborate front. Actually he’s got a huge mansion on Long Island, a villa in Monte Carlo, a home in the Hamptons and another in Palm Springs.

    That’s very funny. Because Krugman’s personal empire is small by your elitist standards, because he personally hasn’t managed to extract as much loot as some others (or at any rate doesn’t display it as conspicuously, according to you), you think it’s funny to laugh and say “how could he be part of the kleptocracy? He’s only very wealthy, not super-rich!”

    And you really think that’s an argument. You really measure “humanity” only by how rich people are, and the merely rich are, according to you, the normal people, so he, and I assume you, are therefore the salt of the earth.

    You sure lay bare the psychopathic elitist liberal mindset. I hope you and your fellow effete little Obama idolators are enjoying your little snicker. But don’t forget your prayers, that the people never do take back this country, because if that ever happens, no matter how it happens, your kind have no future at all.

  34. Let’s be honest, if we could put together a hall of fame dream team that included the likes of a Paul Krugman, Simon Johnson, James Galbraith, Robert Reich, William Black or a Brad DeLong and assign them the task of creating the perfect financial reform bill, the victory, however sweet, would vanquish a symptom and be short lived.

    There is only one battle to be waged: Outlaw all bribes of government employees. Ban outright, any corporate money in politics. Limit annual campaign contributions to a maximum $250 per individual for any candidate. Enforce a life-time employment ban on revolving doors. If there is no financial incentive for selling votes to the highest bidders, then our government is stuck representing us, we the people.

  35. You ought to distinguish how much is too much regulation. Larry Summers is not a republican.

    I believe the academia ought not to lose sight of how to run the nation’s economy with the best informed path, and not to get bogged down by academic issues. $50 billion or even $500 billion may not be such a big price to pay in time of a economic calamity such as the one in 1930 or in 2008.

    A fool proof perfect system may be just for the fools. We ought to be careful not to let the country to drift from one extreme to another.

  36. “With 50 smaller banks instead of 13 big ones, the industry would probably still be able to afford $1m per congresscritter per year for lobbying.”

    I disagree and here is why: There are several hundred million average joes like me in this country. We don’t have anyone lobbying Congress for financial legislation on our behalf. The smaller each unit, the less clout.

  37. “. They always said, “tell him to shut up about non-economic stuff”.”

    Actually, the screamed that he was shrill, when he was more correct on non-economic stuff than all conservatives put together.

  38. “Celebrity corrupts. There is a reason the Romans would not allow actors into the Colesseum.”

    You mean, where gladiators fought for the crowd’s amusement? From

    “Capable of seating 50,000 spectators,[1][4][5] the Colosseum was used for gladiatorial contests and public spectacles. As well as the gladiatorial games, other public spectacles were held there, such as mock sea battles, animal hunts, executions, re-enactments of famous battles, and dramas based on Classical mythology. ”

    Voltaire once said that he had prayed only one prayer, and that God had always granted him that prayer. It was ‘make my enemies look like fools’.

  39. Larry H. Summers is one of the leading advocates of the disasterous deregulation. For that alone, he should currently be gracing the Harvard gallows. For the swathe of destruction that he cut while at Harvard, he should have been impaled with the rest of the Harvard Board of Governors.

    We will not have successful reform unless and until we punish the moertherf*ckers who put us into this mess. Otherwise, they’ll continue, knowing that even disaster is no disaster for them.

    Please note that Alan ‘Randroid’ Greenspan has been backpeddling and talking smack recently; he seems to have recovered from his shock.

  40. “I don’t quite get the Krugman-bashing here.”

    Krugman has been possibly the most-correct person of the last decade, and one of the few with a platform in the elite MSM to publicly speak out, consistently and repeatedly. The right, therefore, hates his guts.
    Pure and simple.

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