Larry Summers: From Global Economic Mandarin to a Domestic One
Why should Larry Summers now shift his focus away from the global economy?
February 19, 2009
In the late 1990s, Larry Summers, in his capacity as U.S. Treasury Secretary and Tim Geithner as the Under Secretary for International Affairs were literally touring around the world to "make the world safe for AIG," as the slogan went.
The principal idea behind their policy approach was as far-reaching as it was ambitious. They believed first of all that the U.S. financial system was superior to that of all other nations — in terms of such metrics as transparency and disclosure, general accounting standards, market depth and liquidity, as well as compensation practices.
Second, they were ardent advocates of the notion that other nations could only benefit from adapting U.S. practices in a dynamic fashion (and would fall onto the ash heap of history if they didn't).
Third, in the case of emerging markets from China and the rest of developing Asia to Brazil and South Africa, they were tough negotiators demanding market opening measures to provide access to U.S. insurance firms, investment banks and other entities keen to expand their presence in those markets.
And the rest, as they say, is history. In hindsight, the nations that resisted U.S. market opening demands more successfully have generally had to contend less with financial instability and contagion.
Now that same country is hanging in the ropes like a punched out boxer. Former top flight financial institutions incapable of providing clear accounts for their assets are … American ones.
For all the incriminating charges raised by Messrs. Summers and Geithner against Asian business tycoons in the late 1990s about being wholly irresponsible and playing all-too-loose with their balance sheets and assets, Asians may be forgiven for demanding an apology.
Certainly, the U.S. money center and investment banks — in the late 1990s the vanguard of global financial propriety and power — find themselves with significantly more in curious (and likely worthless) off-balance sheet items than even the biggest Asian family tycoon ever dreamt of.
It is probably too much to ask of the new leadership team of American finance to apologize for past misdeeds (in the form of a grandiose over-interpretation of the rigorous disciplines supposedly embraced by American financial firms).
And anyway, this time around, the U.S. house is on fire, leaving little to no time to look backwards. Still, the world community can only benefit from a U.S. leadership team that finds its hands tied to staving off a constant supply of fires on the domestic front.
Lest we forget, long before the world got somewhat annoyed by George W. Bush's militarized approach to foreign policy, it had gotten tired of the quite arrogant lecturing on financial matters coming from the Clinton Administration.
The hope now is to let bygones be bygones — provided the U.S. team keeps its focus on cleaning up on the home front first and foremost, and in addition does its part to lay the groundwork for a much improved form of global financial supervision and coordination than the U.S. government was prepared to accept for the last several decades.
Outside the United States, many doubt that we will see a real move toward such conciliation and cooperation. The basic assumption there is that the Obama Administration will seem agreeable to such moves for a while.
But as soon as it becomes at all possible, and in keeping with past U.S. tradition, it will resurrect its independence (and implied domestic superiority) on global rulemaking. As exhibit one, they point to the past arrogance and air of superiority projected by Mr. Summers.
The good news is that we live in significantly different times. And global capital markets are sufficiently concerned about the long-term prospects of U.S. public finance that the Obama economic team is painfully aware of the need to act in constructive global unison.
Though uttered at the occasion of signing the Declaration of Independence in a strictly domestic context, Benjamin Franklin's admonition that we have to hang together or we shall be hung separately clearly is a good mantra for what lies ahead in the field of global finance.
In addition, whatever Messrs. Summers and Geithner's potential ambitions beyond U.S. borders, they do have their hands more than full with cleaning up the wreckage after 15 years of exponentially increasing irresponsibility among the famed top flight U.S. financial "players" (sic!).
In addition, Mr. Summers is providing guidance to Mr. Geithner in a manner similar to what Bob Rubin did at the time for Mr. Summers when he received hands-on job training to succeed Rubin as Treasury Secretary.
Summers is dreaming of taking over as Fed Chairman and having his own former assistant as his counterpart Treasury Secretary — which should guarantee a very smooth working relationship.
But even failing the realization of that grand ambition, Mr. Summers has work aplenty. In moving from GEM — or Global Economic Mandarin — to a mere DEM (read: Domestic Economy Mandarin), he finds himself faced with rich hunting grounds for his generation's most rigorous and skilled economic mind.
And whatever was too much to take for the coddled faculty of Harvard University, when Summers had a stint there as the institution's president, should not be any hindrance in his current assignment as the Director of the National Economic Council.
From safeguarding the future of the U.S. car industry, health care industry, social security, infrastructure, competitiveness, etc., he has the full panoply of long-term challenges on his plate — which should give him plenty of opportunity to hit some people hard over the head.
Being tough, even somewhat mean, to economic interests that have held the entire United States as an economic hostage for too long is a terrific assignment for a man who is known not to suffer fools gladly.
To tackle the urgent task of rectifying the U.S. economic ship requires the removal of plenty a fool — and the top-to-bottom restructuring of plenty a sector of public policy.
And so it goes in the life of humans. He who wanted to reshape the world in the mold of the American example now finds himself facing almost the reverse mission — the task of remaking America in a manner that ensures its future success in the world economy.
He who wanted to reshape the world in the mold of the American example now finds himself facing almost the reverse mission.
Benjamin Franklin's admonition that we have to hang together or we shall be hung separately clearly is a good mantra for what lies ahead in the field of global finance.
Long before the world got annoyed by George W. Bush's militarized approach to foreign policy, it had gotten tired of the quite arrogant lecturing on financial matters coming from the Clinton Administration.
It is probably too much to ask of the new leadership team of American finance to apologize for past misdeeds.