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Obama de-regulates Larry Summers, reins in Volcker

By Ward Harkavy in Bailouts, Bankers, Featured, Paul Volcker, Summers
Thursday, Mar. 26 2009 @ 7:20AM
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Volcker

I must have been really naive to think that Larry Summers wouldn't win a power struggle with Paul Volcker.

During the Clinton Administration, Summers was hot enough to melt down Glass-Steagall, the Depression Era law that kept Wall Street schemers from forming trusts and banks from getting into the securities business.

You know, the law that would have prevented the current overall meltdown and the kind of regulation that former Fed chair Volcker has been pushing for.

So why are Summers and his fellow non-regulator, investment banker Robert Rubin, Barack Obama's golden boys while Volcker's influence is waning?

Over at MonkeyBusinessBlog, Eric Salzman admits he has a "man-crush" on Volcker but then gets serious about the aged Volcker's being taken off the front lines and sent back home to work on "tax reform":

Sending Volcker to go work on taxes for the rest of the year, right after he seemingly disagreed with the Administration over the timing of regulatory reform, smells to me that Larry Summers threw a hissy fit and told the president that he wasn't going to play in the sandbox anymore with Mr. Volcker. Additionally, Mr. Volcker's comments about bringing back Glass-Steagall had to chaff Dr. Larry's butt. Why can't Summers go and do the tax thing? It sounds perfect for him. An academic circle-jerk. Meanwhile, real work needs to be done by real people that have actually solved an economic crisis before. Mr. Volcker is one of the few individuals we have that can lay that claim. Unfortunately, President Obama seems to be making the wrong personnel choice.

As to Summers, Arianna Huffington takes more than a star turn with her "Larry Summers: Brilliant Mind, Toxic Ideas."

Huffington's got an edge over most other media critics of Wall Street, because she was a Reagan Republican — she has particular knowledge of the mindset of pols on the right who hate regulation. Here's Huffington on Summers:

As Treasury Secretary under Clinton, Summers played an important role in convincing Congress in 1999 to pass the Gramm-Leach-Bliley Act, which repealed key portions of the Glass-Steagall Act and allowed commercial banks to get into the mortgage-backed securities and collateralized debt obligations game. The measure also created an oversight disaster, with supervision of banking conglomerates split among a host of different government agencies -- agencies that often failed to let each other know what they were doing and what they were uncovering.

Right to the point is the revealing slice of history Huffington dredges up to make her point that Summers also spoke up strongly in favor of what she rightly calls a "time bomb": Senator Phil Gramm's other measure that let these conglomerates-in-the-making create and trade derivatives — without regulation.

Those derivatives were manufactured by the kind of "financial engineering" that Volcker sneers at. Here's a last little bit from Huffington's own post:

Indeed, during a 1998 Senate hearing, Summers testified against the regulation of the derivatives market on the grounds that we could trust Wall Street. "The parties to these kinds of contract," he said, "are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies and most of which are already subject to basic safety and soundness regulation under existing banking and securities laws."

It would be hard to make assumptions that turned out to be more wrong than Summers' were.

Yet Obama has chosen Summers over Volcker. Kind of self-defeating if the president wants to pass a sweeping social agenda while at the same time he's not sending Wall Street to reform school but instead financing the bankers' revival of their reckless trading practices.

While the Europeans are crying for more regulation of the financial markets, Summers will be standing up for out-of-control business as usual on Wall Street — as soon as we take care of this pesky recession problem by keeping the focus on bailing out the bankers.