Larry Summers and his role in recent US policy

And yet he seems to screw up everything he touches. His “brilliance” seems to consist chiefly of the Right Sort of People repeating over and over again how brilliant he is.

It’s exactly the kind of “brilliance” that has been repeatedly demonstrated by our Ivy League “meritocracy” as a whole. Superficial cleverness (masking deep ignorance), combined with the “right pedigree”.

Ten years ago, Posner’s “Public Intellectuals: A Study of Decline” pointed out that the market for sophisticated intelectual analysis of public issues simply didn’t work, because there were no effective feedback mechanisms to reward good analysis and punish bad analysis. Posner pointed out that many public intellectuals were effectively paid by advocacy groups or established institutions, and not by the “public” or groups actually trying to solve difficult problems, thus intellectuals that fit their cultural/ideological bias were favored despite predictions and proposals that had been repeatedly discredited by subsequent events. Thus D-squared’s “echo chamber” reinforcement problem, and the problem that many “end users” are equally uninterested in developing policy solutions, and just want their biases and group loyalties affirmed.

Posner incorrectly predicted that the role of public intellectuals would continue to decline as he hadn’t foreseen the explosive growth of paid corporate advocacy groups, the increasing corporate domination of DC think tanks, cableTV news or internet blogs. All of which made the cultural/ideological bias and echo chamber/bias confirmation problems exponentially worse. But the underlying problems allowing folks like Summers (or Glen Beck or Thomas Friedman or scores of others) to prosper despite truly dismal track records aren’t new.

The problem with Friedman’s piece on Summers is that is isn’t at all clear whether he wants people to focus on the dismal track record/cultural bias within universities problem (a very long-term issue, mostly echoing Posner) or whether we should focus on the explosive growth of corporate funding and legal shifts–recent shifts making the echo chamber arguments more powerful and more immune from any counterattack, and creating much bigger impacts when these arguments are implemented.

It reminds one of those other “brilliant” people with “a profound knowledge of geo-political strategy” who tend to recommend fighting land wars in Asia…

…And that reminds me of Eisenhower’s speech on the Military Industrial Complex. For Eisenhower did not only caution us against the MIC lobbying to fight useless wars. He also warned that “The prospect of domination of our nation’s scholars by Federal Employment, project allocations and the power of money is ever present.” I don’t think Eisenhower was thinking of the influence of corporate money on academic economics or medicine, more of the potential for a war on science carried out by political actors, but prescient it remains.

Anyway, interesting article by Ferguson. More Research Needed on the political economy of economics.

His “brilliance” seems to consist chiefly of the Right Sort of People repeating over and over again how brilliant he is.

The Scalia Effect.

The problem is, despite limited evidence that brilliance is correlated with competence, the conflation is yet made.

Ferguson makes it appear as if Summers did it; that Summers was always wrong. That’s way too simple. It also is way too narrow. We started towards the almost depression long ago, at least from Reagan. Europe did the same and without Summers.

On the other hand brilliant is not well defined. Summers may be a brilliant economist, but he doesn’t seem to be very good at understanding Wall Street greed nor is he street wise. Those Summers’ drawbacks and below average human nature understanding made him a failure.

It’s way more complex than Summers and Rubin.

the design, implementation, and maintenance of financial policies during the period from 1996 through 2006 were primary causes of the financial system’s demise

I’m not sure how this is supposed to get Summers off the hook. Or did the policies design and implement themselves?

Lemuel Pitkin,

blaming someone who does not hold elected office is a way of avoiding deciding who among those who held office and are still in office dropped the ball.

Bill Clinton is old hat, and bush-cheney is a too well-worn path, so a new bad guy was needed.

if you avoid blaming those in elected office, you do not have to do the hard yards and work out political solutions. Much easier to blame a courtier who is opinionated.

cf http://blogs.reuters.com/felix-salmon/2010/10/05/inside-job/

LFC,

Kissinger was an agent of the president. he would not have lasted if he stepped out of tune. Nixon never struck me as someone who liked to surround himself with critics and threats to his power.

Volcker is a good example. He survived by doing what people wanted. Bring down inflation from double digits.

Fed chairs have a four year term, so not reappointing him, or promoting him mid-term to be Treasury secretary was always presidential options, as was done to his predecessor by Carter.

A lot can be explained about monetary policy by applying the usual models of bureaucratic behaviour. Using the real Fed Funds rate to measure monetary policy:

• Republican presidents and more conservative leadership of the Senate Banking Committee are significantly correlated with tighter monetary policy.

• Changes in the chair of the Fed are significantly correlated with changes in monetary policy.

Carter knew something about Volker when he nominated him. Reagan did not have to reappoint Volker. Volker was unpopular in 1983.

john c. halasz

given the choice between ferreting out a long forgotten rule change and looking at recent changes in monetary and housing policies that were popular just a few years ago, old obscurities wins every time.

Loose monetary policy that lowered interest rates to 1% and massive increases in government regulatory subsidies for the underwriting of housing loans for middle-class and emergent middle class constituencies can never be to blame.

A more compelling narrative would focus on the effect of over 25 million subprime and Alt-A (that is, nonprime) mortgages that are pervasive in the mortgage system in the United States.

These loans amounting to almost 50 percent of all mortgages and began defaulting at unprecedented rates in 2007. This caused the collapse of the asset-backed financing market in 2007as interest rates increased. The loss of the asset-backed securitisation market caused a huge reduction in financing that was available for businesses and consumers, precipitating the great recession.

Mortgage brokers cannot create and sell low quality mortgages unless they have buyers to underwrite them. Their main customers were government agencies or companies and banks required by various regulations to purchase these junk loans.

Blaming subprime and Alt-A mortgages on unregulated mortgage brokers must fail because the dominant role in creating the demand for and supply of the funds to make these deficient loans ever possible was the U.S. federal government.

The story from go to woe is government failure.

Jim Rose:

Pure B.S. Blaming it all on the government and monetary policy, when it was largely the result of a de-regulated securitization “market” devised at Wall St.’s behest is not only in sheer bad faith, but in defiance of the overwhelming preponderance of the facts, (which, yes, I’m well familiar with, having followed these issues since long before the explicit outbreak of the crisis, though from a U.S.-centric perspective). And the “obscure” rule change was one of the beginning de-regulatory moves,- (and note the 3 items I indicated, of little significance then, but which sure came to roost in the end, eh?)-, which goes to the larger point that it wasn’t a matter of government failure, in accordance with your fact-distorting ideological proclivity, but of de-regulatory government capture. It wasn’t any government directive, but the securitization and derivatives apparatus of Wall St. Ponzi finance that blew the U.S. housing bubble, for all that political “authorities”, (cf. “the ownership society”), were fully complicit. Some of us have an actual attention-span, rather than being blinded by time-spanning ideological blindness.

…even if one believes that more or less anyone else in the same position would have done more or less the same, it is nonetheless good practice to allocate a significant amount of blame and opprobrium to the people who actually were in that place and that time, and who actually did fuck it up.

If indeed those “much bigger trends that are related to the overall structure of the postwar capitalist system” you mentioned are responsible for discovering and elevating right individuals to the right positions – then what’s the point of blaming and demonizing the tools? It’s a red herring.

john c. halasz, securitisation requires assets to securitise.

Explain why this bubble was different – the first bubble in 70 years to result in a world-wide recession. There have been 15 banking crises in the US since 1800, but only two – the 1930s crisis and this one – seeded a world-wide financial collapse.

The whole government mandated housing bubble was built on usually low interest rates – these rates are set by the Fed – and greatly expanded underwriting by Freddie and Fannie as the behest of Congress.

As of the end of 2008, of the over 25 million subprime and Alt-A mortgages:
• the Federal Housing Administration held 4.5 million subprime and Alt-A loans;
• Ten million were on the books of Fannie Mae and Freddie Mac – Fannie and Freddie actually bought most of the subprime and Alt-A mortgages sold in the US between 2005 and 2007; and
• 2.7 million are currently held by banks that purchased them under the requirements of the Community Reinvestment Act.

These 25 million subprime and Alt-A loans amount to almost 45 percent of all single family mortgages in the United States. Up to 1995, the homeownership rate in the US was a steady 64%. By 2000 it had risen to about 67.3%, and by 2004 it reached 69.2%.

In July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote–all Republicans in favor, all Democrats opposed. The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.

It takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. In a 45 member Democratic caucus that included Obama, these votes could not be found.

Of late, Obama has taken to accusing others of representing special interests. Obama was the third largest Senate recipient of campaign donations from Fannie and Freddie.

The collapse of the housing bubble would not have sparked the great recession and credit crisis if the bubble had not been over-inflated by the low-quality loans required by government mandate that are now defaulting at unprecedented rates.

@27, Because it makes it more likely that people oppose the trend. Every big structural trend consists in the end of individuals, and the way to stop and reverse trends is to get enough individuals to dislike the trend

I’m afraid that demonizing tools produces the opposite effect. If this is Summers’ fault (even if only partially), then let’s send a better person there! Elizabeth Warren! And Paul Krugman! Let’s vote for Obama, because he is a smart and nice person.

Well, it’s not going to work. You need to talk more about the trends, and less about individuals.

I agree that Larry Summers’ role in the financial crisis cannot simply be dismissed, but some of the causation here is weak:

“As a rising economist at Harvard and at the World Bank, Summers argued for privatization and deregulation in many domains, including finance.”

Yup, like most economists then. I bet you wouldn’t even have gotten much of an argument from Krugman at the time (though I’m not sure and would love to be proved wrong). As a reminder of the climate of the Washington Consensus at the time think back to when Krugman was pilloried by economists and the press etc. when he stated the obvious during the Asian financial crisis that capital controls, might, you know, make sense?

“…Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector.”

He “oversaw” it? Surely Gramm et al were responsible for pushing the legislation and Democrats like Shumer etc contributed their fair share.

“He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, including exempting them from state antigambling laws.”

Same thing. Now you can argue that as Treasury Secretary he could have opposed these things and convinced the President to veto them, and I’d be happy to hear you out. But it seems more plausible to me that the neo-liberal ideology that took hold in the economics profession, combined with a rightward lurch in economic policy and activism in this area in the Republican and to a somewhat smaller extent the Democratic parties due to collapsing unions the business community’s and especially the finance industry’s lobbying efforts etc. created the ground for all of this. If the political landscape had been different Larry Summers either would have had other beliefs or someone else would have been there implementing and advocating policy in the Treasury. I do think it is fair to argue that considering Summers’ previous work Obama should not have brought him to the White House and that a real opportunity was missed to reform (as much as is possible) the financial industry when it was at its weakest and needed to be bailed out. But that is another story.

Tin Wilkinson @ 29: You’re not using the definition of “conspiracy theory” most people use. Corruption and conspiracy theory are two thoroughly different kinds of historical explanation.

Jim Rose @ 20: No. LFC is right on this. Kissinger did what his employers could not and perhaps would not. That is the definition of a superstar employee.

bianca: Better try to avoid a lengthy threadjack, but: there is use, and there is definition. And in the case of ‘CT’ neither is very consistent and the two are not closely aligned one with the other. This is exactly the kind of situation in which the term CT would be used – to fend off a reasonable accusation (which can be described as a CT on an expansive, reasonably face-value meaning of the term) by implicitly bracketing it with stereotypical loony stuff.

I was using it ironically to refer to this kind of tactic, but in fact if it were not for the sneakily pejorative use of the term, it would not be unreasonable to use the it in these circumstance, since there is no clear distinction in kind separating conspiracy from corruption. The main difference is perhaps in the degree of specific, conscious and explicit planning – but that is not a salient distinction, nor an apt one – there are commonly very mixed mechanisms involved in both conspiracy and corruption.

And conspiracy theories – on any reasonable understanding of the term – are not a special mode of explanation, any more than anything else is,nor need they perform an explanatory function in pragmatic terms. Popper and Hofstadter are to blame for some very badly mistaken (or at least as plausibly, dishonest) ideas about this that have – amazingly – only recently been explicitly exposed as such in the philosophical literature. I have done some lengthy droning on about this stuff on CT before.

I do not think Ferguson’s article makes Summers out to be the villain in the black hat. I think the article points out the way moving from academia to corporate chair to government office and back again is not dependent upon the actual outcome of policies for which individuals advocate and implement. Rather, having reached the stature which allows for this to happen insulates individuals from accountability. Not only because cronies and acquaintances and colleagues share the same general ideology, but also because there seems to be an implicit assumption that membership in this elite group insulates one from the larger consequences of acts done in an official capacity.

I do not think Ferguson sees Summers as the villain. Rather, Summers is offered up, in this article, as an example of a larger (but still relatively small) cohort of individuals who, despite working on different sides of the party-political fence nevertheless shared certain assumptions and biases. They worked to implement policies rooted in these biases and assumptions. When they turned out to be catastrophically wrong, the cohort looked at one another, scratched the back of their heads, chuckled and said, in effect, “Oops.”

It’s an entire system that sees does not need to define “brilliance” because achievement of a certain rank and station is an indicator of brilliance. There is no more an accountability for that epithet than there is for the results of implementing policies that nearly bring down the entire financial system of the western world.

“This fits Kissinger, Wolfowitz, and Summers, who are all regularly considered brilliant.”

Also Condi Rice.

djw: “Also Condi Rice.”

I’m sure that that Stanford maggot will crawl back out of the Hoover cesspool and into the next GOP administration.

John Quiggin’s “argument” is purely a fallacy, that is, tu quoque. It is impossible to violate the American Economics Association’s (AEA’s) code of ethics. They don’t have one.

Who describes Roger Scruton as “brilliant”?

John Quiggin,
On Roger Scruton, I suppose that economists and philosophers who call for the decriminalisation of marijuana are equally bought and paid for? They too are enemies of the Nanny state.

Some want to tax sin; others want to ban it.

You do not have to approve of other’s vices to suggest that people should be able to pursue their vices as long as they do not harm others. These same supposedly short-sighted sinners/smokers are deemed competent to vote and drive cars. Would you vote for a smoker? is’nt smoking evidence of a lack of foresight and self-control?

Excise taxes on cigarettes are regressive and whose burden falls more heavily on the poor than on the rich. Marijuana consumption increases when beer or cigarette taxes are increased or the minimum drinking or smoking ages are raised.

Roger Scruton criticised the WHO for focusing on tobacco instead of vaccination campaigns and diseases. This is a fair difference of opinion over priority.

In the least developed countries, when life expectancies get to be long enough that many might live long enough to start to die in large numbers from tobacco related illnesses, smoking might be a major public health issue.

I hope the WHO is spending nothing on anti-tobacco education in Aids ravage countries such as in Africa. They have more important things to do. Do you agree?

How much does the South African Health ministry spend on anti-smoking issues as compared to combating Aids? The South African Government banned smoking in all the stadiums in World Cup games. Was their Aids-denier of a President the patron of the whole anti-smoking show?

As an aside, if income taxes do not have significant disincentive effects – a core Left-Wing belief – why would higher sin taxes do a better job of reducing the consumption of addictive goods such as tobacco?

jch @37: “nor need they perform an explanatory function in pragmatic terms.” the distinction was meant to be between (1) a logical explanation relation between two propositions and (2) the answering of a ‘why’ question. Any conspiracy theory will enter into the former with any number of other propositions, without necessarily figuring in any instance of the latter.

BTW – re ##29, 34, 36 on ‘conspiracy theories’ – I hadn’t noticed before, but scrolling down the page, I noticed that one of Jim Rose’s (@13) mentions the word ‘conspiracy’: a closer look at the surrounding wordage revealed a sneering comparison with JFK (the film) and the suggestion that this was all about looking for scapegoats by means of a fact-insensitive construction of explanatory theories.

What it is actually about of course is some extremely dodgy behaviour, which no amount of bleating about black-hatted villains, conspiranoia and wider events is going to make go away. A fine example of the conspiracy-theory smear tactic though.

Another is an unexplainable inability to reconcile his own academic work with economic policy making – i.e, Larry’s own papers are perhaps the most important arguments against his own practical policy-making.

I think that TW at least regards it as all too easily explainable.

“Larry Summers, as a white-collar criminal, is indeed brilliant, as like the Rothschilds were brilliant.”

No, Summers is a brilliant economist, regardless of the non-brilliance of his other activity. The Noise Trading article alone is one of the most important papers in recent years. It’s almost as important as Debreu-Sonnenchein-Mantel.

TW @ 53:

Not to feed your pet obsession too much, (not that I disagree with it, in terms of distinguishing between conspiracy theories and “conspiracy theories”, and the apologetic function of the conflation of the two), but by way of further clarification. I take it you’re saying that non-dubious functional orchestrations that amount to apparent “conspiracies” can be objectively identified and described without resort to special conditions or hidden mechanisms. (I have a bit of trouble with the notion that any explanation can avoid some sort of “why” question motivating the explanatory endeavor. But in this sort of case, we’re dealing with an explanation in terms of (systems of) social action, so the identification of intentions, structures and conditions of variously distributed agents or agencies enters into the “equation”, no?). But some sort of goal-state, if only on a systemic and not a personal level, must be involved in the identification and explanation-or-description of such a “conspiracy”, in logical and “causal” terms, else it can’t be clear whatever is being talked about. And, on the other hand, “corruption”, even if licit, is a normative term, imputes some sort of standard, together with deviations and duplicity with respect to it.

To give an example of what I think you’re getting at, Madoff et alia was a narrowly held Ponzi scheme, which required highly restricted access or secrecy among a sharply limited number of confederates to maintain the dysfunctional or destructive results of such activity by means of a contrary deceptive appearance. But the Wall St. machinery of structured securitization was an open-air Ponzi market, in Minsky’s sense, which involved much fraudulent and predatory behavior. even though apparently perfectly legal, among distributed agents and agencies, which many of the more savvy must have been fully aware of, but which didn’t involve any closed coordination among a select group to maintain a covert deception.

Another way to make the sort of distinction I think you’re trying to get at, is that an excessive obsession with ad hominem criticism and the corresponding seeking after hidden motives is largely beside the point for any “conspiracy” that generally matters. Since motives, as opposed to the identification of acts, intentions, structural constraints and conditions, are simply inferences from the aforementioned and never in any sense objectively in evidence, a basically paranoid obsession with hidden motives, though in particular cases such motives might be operative, adds nothing to the general case, and is neither sufficient nor necessary for the identification and explanation of a “conspiratorial” effect, though the conflation of the two cases, such that all such all such imputations reduce to the explicitly paranoid instance, is itself obfuscatory to apologetic effect.

On the other hand, to return to the general topic of the thread, I’m sure you’re familiar enough with economic discourse to know that there’s more than one way to skin a cat, and that economists routinely make numerous different arguments based on the same or different models, often to my sensibilities quite sophistically, to bewildering and contradictory effect. So there’s an issue of fundamental uncertainty and dreaded relativism involved, which economic theory per se, with its “rigorous” distinction between the normative and the positive, can’t resolve. The likes of Larry Summers makes his way to “brilliance” by the utter confidence of his argumentativeness, by which he can evade the sort of accountability that one might otherwise expect.

[aeiou] Pr Q @ #39 said, third time properly tagged:

An economist could[1] point to the numbers in Ferguson’s piece as evidence of how hard it is to corrupt economists.

fn1. But, I have a fine counter-argument ready to go if someone else doesn’t make it first.

An “economist” ie a profession that knows “the price of everything and the value of nothing.”

The collapse of the housing bubble would not have sparked the great recession and credit crisis if the bubble had not been over-inflated by the low-quality loans required by government mandate that are now defaulting at unprecedented rates.

Well, I’m glad somebody said it. You can cry about “deregulation” of derivatives all you want, but if not for some very heavy-handed government interference in real-estate finance, there never would have been any bait in the trap for those horrible capitalists. Anybody care to explain how derivatives would have crashed the economy if the underlying debt was good?

Halasz came closest to answering:

you’re pursuing Austrian ideological piffle: the free market fails only because it is never free enough, therefore its dysfunctions and failures must all be the fault of government interference and policy failures

That’s a generalization which doesn’t address the specific argument. No surprise, since the specific argument is unanswerable. No wonder Chris told that guy to shut up.

I personally am not ideologically committed enough to have much need for “always” or “never”. There’s plenty of blame to go around, I’d guess. But free markets, while they are far from perfectly rational, do have strong incentives to correctly assess debt risks. When a .gov applies artificial downward pressure to that assessment, the actions which result are almost by definition less rational. This is true even if the .gov has a noble progressive intention, such as getting more people to own their own homes. Some people can (ahem) never admit that noble progressive intentions may contribute mightily to bad outcomes.

I have no opinion on whether any of this tends to vindicate Larry Summers.

But free markets, while they are far from perfectly rational, do have strong incentives to correctly assess debt risks.

How so? I’m not sure what “free markets” is, but if I own a rating agency and some powerful financial institution offers me a very large (and not quite illegal) bribe to give a higher ratings to some complicated securities, what is my incentive to reject the offer?

Beauregard @63: I don’t understand what you mean by ‘conspiracy accommodation’. Dismissing people on spurious and lurid pretexts like that is something I specifically oppose, strenuously, consistently and publicly. The string of quoted extracts was intended as an illustration of that very tendency, and not as an endorsement, if that has caused any confusion.

FWIW, I’m not sure I have the evidence at my fingertips to agree that in the case of Summers the facts don’t merely suggest conflict of interest but like serious crimes, market manipulation, insider deals, etc, except on a pretty weak sense of ‘suggest’. But I would certainly be unsurprised, I mean that’s business as usual isn’t it. One of my points was that the charge of conflict of interest stands without the need to get into the further details of the actual foul play involved – it was certainly not that c. of i. is the worst charge that can be laid.

Barry: quite right. The whole “CRA is to blame for the crisis” argument is a lie. (Not an honest mistake; the evidence against it is too good for anyone to make that mistake in good faith. It’s a lie.)

But free markets, while they are far from perfectly rational, do have strong incentives to correctly assess debt risks.

As Henri notes, free markets and ratings agencies don’t seem to work, and there were a bunch of other market failures in the real world, but let’s take a trip to Jim Ross’s universe and look at the free markets there.

To review, in JR’s world:
-CRA-regulated institutions were disproportionately involved in making bad loans.
-GSEs were early instigators to the bad-loan securitization game, rather than late arrivals
-GSE executives were motivated by government mandates, and not the desire to make money.

Even in JR World, that still leaves us with some questions: Why did all of of those “free market” actors imitate the GSEs? How did publicly traded entities like Fannie and Freddie become exempt from free market motivations? And why, if they were exempt, did their behavior mirror the behavior of private actors?

The conservative excuse du jour is that the government “mandated” loaning to the poor, hence the crash.The conservative excuse du jour in 2000, when the conservo-pig Gramm was thrusting a deregulated mortage market upon the U.S., was that government regulation imposed burdens on the poor by disallowing the free market from assessing risk and making loans to the poor. Of course, any conservative narrative is wildly fantastic, and constructed solely in the interest of enriching a small number of those morally dubious people who inhabit the upper 1 percentile class. However, the idea that the government caused the crash is a particularly hilarious idea. After all, if the government wanted the poor to have homes, they could, well, like build them for the poor. This was done up until the eighties, when, it was discovered, this was rank socialism. The free market, conservatives assured us then, could serve much better.

It is one disaster after another in the conservative program of always peculating on a wider field. Happily, conservatives have found a country, the U.S., rich for plucking, and evidently intend not to leave until the medium income is a nice 10 thou per year. What’s really sweet about the thirdworldization is getting the peons to actually believe their unbelievable tripe. Although those further up the food chain, your true rightwing media gun doesn’t really believe anything for very long. Belief, after all, is hard to maintain once you have woven your arguments out of short term memory loss.

Musical M.
This is a grand slam of ignorance. Ignorance of the private rating agencies; ignorance of the deregulation of the mortgage markets and how it was supposed to work; and finally, ignorance of the government insurance. You have obviously not read a book or article about how the mortgage market worked – or derivatives, for that matter.

But you can improve yourself. For instance, read Our Lot to find out how the deregulated mortgage business worked (an on the ground perspective). Read Michael Lewis’ The Big Short for a good journalistic account of making money in the “free market” of financial services. Gain some small knowledge of the chronology of the housing bubble, and how Fannie and Freddie lost market share between 2002-2007 because they avoided the subprime market. Then go over the rightwing prop machine’s own comments about the housing bubble when it was going strong under Bush, and find that, at the time, it was attributed to getting the gov. out of the housing business and was a triumph of the private sector. Of course, that part of the story is simply conveniently erased – why, though, you might ask, did conservative tv personalities in such venues as Forbes and CNBC consistently tout the housing bubble? Were they all just poor little sheep?
Really, don’t try to pull this intellectual vapid act. It is bad for who your are. Just proudly stand up for ripping people off, as long as you can get away with it. Which seems to be your true ideological compass.

I don’t think the “paid off” explanation does enough work to explain the central paradox: that Larry Summers’ own academic work argues ( at least, in broad terms) against his own economic policy-making. If Summers had always been motivated by profiteering, he wouldn’t have published his academic work – particularly since his academic work undermined the work of the then-leaders of his discipline. And the Chicago School is not known for being particularly gentle to those who criticize it. If Summers had always been about profiteering or personal power, he would have published the same stuff everybody else was doing in the late 1980s and undoubtedly still have gotten an endowed chair, and so on, with almost no risk at all.

It was not at all predictable in the late 1980s that any challenges to EMH would succeed or even be tolerated. While Shleifer and DeLong might have had less to lose, Summers had a lot to lose – if he failed to make a very strong case and failed to persuade a large number of economists, the prominent academic career that was already his could have easily been derailed. (Summers already had tenure at Harvard, while DeLong had only begun teaching in 1988 and Shleifer had taught for a year at Princeton and then a year at Chicago).

jch @61 – most of that sounds about right; I’d take issue with a couple of things

I have a bit of trouble with the notion that any explanation can avoid some sort of “why” question motivating the explanatory endeavor Well, explanation at one level is a logical relation like (though much more complex than) implication, say. There need be no explanatory endeavour (at least relative to a given explanandum) for an account that provides an explanation (of that explanandum) to be arrived at. Even an explanation which is apprehended as such can emerge without being sought – you discover x and only then say ‘ah, that explains y’. Discovering x need not have been motivated by a need to explain y, nor need it be inferred from y’s occurring, nor depend for its warrant on the fact that it explains y. This is obvious stated in such abtract terms, but in this area, the normal rules of obviousness seem to be suspended.

This is important I think, because imputing a particular explanatory aim is often used to discredit or deflect a perfectly good account of events, as for example Summers’s activities are an attempt to find a scapegoat for the banking collapse, a failed atempt to explain it, so, mumble, they fail, so forget about them. The explanation-as-process model also ushers in irrelevant objections – e.g. Occam’s supposed razor, or the old Marxian saw that there is no need to appeal to any explanation via conspiracy… to which the retort is that there is no need for such a need.

Re: ‘quasi-conspiratorial’ events, i.e. (something like, off the top of my head) those whereby a many actions taken together further some shared goal (generally to the detriment of others). There is no general form that such ‘functional’ processes must take, and typically there is a whole range of intentional and non-intentional mechanisms at work at various levels of analysis and applying to various participants.

The attempt to fit all such events exclusively and exhaustively into a smoky-room conspiracy model, or into an invisible-hand model, or into a macrohistorical model is ridiculous IMO. (Further and btw, it is the 2nd and third of these that are, if any are, special modes of explanation, while the first is just a case of intentional explanation of the ordinary everyday kind that Marx uses, e.g. in The German Ideology IIRC, and which even the most simplistic micro-economic model adverts to by invoking rational action.)

Also, para 3; a basically paranoid obsession with hidden motives, though in particular cases such motives might be operative, adds nothing to the general case, and is neither sufficient nor necessary for the identification and explanation of a “conspiratorial” effect this is largely right I think at the level of ontology, but (a) I don’t agree with ‘paranoid’; (b) it does not have firm implications for epistemics or forensics, and {c) is more generally a matter of degree.

a: I don’t think a concern with hidden motive is necessarily paranoid in any useful sense of the term, and the focus on this kind of issue is itself generally beside the point;

b: there’s nothing wrong with inferring an account of events, even an explanatory account in the fullest sense, on the basis of motive., and even with relying on the fact of motive for at least some of the justification for believing the resulting account. Motive alone is highly unlikely to provide a compelling case, but cases have to be taken on their merits. In other words I suppose motive may in some marginal cases provide a necessary part of the evidence that tips an account into credibility, and it may also provide a valuable heuristic in finding suspects for investigation;

c: I don’t in nay case think there’s a clear distinction between operative motive and intention, and the latter will often have an ineliminable role in the acount of events, in particular as providing the teleological mechanism in a functional explanation.

Basically I think far too much oversimplified and over-categorical abstraction has been brought to bear on the issue of ‘conspiracy theories’ and quasi-conspiracy, largely because such can provide an easy way to dismiss a whole class of very ordinary, everyday historical hypotheses without having to consider them in any detail. (Note the functional ‘because’ – the underlying mechanisms are many and various.)

(re Beauregard @63 I’ve just looked at this in a less earnestly abstract light, and I think the reason I couldn’t quite work out what he was getting at is because I was implicitly relying a too heavily on the principle of charity in interpretation, and failed to notice the none-too-subtle implications of his remarks.

That sort of depends on which side of grisly history one stands on and stringing up Summersschwein and his cronies from streetpoles don’t appear to be capable of being taken as anything other than genuine examples of violently antisemitic sentiment. If that’s right, he is cordially invited to do one.)

I’ve wondered about the people who say they knew about the bubble and virtuously sold their houses and rented instead: did they take the first offer they got, or having decided to sell anyway, did they hold out and play desperate potential buyers off against each other to get the price bid up as high as possible?

beauregard @82: Yet….did Summers and crew have some inkling via their boss Clinton, etc [etc?] of the Bush political schedule, like…the invasion of Iraq??

9/11 created, in large part, the context which made the invasion of Iraq possible. 9/11 occurred, of course, after Bush took office and Clinton had left. Moreover, Bush would have had no reason to pick up the phone during the 2000 campaign, call Clinton, and say: “Hey, if I beat Gore and become president, I’m going to invade Iraq” (on the [somewhat unlikely but not impossible] assumption that Bush already knew he was going to do so). For these reasons among others, the answer to the question above is almost certainly: no.

Even if derivatives were illegal altogether, the bad debt would be just as big and just as bad.

The hope: those [private] entities might have made better loan choices if they were unable to launder their loans through the derivatives process. Derivatives allowed these bad loans to be laundered.

By analogy: Murder is bad regardless of whether it gets covered up. But. If it were possible via regulation or legislation to prevent a common way of covering up murders, that would be worth looking into, and might plausibly reduce the murder rate. It would, at least, be an option worth considering.

You guys are the “always” and “never” crowd, not me.

[…]

You. All of you. None of you can deal with the historical fact that the government took a dumptruck-sized crap into the finance market. That this great heap of unserviceable debt may have had something to do with the meltdown, you literally cannot imagine. All you care about, all you’re capable of thinking about, is that a few sharp players in the private sector managed to make a buck before the toilets backed up.

Please, do go on.

/daily comment per thread quota

Oh, dear. How unfortunate.

The hope: those [private] entities might have made better loan choices if they were unable to launder their loans through the derivatives process. Derivatives allowed these bad loans to be laundered.

But that wasn’t the only role of derivatives. They not only helped the bad guys cover their tracks, they paid the bad guys.

our mighty mountaineer friend does not seem to realize that he’s merely casting the government in the role of one of Summers’ noise traders.

Tim,

I think one problem with what you’re saying is that you effectively make it impossible to distinguish between actual conspiracies and instances where the policy-makers self-deluded themselves or instances where all the participants self-deluded themselves.

Here’s some things to consider:

1. When Summers was involved in the Clinton Administration deregulation, he was participating in something that was widely considered to be correct economic policy. The vast majority of other prominent economists of the time would likely have not done anything differently, and it’s hard to say if any economist who was heterodox enough to oppose this at that time could have even been successfully appointed.
2. The reality is that Summers was probably the most heterodox of the prominent economists of that moment, or at least one of the most heterodox of that time.
3. Not only were the policies under discussion strongly supported by elite opinion, popular opinion was also supportive of it. Remember, we are writing about a population that today is more convinced about free market economics than the economics academe is.
4. We should remember that earlier forms of Chicago School economics have been dominant in Anglosphere countries since the early nineteenth century (with some periods of exception). That does not seem to have been some sort of conspiracy – what conspiracy could last two hundred years all over the world? It’s simply far more likely that people have indeed been truly convinced by this sort of economic thought.
5. It’s really dubious to say that economists have really been bribed into certain modes of thinking. The top level of economists certainly does get a level of cash flow from the business community. But lower levels of economics academe also believe the exact same things while receiving little or no cash flow. And heterodox economists who have become prominent receive cash flow from the business community even if they oppose (some of) the business community’s policies (Krugman being on the board of Enron, Tyson being on the board of Morgan Stanley, etc). There’s a level of cash flow almost everybody with a certain prominence level in economics can get without much additional work, or without even seeking out that cash flow.

There are economic conspiracies, of course. But I think a good analogy would be a nineteenth century Frenchman saying that both the Dreyfus affair and the defeat of the French armed forces in the Franco-Prussian War were both similar sorts of things. One was a explicit conspiracy (which we can document) and the other was something else. They were linked but of entirely different natures.

Krugman being on the board of Enron

Krugman was a consultant; not on the board. It seems reasonable to suppose that the small amount of cash they threw his way was an effort to get him to sign on with their program – which I think could have happened in an alternate universe. Krugman is a former Reagan administration official, and was never much of a firebrand liberal until Bush II. Ideologically, he fit right in with Clinton, Summers, Bernanke, et al.

Heck, if Krugman had decided to play ball, maybe he could have gotten a spot on Enron’s board.

Krugman meditates usefully on the subject of conspiracy theories here and here and elsewhere.

no law or regulation required, induced or rewarded the making of bad loans.

Not directly. They merely mandated making quotas* of loans in certain markets, where the quota far exceeded the number of qualified buyers.

those [private] entities might have made better loan choices if they were unable to launder their loans through the derivatives process. Derivatives allowed these bad loans to be laundered.

Actually, you may have a better point than you realized. Sales of derivatives provided the capital to make many of those bad loans in the first place. So, yeah, if derivatives had been illegal as I suggested, it almost certainly would have reduced the scale of the problem (contrary to my earlier comment).

It also would have meant that banks had far less capital to loan to low-income, no-credit buyers. They would have had to scale back their business with qualified buyers, or what is more likely, disregard their government mandates in the service of a more equitable housing market. And Some People would have screamed bloody murder at those greedy criminal bankers as a result.

Someone is really on about “market failure”, as though I can’t comprehend the concept. I get it, dude, OK? I understand that even free markets can fail, just because nobody has perfect information. But to say that this derivatives market was free and unregulated, is disingenuous. Its incentives, its “opportunities”, and its ability to assess its own risks, were heavily and negatively influenced by government and by politics. Any explanation which leaves this out, will fail to explain.

* quota expressed as a percentage of total business, or something like that. Fuck, it’s complicated.

political football @101 – thx for useful links. I guess the first may have included a preview, which doesn’t show up (perhaps due to geo. location), but I’ll find something on it somewhere. It’s evidently about the Hillary Clinton remark, which was especially interesting, beside its content, for being a very rare example of an explicit ‘conspiracy’ claim made by a very mainstream figure – and a politician to boot.

comment on 2nd, NYT, link here. (I’ve just splurged all over another thread and think I should rein myself in now since the comment got far too long and was of only tenuous topicality. As Chris B runs a tight ship, Bristol-fashion, I’ll follow the example of big business and pre-empt any intevention with a judicous bit of self-regulation.)

They merely mandated making quotas* of loans in certain markets, where the quota far exceeded the number of qualified buyers.

This is another one of those cross-universe communication problems. In our universe the government didn’t mandate bad loans. Had it happened in this universe, the free market would have responded the way it tends to respond: Loans would have become less available, rather than promiscuously available, as the bankers responded to market incentives. If some form of economic activity is a government-mandated money-loser, in our universe people tend not to do it, rather than doubling down on it. In our universe, to understand the way the meltdown occurred, you have to look at the behavior of markets.

What was the enforcement mechanism in your universe? Were people put in jail if they failed to provide loans to bad risks?

Here in our universe, we had the Community Reinvestment Act, which specifically prohibited predatory lending – and for which the only enforcement mechanism was restrictions on mergers for those who chose (note that word) not to comply. As you’d expect, in our universe, CRA lenders didn’t default at worse rates than anybody else, and all the high-profile catastrophes (Bear Stearns, Lehman, AIG) weren’t making loans under the CRA at all.

In your universe, what were the default rates on these government-mandated loans compared to other loans?

political football @107 Yes, surely that must have put a stake through the heart of what even in its first brief life was a forlorn and desultory attempt at somehow managing to blame teh Socialists for the latest market fuck-up.

Burritoboy @108: economics academics on that level have all sorts of cash flow essentially thrown at them indiscriminately without much regard for the substance of their economic thinking

I’m not particularly trying to argue a case against Summers (or you) here, but this statement prompted some general questions:

What do you mean by ‘that level’ – is it, for example, the level of getting to be a bigshot of some sort, or the level of being a genuinely accomplished academic economist, or what?

Are there any filter or other mechanisms determining who gets to that level (however it is defined) and if so, might those have anything to do with the expectation of getting money ‘indiscriminately’ thrown at one?

Would an economist whose opinions about political economy fell outside the attenuated spectrum of US mainstream thought also be showered with unconditional largesse (should ‘that level’ be defined in such a way as to include any such economists)?

Might the throwing of money be in the nature of a test to see who will bite?

Woudl it be too much to ask these academics to refuse these gifts on the old-fashioned grounds that they would be beholden even if they tried to tell themselves they weren’t, or because they don’t think its proper to allow conflict of interest, also regardless of their confidence in their own ability to resist bias?

In our universe the government didn’t mandate bad loans.

Thanks for being so gracious. I must confess I’ve been confused by the term “mandate” which seems to crop up in these discussions again and again. It doesn’t seem to be associated with any particular argumentative agenda, either. People on both sides use it, but I’m damned if I can figure out exactly what they’re talking about. Obviously it means something. There clearly was some kind of political pressure on banks to make crappy loans. I don’t think the most committed progressive can argue that bankers decided on their own: “hey, you know what? Let’s loan scads of money to people selected for their lack of creditworthiness. Sure, we’ll lose money on the average transaction, but think of the numbers! It’s a HUGE market!”

That said, I think you can definitely explain much of the damage in terms of market behaviors. Markets really can be fucking stupid, especially when they’re as complex as this one has been. Of course I have a strong bias towards free markets, and I find some of the talk of “market failure” sinister. I think there are obvious advantages to voluntary commerce conducted without force or fraud, and progressive thought generally seems to want to force commerce in one way or another, which sacrifices these advantages. I have little confidence in regulation to make a bad situation better. If there’s anything stupider than a stupid market, it’s stupid policymakers.

I think I’ll read this book before I comment on this subject again.

“I don’t think the most committed progressive can argue that bankers decided on their own: “hey, you know what? Let’s loan scads of money to people selected for their lack of creditworthiness. Sure, we’ll lose money on the average transaction, but think of the numbers! It’s a HUGE market!””

We’re at this point in the discussion and he still doesn’t understand that the originating lenders sold the loans? Why are you still talking to him?

If he means the eventual owners of the CDO’s – no, they certainly weren’t forced to buy them. Indeed, US CDO’s were particularly well-liked in Europe, for instance. I hope he’s not arguing that the US government forced Europeans to buy CDO’s, is he? There was a very strong, entirely private, market for the instruments of which a very substantial portion was entirely outside of influence by the US government (some simply foreign and some in offshore vehicles).

“Of course I understand that, and have all along. What I can’t claim to fully understand (and what you may be at pains to avoid understanding yourself), is why. Surely the profit motive is no incentive to throw money away. Nor would incompetence reasonably explain it. ”

No, you don’t seem to understand it at all. The originating lender would not care about the quality of the loan because they would be selling it in a very short period of time (usually a period of a few months). Within this period of time, the borrower would only rarely fail to make payments (and sometimes not even need to make any payments at all). The originating lender would sell the loan, collect fees for servicing it and a small profit for originating the loan. After that point, they would be entirely unconcerned what the performance of the loan was.

Your actual question is why investors bought the resulting CDO. This set of people is not the originating lender. In fact, the investors were frequently not US onshore entities at all. The set of investors misunderstood what they were purchasing. The reasons for this are varied: they made assumptions that turned out not to be correct, didn’t understand the risks, did modeling which didn’t encompass the entire spectrum of possible events, etc. None of these reasons are related to US government regulation. Again, the US government doesn’t regulate how anyone does investment analysis, many of the investors weren’t even US domiciled and the US government does not decide what investments investors should be making. There was literally no US government involvement at all on the investor side.

The only reason why the originating bank was making the loan and was unconcerned about loan quality was that there was a very high demand for CDOs. Thus, an originator could unload any quality of loan whatsoever quickly (there were investors specifically looking for very bad credit quality, for instance). If there hadn’t been that level of investor demand, the originators would not have found it so easy to sell loans of poor quality.

None of this story has much to do with government regulation. It literally does not matter if the government forced the originators to make bad loans (which it didn’t). If there hadn’t been investor demand, the originators would have largely kept the loans on their own balance sheets (assuming they had been forced to make the loans) and then blew up in an entirely different way than what we saw.

Your narrative is not only wrong, but worse, it’s irrelevant.

Just to add a belated U.S.-centric note, the housing bubble wasn’t simply a matter of subprime. If you’re going to blow a housing bubble,- (which doesn’t necessarily require the machinery of structured securitization set up by Wall St. here, since ordinary banking folly will do, but that is the main culprit for the size and duration of the bubble in this case)-, then to get people to sell their houses at a profit and move up the ladder to better houses, (with expectations of further appreciation), you need feeder-stock at the bottom of the market to start the price-appreciation chain. Which is the real point about the sudden expansion of the subprime “space”: white home ownership rates were at 70%, whereas black and Hispanic rates were at 45%, so if you’re going to increase the home-ownership rate, as a prerequisite for blowing the bubble, where do you think the extra supply of suckers is to be found? The lenders might have cottoned on to the rhetoric of the “ownership society”, (itself a right-wing, “free market” ideological trope), to disguise their aims, but it hardly amounts to an actual causative factor. Rather blaming subprime borrowers, (often enough victims of predatory practices), amounts to a typical right-wing strategy of blaming the victims to cover the tracks of the powerful and deliberate interests of the right.

I have no respect for advocates of “free markets” who don’t even understand the basic issues of market *structure*.

THE HILLS ARE ALIVE WITH THE SOUND OF MUSIC…!

“Such a buyer might well not know or care under what policies the loans were issued. He would take it on faith that the loans were issued under policies that would mostly ensure payment. After all, that’s what banks always did before.”

Again, you don’t understand the problem. The investors in CDOs were nearly entirely institutional – CDOs were generally only sold in very large sizes (usually in pieces of 1-10 million USD each) and generally sold to highly sophisticated institutions who had considerable staffs to analyze these investments. That is, if you are that investor, you’re in a situation where an originator is selling you something out of their own portfolio. Thus, the first question is: why does the originator want to dump this? Now, there can be excellent answers to that and horrible answers to that.

There’s obviously something different about a loan the originating bank is keeping in it’s own portfolio versus one it is selling to external buyers. There’s no reason to assume the two are the same and an investor naturally should view the two as different. It is irrational to simply assume (to take on faith, as you put it) that lending standards are uniform across the two situations.

In fact, banks have sold whole loans for many decades. Buyers of whole loans always assume that the loan being sold has some sort of problem with it. To get buyers interested, the bank will usually open a data-room where potential investors can come in and look at the bank’s entire file on the loan (examine the bank’s records, the bank’s analysis, notes of the bank’s meetings with the borrower, etc). Generally, whole loans will not be sold at face value precisely because the buyers locate the problems and demand a discount.

Investors extended portfolio theory to portfolios of loans. The problem is that the correlations of default were higher than they expected. They did not do the type of work normally done to purchase whole loans because they had overconfidence in their understanding of portfolio theory. The US government does not regulate investment analysis in any way and, indeed, has no opinion whatever on how to do investment analysis.

Thus, it’s irrelevant if the US government pressured banks to make lower quality loans (which they didn’t do anyway). If there hadn’t been strong investor demand for the CDOs, the banks would simply stopped lending and lobbied very hard for rule changes. You would have seen the following transaction: the originating bank would make low-quality loans ->bundle the loans -> only obtain significantly below face value prices for the CDO -> take equity loss and writedown – > not repeat transaction -> lobby government. We would have seen this scenario 5-10 years before 2007 if your narrative was true.