The most famous instance was that of Larry Summers, erstwhile president of Harvard University, and head of the National Economic Council during the first two years of the Obama presidency. Indeed, it was precisely that high-profile government position that forced him to disclose his numerous ties to and payments from the financial sector. When he filed his “Executive Branch Financial Disclosure Report” on January 20, 2009, listing a net worth of $17–$39 million, he prompted a flurry of newspaper and blog accounts of his outsized speaker fees and favors done for the financial sector from the late 1990s onward.93 Summers has enjoyed an extremely checkered career in many respects, dating from his controversial tenure as chief economist at the World Bank in 1990, but had nonetheless risen to political prominence due to the long-term patronage of Robert Rubin, formerly co-chair of Goldman Sachs, secretary of the Treasury, and later gray eminence at Citigroup and other Wall Street institutions. During the Clinton administration, Rubin and Summers played a now-infamous role in quashing Brooksley Born at the CFTC in 1998 when she proposed reining in the proliferating markets in credit default swaps. Indeed, many of the most significant neoliberal bank deregulations that led up to the crisis happened during the joint watch of Rubin, Summers, and Greenspan. When Rubin left the Treasury in 1999 for Citigroup, he persuaded Clinton to name Summers as his replacement. Rubin lobbied for Summers to be appointed president of Harvard, a term that ended rather inauspiciously in 2006 with accusations of economics faculty fraud from the federal government.94 Summers did not suffer from these contretemps, however; he was taken on board at Taconic Capital Advisors, a Goldman alumni hedge fund,95 and began earning $5 million a year working one day a week at the hedge fund D. E. Shaw, and earning really substantial speaking fees from all the main players in the crisis: $135,000 from Goldman Sachs, $67,000 from JP Morgan, $67,500 from Lehman Brothers, and $45,000 from Merrill Lynch eight days after Obama’s election. Much of his wealth appears to have been racked up during this run-up to the crisis. Obama then appointed Summers his top economics advisor, as someone who would serve Solomon-like in helping decide who would be rescued, and who cast into oblivion.96
Summers has been contemptuous of the few journalists who have had the temerity to suggest that this revolving door has had any conditioning effect on his behavior in the Obama administration.97 Although Summers has long been associated with the Democratic Party, he has been an unapologetic neoliberal for most of his career. He wrote:
If Keynes was the most influential economist of the first half of the 20th century, then Milton Friedman was the most influential economist of the second half . . . Any honest Democrat will admit that we are now all Friedmanites . . . I grew up in a family of progressive economists, and Milton Friedman was a devil figure. But over time, as I studied economics myself and as the world evolved, I came to have grudging respect and then great admiration for him and his ideas . . . Today we take it as given that free financial markets shape finance . . . At the time Mr. Friedman first proposed flexible exchange rates and open financial markets, it was thought that they would be inherently destabilizing.98
What confuses people is that Summers apparently understands the true nature of neoliberal policy response to crisis in a way that escapes its rather more literal True Believers.99 Relace the term “stimulus” with “bank bailouts,” and one quickly discerns Summers’s Realpolitik:
“the central irony of financial crises is that they’re caused by too much borrowing, too much confidence and too much spending and they’re solved by more confidence, more borrowing and more spending.” That is profoundly counterintuitive. It makes it difficult to persuade people of the need for more fiscal policy. That’s one element.
The second element is that people see economic issues through moral frames and people think there’s an extent to which recessions are punishment for sins—mainly sins of excess—and you don’t expiate sins by binges. So there’s a kind of moral counterintuitiveness that has made it difficult for the public and for political figures to accept stimulus.100
Whatever else one might say about Summers, and many have taken their turn,101 it seems safe to observe that if the banks and hedge funds had been quasi-nationalized or otherwise wound down when they were on the brink of failure, and the financiers consequently demoted to modest roles in the Democratic Party, then economists such as Summers would not have been positioned among the serious candidates to occupy the political stage from 2009 onward; further, his neoliberal credentials might have come in for far more scathing criticism, rendering him persona non grata.
Take another illustrious Harvard economist, Martin Feldstein. Among other ties to the key crisis institutions, he had been on the board of AIG for twenty-two years, only to conveniently resign from his duties on June 30, 2009. He had also been chair of its finance committee and risk management, and therefore was formally directly responsible for the disastrous AIG Financial Products division, whose credit default swaps and other unsustainable derivatives brought down the company. For his services there he accrued more than $6 million, and has apparently never suffered any ostracism for saddling the Treasury with a shell of a remnant of an insurance behemoth that is still hemorrhaging money. Indeed, none of this seemed an obstacle to President Obama appointing him to his Presidential Economic Recovery Advisory Board in 2009, and his Tax Policy task force thereafter.
The AIG stint was only the most high-profile corporate directorship held by Feldstein, disclosed in part because the news media speculated that the reason he was not appointed Federal Reserve chair by George Bush back in 2005 was this politically problematic connection. He has also served as a director of Morgan Guarantee Trust, and in his dual capacity as a health care economist, previously was on the board of HCA Inc., and has been on the board of directors of Eli Lilly since 2002. His annual compensation for the Lilly position alone is $300,000 per year. Feldstein has been a staunch neoliberal his whole life, starting out with a critique of the British National Health Service, and has been credited with transforming the Harvard undergraduate economics curriculum from its prior breadth to a narrow orthodox boot camp with strong neoliberal inclinations. Feldstein served as chair of the Council of Economic Advisors under Ronald Reagan, and took with him as staffers Larry Summers, Gregory Mankiw, and Paul Krugman. His protégés are salted throughout the East Coast economic establishment. He is a master of navigating the interlocking directorates of finance and academia, arranging, for instance, to have the Starr Foundation (controlled by the former AIG CEO Hank Greenberg) to make numerous grants to Harvard and the NBER when he was head of that latter institution.102
None of this is mentioned at Feldstein’s official Harvard website. He has explicitly denied on record that the financial industry has had any influence on the economics profession.103
Sticking for the moment with AIG, a third Teflon financial action figure is manifest as the Yale economist Gary Gorton. Feldstein may have been formally responsible for the AIG fiasco in his role on the board, but Gorton was substantively responsible. Gorton joined AIG Financial Products as a consultant in 1996, for remuneration that climbed from $200,000 per year at the beginning to more than $1 million per year toward the end. Gorton is reported to have told an AIG shareholders’ meeting in 2007, “no transaction is approved by the chief of AIG’s financial products unit if it’s not based on a model that we built.”104 Gorton provided the intellectual justification (and some of the code) behind AIG’s disastrous credit default swaps from 1998 onward that by all accounts caused the company to fail in September 2008.105
So, did Gorton suffer any of the consequences of detonating one of the biggest IEDs in the biggest financial crisis since the Great Depression? Apparently not. First off, in May 2008, just as AIG was reporting a massive quarterly loss of $7.8 billion, the Yale School of Management thought it an auspicious occasion to hire Mr. Gorton away from the Wharton School. In August, Mr. Gorton presented a paper to the Fed conference in Jackson Hole on the “Panic of 2007,” something w
ith which he presumably had some intimate experience. Chairman Ben Bernanke was so favorably impressed with it that he went around promoting it as the must-read document concerning the crisis for the year 2010. Gorton then turned that paper into a book, graced with the possibly ironic title Slapped by the Invisible Hand, which mentioned AIG and his intimate involvement only in one lone sentence: “I also consulted for AIG Financial Products, where I worked on structured credit, credit derivatives, and commodity futures.” That’s it. This unrepentant practice of mendacity through circumspection is precisely how the economics profession manages to purport to speak for “the public” while functioning as public relations arm for the financial sector. Certainly it seems to have fooled at least one journalist who might otherwise been on the lookout for self-serving narratives concerning the crisis.106
Astoundingly, the Journal of Economic Literature, the primary reviews journal of the orthodox economics profession, turned to this particular scofflaw, in preference to literally hundreds of other economists who had written about the crisis, to provide a short syllabus for general economists to “get up to speed” on the crisis. Gorton’s choice of indispensable texts for crisis hermeneutics was so narrow of scope and devoid of curiosity as to be gobsmacking: Ben Bernanke’s testimony before the Federal Crisis Inquiry Commission blaming the whole thing on a spurious “global savings glut”; the Rogoff story that all crises throughout history look alike and involve government overindebtedness;107 the Shiller index on the housing bubble; his own work on repo; some deadly colorless reports from the IMF; and a couple of papers that suggest banks pulled back on their lending in 2008 because they were “constrained” when their own short-term lending dried up. Nothing untoward or illegal here. Other than insisting that the extent of mortgage defaults in 2008 did not warrant such a drastic contraction—because the magic of high-powered credit securitization models (unstated: flogged by Gorton during his time at AIG) was on the money in retailing risk—the rest of the story comes across so bland and diffuse and colorless that it beggars belief that we have come through the worst economic collapse since the Great Depression. Perhaps it resonated with the implicit requirements of the JEL not so much that these texts were baldly wrong,108 but rather that they were strategically superficial, bordering on irrelevance. In Gorton’s world, nobody really did anything wrong; nothing hints at a system that is self-destructive and unsustainable; the economy hasn’t really changed its stripes; all that happened was that garden-variety financial innovation got a little ahead of itself: “The novelty here was in the location of the runs, which took place mostly in the newly evolving shadow banking system . . . This new source of systemic vulnerability came as a surprise to policymakers and economists.”109
Gorton has only grown bolder in fulfilling the role as apologist-in-chief. In Slapped, he described the securitization process as a contraption for reducing the ability to get at underlying fundamentals, and praised it as a good thing. In a subsequent interview he stated: “The term shadow banking has acquired a pejorative connotation, and I’m not sure that’s really deserved . . . Banking evolves, and it evolves because the economy changes. There’s innovation and growth, and shadow banking is only the latest natural development of banking.”110
Seemingly perched outside the process, his own interventions obscured, Gorton can paint the current situation as the product of purely “natural” evolution, without once mentioning the role of economists such as himself in juking and splicing the DNA of the evolving entities.111 If, in some alternative universe, AIG had been wound down in a more rigorous and systematic fashion, with something approaching retrospective full disclosure, would anyone still be listening to Mr. Gorton outside of a Yale classroom?
There is a fourth case, highlighted here not so much because of this figure’s intimate direct involvement in the crisis (unlike Summers, Feldstein, and Gorton), but rather because he was the other designated reviewer of a marathon evaluation of twenty-one books devoted to the crisis in the JEL.112 Andrew Lo is the Harris & Harris Group Professor of Finance at the MIT Sloan School of Management and the director of MIT’s Laboratory for Financial Engineering. In other words, in the rarefied world of the “quants” who built the models that underpinned most of the complexity in the run-up to the crisis, he was chief guru. The only private affiliation listed on his personal website is as founder and chief scientist at the hedge fund AlphaSimplex, but on its website we learn, “Andrew has 24 years of industry experience. Prior to starting AlphaSimplex, Andrew developed investment strategies and trading technologies as a consultant to a number of prominent Wall Street firms.” Professor Lo never lists any of these consultancies on his public papers and appearances, nor does he mention his position at the New York Fed or FINRA, an organization dedicated to the private self-regulation of the securities industry, along the lines of a “Better Business Bureau.” But we are getting used to this pattern of strategic silences. Despite all these rather specific commitments, Professor Lo presents himself as an open-minded, impartial arbiter of all things having to do with the crisis, all the while promoting a very specific political set of positions. Not surprisingly, the premier thesis that he never misses an opportunity to roll out is that the quants, and economists in general, should not be saddled with any responsibility for the crisis. (This was probably one of the reasons he was chosen to survey the crisis landscape by the JEL.) He opted for this position as early as October 2009, in a public lecture produced by the National Science Foundation (so much for the neutrality of the funders of the natural sciences), which argued that blaming financial engineering for the crisis was on a par with blaming accounting, or the system of natural numbers.113 There he also mooted a proposition he has returned to repeatedly in the interim, that the causes of the crisis should instead be rooted in individual psychology, such that any blame is diffuse, or “all of us participated to some extent in the crisis.” It was rather due to a series of technical glitches, ones that we may be congenitally blind toward as they develop, but that can be diagnosed and fixed by technocrats in retrospect, rather like the National Transportation and Safety Board inspecting a plane crash. (The seductiveness of the metaphor smoothly elides the fact that the NTSB was not tasked with the postmortem of the planes ramming into the Twin Towers in New York.) In his most recent survey, Lo tends to favor neoliberal books on the crisis, such as Rajan’s Fault Lines and Rogoff and Reinhart’s This Time Is Different, while disparaging books such as Stiglitz’s Freefall.114 Economists on the center left are chided for getting a little testy, whereas books by neoliberals are treated as par for the course. There he also innovates a few more rather contrarian positions on the crisis: that the efficient-markets hypothesis (more on this in the next chapter) did not lead investors astray; that Wall Street compensation packages did not distort incentives and behavior; and finally, that the big investment banks did not become especially highly leveraged in the boom. From the commanding heights of the current pinnacles of finance, what’s not to like here?
Other similar cases of repressed allegiances have come to light over the past two years, although perhaps lacking the direct immediacy and audacity of immunity that one detects with a Summers or a Feldstein or Gorton. For instance, much has been made of the testimony of the Stanford economist Darrell Duffie before the Financial Crisis Inquiry Commission concerning, among other things, the culpability of the ratings agencies, while neglecting to mention he was a member of the board of governors of Moody’s.115 At minimum, under pressure, he then disclosed that he did work for at least two hedge funds, and consulted on the winding-up of the Lehman estate. Simon Johnson has noticed that Duffie’s work has frequently been paid for by industry interests, but that this is rarely mentioned in the contexts where he is cited as an authority on financial regulation.116 We have already mentioned his role in the Squam Lake Report; subsequently, Johnson reports he was paid $50,000 by SIFMA (Securities Industry and Financial Markets Association, a lobbyist organization) to produce a paper opposing
certain forms of derivatives regulation by the CFTC. It seems pretty clear that Duffie allows the Stanford trademark to mask his role as paid apologist:
Why should we take such work seriously—or any more seriously than other paid consulting work, for example, by a law firm or someone else working for the industry?
The answer presumably is that Stanford University is very prestigious. As an institution, it has done great things. And its faculty is one of the best in the world. When a professor writes a paper on behalf of an industry group, the industry benefits from—and is, in a sense, renting—the university’s name and reputation. Naturally, the banker at the CFTC roundtable stressed “Stanford” when he cited the paper.117
The Dean of Columbia’s Business School, Glenn Hubbard, came off as petulant in Inside Job when questioned concerning his corporate ties; but only long afterward did the public catch a glimpse of the sorts of shenanigans he was loathe to disclose. In a leaked set of depositions from a suit by monoline insurers against Bank of America, it was revealed that Hubbard was paid $1200 an hour to testify on behalf of Countrywide, conceded by all and sundry as one of the worst fraudulent mortgage pushers in the run-up to the crisis. Hubbard testified Countrywide’s mortgages were not fraudulent with a straight face. The econometric exercise produced by Hubbard was so full of holes that the opposing counsel easily pointed out that it could not demonstrate that Countrywide did not engage in mortgage fraud; and that, in fact, Hubbard knew little about underwriting. This was the kind of work regularly undertaken for pay by the person who was once rumored to be Mitt Romney’s choice for Treasury Secretary.118 Or take Richard Clarida, an economist at Columbia University, and assistant treasury secretary under George W. Bush. Clarida has often been invited to testify on various aspects of government debt, but did not disclose he was also executive vice president at Pimco, the world’s largest bond investment fund, until he was caught out by a New York Times reporter.119 A little more digging uncovered more ties, such as positions at Credit Suisse and Grossman Asset Management.
Never Let a Serious Crisis Go to Waste Page 28
