So, apparently Larry Summers is now the leading candidate for Chairman of the Federal Reserve. This is a bad idea, for lots of reasons, not least of which is that Summers' sudden ascendancy is a sign that The Usual Suspects are talking him up, and it's The Usual Suspects who not only got our economy into this mess but made our government's top priority not getting out of the mess "too quickly." Summers himself was one of Obama's leading economic advisers during the first term, and neither his advice nor Obama's first-term policy were effective in turning the Great Recession around. The result of Summers's advice was always too little, too late. It was Summers who insisted on asking Congress for a smaller stimulus package than the economy needed, on the theory that the smaller package would get passed. Of course, Congress took that smaller package and cut it down even more.
Larry Summers is also responsible for doing major financial damage to America's largest educational non-profit. People mainly remember Summers's stint at Harvard for the way it ended, with Summers making stupid and self-destructive remarks that cost him the job. That's a real problem; without wading into everything problematic about that speech, it displays a lack of discipline that may be disqualifying. But people generally don't focus on the dire financial consequences of Summers's leadership. Summers's bad economic decisions cost Harvard a staggering amount of money. His main legacy at Harvard is an enormous hole in the ground.
During the bubble/boom years, Summers decided to put billions of dollars of Harvard's endowment into complex financial derivatives, mainly interest rate swaps. He got his way. After all, wasn't he an economist? Hadn't be been Treasury Secretary? Surely, he knew what he was doing. But Summers put three and a half billion dollars into some of the most toxic and illiquid investments possible. When the crash happened in 2008, those investments got hammered: a billion dollar loss for starters, followed by hundreds and hundreds of millions more in interest and bankers' fees as the school had to borrow money at a disadvantage to meet margin calls on all those toxic securities. All told, Harvard lost nearly $11 billion dollars of its endowment in the crash. It survived; going from $37 billion to $26 billion is not the end of the world. But it is an enormous waste, and Summers made it worse by billions. That money has not been made back. And Washington power players are now seriously talking about putting this man in charge of our national bank. Really.
[UPDATE: Here's a piece from Bloomberg setting all of this out in greater detail.]
But that's not all. Back in the heady days of the bubble, Larry Summers decided to bend one of Harvard's oldest fiscal rules. Harvard, which is rich in part because it has traditionally been cautious with its money, has a long-standing rule about not starting construction on any new buildings until after it has raised the cash. First you get the money, then you build the building. It's not complicated, and it works. (As I've said elsewhere, one of the biggest differences between a fiscally sane university and a university headed for financial trouble is that a healthy university raises the capital for new buildings and an unhealthy university borrows it.) Larry Summers was impatient with that rule. And he wanted to build a huge new science building across the river from Cambridge, in Boston's Allston neighborhood. So he broke Harvard's money-in-the-bank rule for new construction. He had the pledges for the money he needed, so he gave the go-ahead. Then the 2008 bust hit, and the donors who had promised money no longer had the money they promised.
Harvard's contractors had dug the hole for the foundation of that big, ambitious new building when the money dried up. So they stopped work. Harvard (and the neighborhood) was left with nothing but a five-acre hole in the ground. That hole is still there. It's been there longer than it takes to get a Harvard degree; the students who graduated last month have never known a Harvard that did not own a massive hole in the ground. Harvard hopes to do something about that hole next year, maybe.
Is the five acre hole in the middle of a major city going unused? Of course not. Rats are using it.
That's what Larry Summers's fiscal mind brought to the richest university on earth: a gaping five-acre pit. That is the genius being proposed as leader of the Fed. Because here's the truth: the American economy is another huge hole, even bigger than the one in Allston, dug in 2008 and still, all these years later, not filled in. The work has not even begun. Larry Summers is not the man to get us out of that hole. He's one of the men who dug it.
cross-posted from Dagblog