By Jeff Harding
Larry Summers worked for hedge fund D. E. Shaw for one day a week for a year and received $5,200,000. Assuming they gave him a couple weeks off, that’s 50 days of work. $104,000 per day is pretty good work if you can get it. He also made a lot of money from speaking engagements: $2,770,000. If you average the 40 or so engagements, he got about $69,000 per speech. Most of his speeches were to financial companies like Goldman Sachs, Merrill Lynch, JP Morgan, Citigroup, Lehman Brothers, and American Express.
After getting his Ph.D. in economics from Harvard he became one of the youngest ever tenured professor at Harvard (1982). He also worked on the Reagan Council of Economic Advisers (1982-1983). In 1991 he left Harvard to be the Chief Economist for the World Bank until 1993. From 1993 to 2001 he served in the Clinton Administration in several positions, lastly being Secretary of the Treasury when his mentor Robert Rubin left for Citigroup. After Clinton he became President of Harvard University until 2005 when he resigned over an argument that deemed him sexist according to university politics.
By all accounts this son of two professors of economics at U of Penn is a brilliant man, going to MIT at age 16. Two of his uncles won Nobel prizes for economics: Paul Samuelson and Kenneth Arrow. Must be some pretty stiff competition in that family.
Mr. Summers never had what most people consider to be a real job. He made money because he was a political trophy for D. E. Shaw, not because he had some extraordinary insight into economic or financial matters. According to the NY Times:
Mr. Summers and Shaw executives say his role there was to be a sounding board for Shaw’s traders. But interviews with friends and former colleagues suggest that Mr. Summers’s role at D. E. Shaw was wider and more complex.
Mr. Summers, these people say, was a marquee hire, a prized spokesman for Shaw. He routinely made himself available for private consultations with Shaw’s clients, an attractive perk for investing with the firm, as one client put it.
Mr. Summers, who taught economics and public policy at Harvard while advising Shaw, also met with investors in the United States, as well as in the cash-rich Middle East and Asia. He spoke at industry conferences, mixing with officials from public pension funds, endowments and other large institutions with many billions of dollars to invest. …
A spokesman for Shaw said Mr. Summers’s main job was not to act as a salesman. But in the fall of 2007, as the financial crisis simmered, Mr. Summers traveled to Dubai for a series of meetings with Shaw’s marketing staff and potential investors. Bankers from across the region flew in for the event. Mr. Summers spoke at several lavish dinners and met with local parties involved in Shaw’s real estate investments in the area, people briefed on his trip said.
Mr. Summers, as Director of the National Economic Council, is now the most powerful person in the Obama Administration on economic issues.
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President Eisenhower warned of a “military-industrial complex,” which was his term for the combination of defense contractors, the military, and politicians who’s goal was, and still is, to influence military, foreign policy, and spending decisions for their benefit. Eisenhower saw it as a threat to individual liberty since it existed to perpetuate its power and money through military spending.
This same issue was raised by Nobel Prize winner and Austrian School economist, Friedrich von Hayek in his classic 1944 book, The Road to Serfdom. His point was that central planning eventually leads to tyranny, as evidenced by the Soviet Union or Nazi Germany. The inevitable failures of central planning leads to demands for more power to accomplish the failed goals which in turn would curtail individual liberty and result in a totalitarian state. He was critical of a war machine driven by former warriors reluctant to give up power.
While we still have the military-industrial complex, we are now seeing the rise of the Wall Street-Washington complex. While not exactly a new phenomenon, actions of the Obama and Bush administrations reveal the power of Wall Street and politics in the arena of economic policy. We have the constant shuffling back and forth between government and Wall Street of very familiar faces who share common ideas and ideals.
It’s been going on for quite a while. Paul Volcker (Princeton/Harvard) left the Fed to become chairman of J. Rothschild, Wolfensohn & Co, a New York investment bank. Allen Hubbard (Vanderbilt/Harvard) was a successful entrepreneur and friend of George W. Bush who became Bush’s chief economic adviser. Laura Tyson (Smith/MIT), another adviser to Clinton, has been a Director of Morgan Stanley, AT&T, and Eastman Kodak. Hank Paulson (Dartmouth/Harvard), Bush’s last Treasury secretary, was a Goldman Sachs man, like Robert Rubin. Stephan Friedman (Columbia) also came from Goldman to be another of Bush’s chief economic advisers.
Fed Chairman Ben Bernanke (Harvard/MIT) and Secretary of the Treasury Tim Geithner (Dartmouth/John Hopkins) fit into this mold, although neither has been employed in the private sector. To round it out, Christina Romer, the Chair of Obama’s Council of Economic Advisers, went to William & Mary and MIT.
Mr. Summers made a lot of money for being a trophy schmoozer for D. E. Shaw. I think he sold himself a bit short; Robert Rubin (Harvard/Yale), his predecessor at Treasury, made an estimated $115 million while at Citigroup.
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It is well known that after spending time at certain regulatory agencies, former bureaucrats seek financial gain in private industry by dealing with the same agencies they worked for. But what I’m talking about is different.
The Wall Street-Washington complex is a relatively small political-financial-economic clique that revolves around a common orbit:
- Degrees from Harvard and MIT;
- Employment with Wall Street banks, especially Goldman Sachs, Merrill Lynch, and JP Morgan;
- Economics professors, especially at Harvard and MIT;
- A revolving door for the above to become economic policy advisers in government;
- The politicians and their advisers who have been funded or endorsed by the above.
They share the same basic philosophies in government (interventionist), economics (Keynesian), and finance since they were educated in the same institutions and worked in the same places, public or private. They easily slip back and forth between government and Wall Street and reap the rewards of power and money. As a result they represent current mainstream thinking in economics and finance in America. They are our leaders in government and in finance and investments.
What’s wrong with this picture?
They are the same people who got us into this economic crisis and are now in charge of leading us out. The bailout is emblematic of this problem because it implements their world view: Wall Street and their friends are of prime importance and bailing them out is the key to economic recovery. You can look at the bailout as kind of a payback.
In light of what Eisenhower and von Hayek warned, here’s what the Wall Street-Washington complex is doing:
They continue to employ the same risk models of finance and investment on Wall Street that helped cause our crisis.
They are demanding more political power to “correct” the economy to save us.
They are imposing new laws to restrict the ability of entrepreneurs and businesses to create wealth and economic well being in America.
They will continue to blame “capitalism” for the crisis instead of the government intervention in the economy which caused this crisis.
They will leave us with huge debt that will be a drag on the economy for generations to come.
They are creating the foundation of a new credit bubble which will bring us another boom-bust business cycle.
They are cutting their Wall Street cronies in on plum deals to buy bank “legacy” (“toxic”) assets.
They are changing the entire nature of the relationship of government to business.
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This Wall Street-Washington complex is the most dangerous clique in America today. They are repeating the same economic mistakes that got us into this mess and are leading us into very dangerous territory.
Your reaction to this statement may be that I am exaggerating or have paranoid delusions or am a conspiracy theorist. As you know from the title of this blog, I support capitalism and the activities of free market traders in the financial markets. Despite the fact that some of my friends went to Harvard, I think I am a reasonable person and not prone to exaggeration. I don’t think they have secret meetings in the basement of the Washington Monument and I don’t think they see themselves as a clique.
There is a word for this type of cozy arrangement where a business and government elite use their power for mutual benefit. It’s a very common political system that has been used many times in many countries under different names: national corporatism, mercantilism, crony capitalism, oligarchy or plutocracy, dirigisme, and fascism. It isn’t capitalism, the free market, or the libertarian vision set forth in our constitution and Bill of Rights.
The reason that capitalism works is that it is a system that allows millions of people to act for their own financial benefit without a Gang of Four or a Gang of 500 telling them what to do. By substituting their decisions for the decisions of millions, this small powerful group can impact much of the world. When we ordinary citizens make mistakes the collateral damage is usually minimal. When the Wall Street-Washington complex makes mistakes we all suffer. This concentration of power is why they are dangerous.
Larry Summers is the poster boy for this world. He put in his time in academia and politics and cashed in big-time during the interregnum. All of his relationships in academia, Wall Street, and Washington are part of this complex and now he is at its center. It’s been good for Larry Summers and his friends. It’s bad for us. The bottom line is that we, the taxpayers, will pay for their mistakes. As will our children, grandchildren, and our great-grandchildren.