Wednesday, January 7, 2009
Architect of plans to tackle meltdown
--Questions are raised about Summers' free market progressive attitude and people skills --Truth is that Summers is never shy of recommending government intervention By Edward Luce Published: January 7 2009 02:00 Last updated: January 7 2009 02:00 Henry Kissinger once remarked that a White House job should be created specially for Lawrence Summers in which he would have the power to shoot down or amend bad ideas. That job is now, in effect, within Mr Summers' grasp. As the next head of the National Economic Council, Mr Summers is widely expected to be the chief architect of the administration's response to the financial meltdown. As the principal economic adviser to Barack Obama, Mr Summers is likely to be bombarded with questionable ideas including - some people fear - various backdoor protectionist schemes to protect American jobs. The trick, say friends of Mr Summers, will be to shoot them down without killing the messenger. One of the questions for his critics is whether a man with his reputation for lack of people skills has learnt his lessons. At Harvard he was forced to resign as president in 2006 following his impolitic questioning of whether women lacked "intrinsic aptitude" at mathematics and other sciences. Friends of Mr Summers, however, say that his record at Harvard was far better than is often portrayed. "Larry may occasionally put people's noses out of joint but Harvard academics have really, really long noses," says Lant Pritchett, who co-taught a course with Mr Summers last year, and worked for him when he was chief economist at the World Bank in the early 1990s. "When people's 401ks [retirement funds] are disappearing they want to know that the president has the best adviser available, and if he rattles a few egos, so what?" A number of left-leaning Democrats have raised concerns about Mr Summers' record in helping sponsor the financial deregulation that they say helped contribute to the current financial meltdown. As Treasury secretary, for example, he joined Alan Greenspan in heading off attempts to regulate the derivatives market. Again, however, friends of Mr Summers say this reputation in leftwing circles as having been the leading free market fundamentalist of the Clinton years is inaccurate. They point out that he has always been a "free market progressive" - a term Mr Summers once used about himself - and was never shy of recommending government intervention, most notably when he convinced Mr Clinton to back an unprecedented defence of the Mexican peso during the "Tequila crisis" of 1994. Ten years ago Mr Summers defended that action and other emerging market interventions in language strikingly similar to his advocacy of a large fiscal stimulus for the US economy today. "The laisser faire approach to these things has been tried before, and it is the kind of thinking that made the Great Depression great," he told the New Yorker in 1998. Mr Summers has also for years been raising the flag about the median wage stagnation that has afflicted the American middle classes in the era of globalisation. Some argue that his record of pushing fiscal rectitude, which he assiduously developed during the Clinton era, can be seen in a different light following eight years of budget deficits under George W. Bush. "Think of how much better a position we would be in today if George Bush had carried on our tradition of producing budget surpluses instead of giving tax cuts to the very rich," says Robert Rubin, who preceded Mr Summers as Treasury secretary. "Larry's concern about keeping our markets open while at the same time questioning the benefits that were going to the American middle classes is longstanding. It's not true to say that he has radically changed his views." Mr Pritchett argues that Mr Summers' change of views is consistent with his "middle of the road Keynesianism" - after John Maynard Keynes, the British economist. "When the facts change, Larry changes his mind and the facts on financial regulation have changed - we've all had to change our minds." says Mr Pritchett. "But on spending it is perfectly consistent for Larry to support large budget deficits now during a severe downturn and to have supported budget surpluses during the 1990s when the economy was booming." More interesting, say observers, is how Mr Summers will get along with the other two key economic players, Tim Geithner, who will be Treasury secretary, and Ben Bernanke, chairman of the Federal Reserve. Mr Geithner, who was mentored by Mr Summers in the 1990s when he was a junior Treasury official, has gathered huge experience of the financial market turmoil as head of the New York Fed. Given Mr Summers' thinly disguised ambition to be chairman of the US Fed, his relationship with Mr Bernanke could prove trickier. Such is the level of potential controversy - Mr Bernanke's term expires a year from now - almost nobody contacted by the FT was prepared even to speak off the record on the subject. "As Larry would say, this is a 'high-class problem to have'," said one former Treasury colleague. The author was previously a speechwriter for Mr Summers This is the first part in a series on the key players in the Obama administration.