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Larry Summers: The Intellectual as Courtier

4:50 am in Economists by masaccio

Larry Summers

Larry Summers sauntered out from his sinecure at Harvard to defend his friends Kenneth Rogoff and Carmen Reinhart in a perfect demonstration of the courtier culture of the intellectual in this country. We know Summers’ history, the Harvard President who caused the loss of $1.8 billion in the Harvard Endowment cash management fund; whose disrespect for smart women brought him a censure from the Harvard faculty; who slapped down Brooksley Born on his way to insuring the deregulation of derivatives, his personal contribution to the Great Crash; who sucked up $5.2 million from the hedge fund operator D.E. Shaw, and another $2.77 million in speaking fees from the mega-banks that appreciated his service.

Then he capped off this history as head of the White House National Economic Council, where he saw to it that the stimulus package designed for President Obama would be too small to solve the problem and big enough to enrage the nutcase right. During the transition to Obama’s term, Summers was asked to produce a proposal for the stimulus everyone every sane politician and economist and member of the general public knew was necessary in the wake of the Great Crash. Noam Scheiber reported that Christine Romer, the Berkeley economist, calculated that it would take a two-year package of $1.7 to $1.8 trillion to fill the hole created by the Great Crash. Summers refused even to consider submitting that calculation to the President. So Romer produced an estimate of $1.2 trillion with two limited options of $650 million and about $800 million. Scheiber wrote:

At first, Summers gave her every indication that all three figures would appear in the memo he was sending the president-elect. But with less than twenty-four hours before the memo needed to be in Obama’s hands, Summers informed her that he was inclined to strike the $1.2 trillion figure. Though Summers, like Romer, believed more stimulus was almost unambiguously better, he also felt that a $1.2 trillion proposal, to say nothing of $1.8 trillion, would be dead on arrival in Congress. Moreover, since Obama’s political operatives were convinced that any stimulus approaching a trillion dollars was hopeless, Summers worried that urging more than this amount would stamp him and Romer as oblivious in their eyes. “$1.2 trillion is nonplanetary,” he told Romer, invoking a Summers-ism for “ludicrous.” “People will think we don’t get it.”

Summers intentionally refused to do what any intellectually honest person would do: provide the miserably unpleasant truth to Power. Summers is supposed to be an intellectual: he’s on this list of the top 100 intellectuals produced by the British magazine Prospect, and on this list produced by Richard Posner, the famous Judge of Intellectuals.

In 1955, C. Wright Mills wrote an essay for Dissent Magazine, On Knowledge and Power (vol. 2, no. 3, reprinted in Power, Politics & People, edited by Louis Horowitz), discussing the sad state of political discourse in the US nearly 60 years ago. Mills explains the role of the intellectual, the man of knowledge, in a properly functioning government:

… his politics, in the first instance, are the politics of truth, for his job is the maintenance of an adequate definition of reality. In so far as he is politically adroit, the main tenet of his politics is to find out as much of the truth as he can, and to tell it to the right people, at the right time, and in the right way.

Summers may be smart but he isn’t an intellectual, and he isn’t politically adroit, either. He told people in power what they wanted to hear, and he did it on purpose. He lied about the truth as he saw it and knew it. He flattered Obama’s political people that their stupid ideas were true and righteous. He is a courtier.

And so, it is natural that he would defend Rogoff and Reinhart. He asks who among us hasn’t made a spreadsheet or judgment error that served their rich and powerful sponsors like Peter Peterson and his oligarch buddies. He tells us to be skeptical of models based on the past, like Keynes’ study of the causes and cures of the Great Depression, just like he was in rejecting Romer’s work. Then the Great Cynic emerges: Men of Power do what they want to do, we just give them the justifications, so it’s not Rogoff and Reinhart’s fault, any more than it’s Summers’ fault.

Exactly in the way that Rogoff and Reinhart kept their data secret, Summers first worked in secret to lie to the President and his inner circle about the predictions of standard economics, and then kept his lie secret for years until it was too late. The memos from Romer and Summers did not emerge until Scheiber got them in Febrary 2012.

Summers’ defends Rogoff and Reinhart, and indirectly himself, saying that neither they nor he had any duty to anyone to tell the truth, or explain their work. Fortunately, with great unearned arrogance comes a complete lack of personal insight, let alone shame. Great gouts of money cure such personal defects. Just ask any oligarch how much those intellectuals cost; they’ll give you the exact price. Read the rest of this entry →

Bond Markets Control Governments

12:52 pm in Economy, Taxation by masaccio

Vultures and Dog, photo by epha at Flickr

We have plenty of evidence that governments are afraid of bond markets. In the US, fears of the retaliation of the bond market have driven the fiscal policy of both parties. The Republicans want immediate cuts in spending, and their pet economists bray about an impending inflation that never comes. These intellectually dishonest hacks refuse to change their minds in the face of overwhelming evidence and increasingly sarcastic statements from people who got it right, like Paul Krugman, here, here, and here (among many). The Obama administration refused to see reason either. It adopted a policy of short-term stimulus, including tax cuts for the filthy rich, followed by drastic spending cuts on a time frame guaranteed to cause further economic distress. Which it did.

It’s worse in beleaguered Greece, Spain, and the Eurozone generally. Their troubles begin as the bond markets set higher and higher interest rates for new issues of sovereign debt, and eventually, the country is brought to its knees. Bond holders get paid and governments inflict pain and suffering on their citizens. These bond vigilantes have enough cash to crush the Greek government, and to shake the confidence of Spain, leading to adoption of policies that have produced economic disaster.

The term “bond market” in this context is misleading. When people talk about the bond market in this context, they really mean a small group of people who control tons of money. Where does all the money come from, and just who is trading it? There is plenty of money out there. The Tax Justice Network estimates a minimum of $21 trillion hidden offshore, plenty of money to crush most economies. That, of course, also has its insane defenders. From the Wall Street Journal blog Washington Wire

And Andrew Quinlan, president of the Center for Freedom and Prosperity, a group that promotes international tax competition and financial privacy, said, “Tax Justice Network and other opponents of tax competition assume that all earnings belong first to governments, which is why they seek to prevent even legal wealth management techniques if they result in less money for spend-happy politicians.”

I wonder how much Romney and his pirate crew contribute to the Center for Freedom and Prosperity.

Other massive piles of financial assets are held by Sovereign Wealth funds, pension plans, endowments and foundation. These things take on a life of their own. They don’t self-liquidate. They are buckets of money used to pay massive sums to their managers and sprinkle some money on causes their donors like.

But that isn’t all. Most of the hedge fund speculators are leveraged. They borrow money from Too Big To Fail banks that exist only because of government support. They get tax deductions for any interest they might pay. Currently, there is about $2 trillion in hedge funds. With an average leverage of 2.5, they control about $5 trillion.

Governments sell bonds regularly. In mid-May, Italy sold $5.25 billion of bonds. It expects to sell about $215 billion in 2012. Considering that a bunch of the bonds will just roll over into bonds from the new auction, the amount of money it takes to screw these countries isn’t that great, at least in the context of the money in the hands of speculators.

So who is doing the speculating? It’s a subset of that crowd of nameless faceless traders at giant megabanks, hedge funds and investment advisers around the world. These people cheat at every opportunity. Maybe it’s a few million in an insider trading scam, or maybe it’s gaming the California Electricity markets for a few tens of millions. Or maybe it’s billions, like JPMorgan Chase’s Bruno Iksil, or even trillions, like those “rogue traders” manipulating LIBOR. Their bosses can pretend not to see, so no one is responsible. They are, in short, the scum of the earth. And, of course, none of them ever go to jail, so there isn’t any reason for them to do anything but cheat and lie.

Governments around the world do the bidding of a group consisting largely of criminals, gambling with money they got from other criminals, including people evading taxation. Those traders get their power from the richest people in the world, people whose interests are inimical to the rest of us. This is the fist behind the velvet glove of campaign contributions, the power that keeps modern governments under the heel of the rich.

Too bad we can’t tax that money away from these thugs.