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Notes From the Fieldby Martin Weil

August 16, 2013

Summers vs. Yellen as Next Fed Head, an Op-Ed

For supporters of stronger regulation, it comes down to a choice between someone they do not know and someone they do not trust.

That is the NY Times reprising the outside-the-beltway attitudes towards the two leading candidates, Janet Yellen (“do not know”) and Larry Summers (“do not trust”), for Chair of the Federal Reserve, when Ben Bernanke retires early next year. Count me among those “supporters of stronger regulation” with serious misgivings about Mr. Summers. I fault his role in political decisions that contributed mightily to the severity of the 2008 financial crisis, specifically beating back the Commodity Futures Trading Commission’s attempts in the late 1990s to bring regulatory oversight to the then-nascent world of private derivatives contracts between regulated banks.

After the financial derivatives-driven  1994 bankruptcy of Orange County and spectacular collapse of Long Term Capital Management in 1998, an event itself that threatened to bring down the financial system at the time, Mr. Summers, then a senior official in the Clinton Administration, testified to Congress “the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves.”

It would take another ten years for the full consequences of this set of beliefs to be fully manifested in the failures of Bear Stearns, Lehman, AIG, Fannie Mae, Freddie Mac and the near collapse of the global banking system.  However, everyone learns from his mistakes and if Mr. Summers, the frontrunner in this race, becomes the next Fed Head, one can only hope he has learned from his.

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