Back in 1995, when I was a staffer in President Clinton’s Treasury Department, Larry Summers read a book called “Fringe Banking,” by John Caskey, about how working folks were being pushed out of the banking system by high fees and hidden costs. Summers, who was then the deputy treasury secretary, set about using all the tools of the Treasury Department to help, from investments in community development financial institutions and new funds to expand access to rewriting obscure department regulations on delivering federal benefit payments.
I thought of that book, and Larry’s response to it, in light of the criticism being leveled at Summers as President Obama prepares to choose the next chair of the Federal Reserve. Summers has come under attack, unfairly in my view, for the policies he pursued as Clinton’s treasury secretary and Obama’s economic adviser. While Summers and I do not agree on everything, I believe the record shows that he is a vigorous, creative advocate for making the financial system work better for American families. I’ve dedicated my career to that goal, and Summers has been there every step of the way.
Summers was acutely aware of those who had been left out of the mainstream. He pushed for successful enactment of the New Markets Tax Credit to spur investments in distressed communities. He worked on the plight of Native American households who could not get access to mortgage credit, and visited the Navajo nation to understand the economic difficulties it faced. Under Summers, the Treasury Department led an effort across the federal government to improve fair lending enforcement and to spur small-business lending to minority and women-owned firms.
Summers was way ahead of the curve on the mortgage crisis. He spearheaded an effort to try to rein in Fannie Mae and Freddie Mac way back in the mid-1990s — at a time when all the pundits told him it would be politically damaging to do so. He then launched a Treasury effort with the Department of Housing and Urban Development to curb abusive and predatory mortgage lending practices — 13 years ago. He called out practices like loan flipping, lending without regard to the borrower’s ability to repay, hidden fees, and fraud. If Congress and the Fed had taken up his detailed suggestions made in that 2000 report, a lot of the worst abuses might have been taken out of the marketplace before it was too late.
Of course, there’s still a debate over changes to the Glass-Steagall Act that Summers supported, which permitted commercial banks to affiliate with investment banks. But in my judgment, and those of other experts like Alan Blinder, it is quite hard to lay the blame for the financial crisis of 2008 on those changes.
In the 2000s, stand-alone investment banks, commercial banks, nonbank mortgage lenders, Fannie Mae, and Freddie Mac all pushed the country to the edge of the abyss. Nonbank firms like AIG, Lehman Brothers, and Bear Stearns took on horrendous risks with far too little capital. Shadow banking, short-term “hot” money, and risky credit default swaps grew to enormous proportions. Opaque securitizations blessed by conflicted credit rating firms fueled horrible mortgage underwriting practices. Nonbank mortgage originators became increasingly aggressive and started a race to the bottom. Bank regulators were far too lax, permitting mortgage lending and other activities that were bad for borrowers and excessively risky for the system. Capital became increasingly and woefully inadequate over time. The financial sector took advantage of consumers and investors, who were left to fend for themselves.
Whatever your opinion of his positions in the 1990s, Summers was acutely aware of those changes in the market, and his views changed with the facts. When Summers came back into government under President Obama, he strongly supported tough reform: a new Consumer Financial Protection Bureau to look out for the interests of American families; requiring major firms regardless of corporate form to be supervised by the Fed; regulating all derivatives, putting in place central clearing and exchange trading, increasing capital and margin, and policing against abuse and manipulation; imposing a 10 percent cap on the total liabilities of any one financial conglomerate; building the authority to wind-down major firms in a crisis; and forcing firms to hold much more capital — to end “too big to fail.” Despite the intense opposition and massive lobbying of the financial sector, these reforms are now the law of the land, and will over time make the system fairer and safer.
Now it is true that Summers is skeptical that regulators can stay ahead of the financial industry and is wary of complicated rules. That’s a healthy skepticism. And it is true that Summers can be impatient when things don’t get done. That’s a healthy impatience. A Fed chair with such traits would help finish the job of reform.
President Obama is blessed with the opportunity to choose among several highly qualified, indeed extraordinary individuals for the next chair of the Federal Reserve. Any of the leading candidates would place a strong, experienced hand on the tiller. Larry Summers deserves to be among them.
Michael S. Barr is professor of law at the University of Michigan and former assistant secretary of the treasury for financial institutions. His most recent book is “No Slack: The Financial Lives of Low-Income Americans.”