The full disclosure makes for juicy reading -- reading about other people's money always does -- and I've stuck the PDF at the end of this post. But, try though I might, I can't share much enthusiasm for the belief, now gospel on the left and implicit in the news reports, that Summers' past income constitutes a problem for policymaking in the present. This sort of financial disclosure story is a wonderful occasion to trot out well-worn chestnuts about "conflict of interest" and the "appearance of impropriety." But reading about an appearance of impropriety is like eating an appetizer for dinner: not altogether satisfying. What's the actual impropriety? Here are five reasons to doubt that there is one.
1. The stories about Summers don't make much of an effort to distinguish between cause and effect. The assumption in news reports is that earning an income from a particular industry would cause Summers to change his views in favor of the industry. But it seems perfectly reasonable to flip this on its head: Summers sympathetic views on an industry might give that industry a reason to seek him out. He's a well-informed guy. Why shouldn't they want his opinion?
(To some extent this is testable: Did Summers have a public position on hedge fund regulation that changed appreciably after he began working for a hedge fund? I haven't seen a great deal of effort to find out.)
2. There's a chronology problem. Which do you think would have a greater impact on your decisions in the present: past payment, or the possiblity of future payment? It seems obvious to me that the latter would. But Larry Summers has made enough money to beg off speaking fees and languish with a public servant's salary for the rest of his life. (And for centuries this would have been seen as something that recommended Summers for the job. Financial independence -- detachment from all those crass material concerns -- was more or less an 18th-century prerequisite for public service.)
3. Stories about a conflict of interest or the appearance of impropriety always assume that closeness is a liability, not an asset. But it can be both, and Larry Summers can contain multitudes. Sure, extreme closeness can warp perspective. But closeness can also mean you have insight into a particular industry that others don't.
4. Stories about appearances and competing interests, like so much else in American public life, elevate the process of politics over the substance of policy. Questions like "how did Larry Summers develop his view on hedge fund regulation?" are interesting, up to a point. But they are nowhere near as important as questions like "Is Larry Summers' position on hedge funds a good one or a bad one?" Trying to suss out whether Summers' position gestated under ethically troubling circumstances is a clever way of undermining the position without actually engaging it on the merits. Journalists should spend more time engaging things on the merits.
5. Finally, stories about apparent conflicts of interest can come back to bite you in the ass. To take an example close to home: I read about Larry Summers' financial disclosure on the Washington Post website, where it sat next to ads from Visa and the luxury homebuilder Miller & Smith. There is apparently a financial relationship between the Washington Post, the credit card industry, and luxury homebuilders. Yes, I know there is a wall between editorial and business decisions in the newspaper industry. But any halfway smart reporter or editor would realize that Visa will be more likely to advertise in the Post if the paper doesn't trash the company.
Do I think reporters at the Post or the Journal (or the Atlantic!) are reluctant to trash big banks because that would make banks less likely to advertise? Of course not. But I don't know why the "conflict of interest" is worse for Summers than it is for any publication that earns advertising revenue.
Anyway. The disclosure is below. (And you can be reluctant to take any of this from me because I have an apparent conflict of interest! Page four of the disclosure lists Larry's compensation for a book that I helped edit.)
disclosure-LSummers04032009.pdf
But I don't know why the "conflict of interest" is worse for Summers than it is for any publication that earns advertising revenue.
Have you bumped your head? Publications aren't formulating the economic policy that may well bankrupt the nation.
Trying to suss out whether Summers' position gestated under ethically troubling circumstances is a clever way of undermining the position without actually engaging it on the merits. Journalists should spend more time engaging things on the merits.
Amongst the non-lobotomized, it goes without saying that the economic policy of systemically subsidizing fraud is without merit. By ignoring the circumstances that cause the implementation of such corrupt policies, we would only be encouraging more of the same.
Stories about a conflict of interest or the appearance of impropriety always assume that closeness is a liability, not an asset. But it can be both, and Larry Summers can contain multitudes. Sure, extreme closeness can warp perspective. But closeness can also mean you have insight into a particular industry that others don't.
William Black had closeness to the financial industry. Larry Summers is an employee of the financial industry. The former has insight into a industry that others don't, the latter is an employee of the industry who masquerades as a public servant. See the difference? If not, let me suggest the following: http://www.theatlantic.com/doc/200905/imf-advice
I have to admit questioning the utility of protecting Summers from capture by Wall Street. After that raft of filthiness, I think that we may need to protect Wall Street from being captured by Larry Summers.
Have you bumped your head? Publications aren't formulating the economic policy that may well bankrupt the nation.
To the first point: Not recently. To the second point: sure, I agree that the stakes are higher in one case. But I'm referring to the ethical structure of the arrangement and not the stakes. It's a red herring to respond to the point by saying "but the stakes are really high here!"
Amongst the non-lobotomized, it goes without saying that the economic policy of systemically subsidizing fraud is without merit. By ignoring the circumstances that cause the implementation of such corrupt policies, we would only be encouraging more of the same.
Are you saying the merits of every larry summers position on financial regulation is so obviously wrong that you don't need to produce an argument against them? I might ask you to humor me and provide an actual argument. Things haven't been the same since my lobotomy...
William Black had closeness to the financial industry. Larry Summers is an employee of the financial industry. The former has insight into a industry that others don't, the latter is an employee of the industry who masquerades as a public servant. See the difference? [...] I have to admit questioning the utility of protecting Summers from capture by Wall Street. After that raft of filthiness, I think that we may need to protect Wall Street from being captured by Larry Summers.
Not totally sure what's going on here. Are you worried about Larry Summers being captured by Wall Street or vice versa?
Most corruption nowadays is not quid-pro-quo William Jefferson cash in a freezer style.
This is more akin to doctors who are up to the brim with drug company money, pens, samples, lunches for staff, etc.
It creates the appearance of corruption even though the official can very plausibly claim that he is not doing a quid pro quo. However, subconsciously, and in keeping with the appearance, this does affect behavior.
But what bugs me is that people equate this with the Jefferson cash-in-the-freezer strategy. I'm willing to believe that being paid by an industry in the past will affect your behavior in the present. (And for reasons stated in the post, I think that can cut both ways.) But I don't think that lets anyone off the hook for producing an actual argument for why behavior in the present is wrong. The assumption seems to be that it MUST be wrong, and that strikes me as a little sophistic.
I think your analogy is close but chronologically different. Sure the analogy to the doctor situation would be Summers earning an income for speaking to the financial sector IN THE PRESENT, right?
Who cares about Larry Summers's income? We the people do. We care not because we like to know his private remuneration details (although that's interesting, as you say), but because Mr. Summers's coziness with the banks makes it impossible for him to be perceived as impartial. And your chronology problem suffers a major oversight: Mr. Summers was Treasury Secretary before he went on to his lucrative hedge fund position. In that position, Summers argued for, among other actions beneficial to the financial industry, no regulations of derivatives and for setting aside Glass-Steagall -- actions that have been partially responsible for the mess that we are in today, and Summers was rewarded with a lucrative position on a hedge fund. And your newspapers and visa analogy is utterly ridiculous: newspapers are not in a position to make major policy nor are they expected to completely forego private income for the public's benefit.
a couple of quick points:
1. What's the problem with perception? I'm willing to believe that the perception is bad. Of course it's bad. If it weren't bad people wouldn't be complaining! But you still have to produce an argument for why it's actually, causally bad.
2. I agree that the stakes are higher in the case of larry sumemrs than re newspapers. But the fact that the stakes are higher is logically unrelated to the structure of the ethical arrangement.
"2. There's a chronology problem."
There's not a chronology problem - there's a revolving door. Larry Summers was taking a deep chug at the trough before heading back into government for a spell. He will be back at the trough soon enough for a refill. He has everyone reason to believe that if he enacts favorable policies for Wall Street he will be welcome and if he actively curtails their compensation he will not.
Also,
"Is Larry Summers' position on hedge funds a good one or a bad one?"
It's bad and always has been. I would invite comment on his opposition to Brooksley Born's initiative for increased regulation of credit default swaps in particular.
http://en.wikipedia.org/wiki/Brooksley_E._Born
Whether he will be back at the trough is an open question. I'm willing to believe he will continue to give lectures for a fee, continue consulting, etc.
It's the second point you make that is more interesting: "[His position on hedge funds is] bad and always has been."
But if it's always been bad, why is the relationship between his income and his position problematic? Summers' critics suggest that there is a causal connection between his income and his public-policy positions -- ie, his income has motivated him to take positions that he otherwise would not. But if he started with the same position, how can that be true?
You might well be right: His position may be bad and it may have always been bad. But isn't that analytically distinct from where and how he earns his income?
Thank you for your response.
The fact that his position is bad is inseparable from his income. My point is that Dr. Summers has been playing a repeated game with Wall Street and government regulation. As long as he supports regulations that Wall Street prefers, he can count on continued future compensation. His position has always been bad because his expected relationship with Wall Street has always been there.
If the taxpayers want someone to look out for their interests they need to look beyond investment bankers.
Conor Clarke,
The rumor mill says that Larry was selling mortgage backed securities for DE Shaw, or selling peices of DE Shaw funds investing in them. If that is true, and if he is now bailing out people he sold them to, would that be a conflict?
Inquiring minds want to know.
Um, can I sort of cop out on that one? I'm reluctant to commit myself to an answer! It depends on the details and I'm blissfully open to the possibility that I'll take all of this back when more details come out, etc etc etc.
But I think I can commit to the following position: A question like "What is person X's relationship to industry Y?" is distinct from a question like "Is person X's position on the regulation of industry Y a good one or a bad one when judged on the merits?"
I think the second question is more important than the first, and it seems to me that the two questions are getting conflated.
Conor Clarke,
If Larry Summers and Tim Geithner want to discuss the merits instead of their ties to industry, they should have hearings on why Eugene Fama's, Williem Buiter's, Joe Stiglitz's, and other leading economists proposals to recapitalize banks by haircutting bondholders won't work. Refusing to discuss that, or mindlessly chanting "systematic risk" is just pissing people off.
And while they are at it, they should explain why Geithner's PPIP plan is legal. It looks as if the goal is to have purchases at inflated prices, through underwater non-recourse loans or guarantees thereof by the FDIc and the Fed. Those are effectively gifts to the extent the loan and guarantee are underwater. The Fed and FDIC don't have legal authority to give gifts. Summers and Geithner should explain why their plan is legal. Or they shouldn't complain about Congress imposing retroactive legislation on Banks with shaky legal authority. I mean, if Summers and Geither can break the law to suit their agenda, why can't Congress?
I thought the point that closeness to a particular industry can cut in both directions was made quite well in this Times article..
http://www.nytimes.com/2009/04/06/business/06summers.html?hp
1) "The assumption in news reports is that earning an income from a particular industry would cause Summers to change his views in favor of the industry." Answer: there are reams and reams of evidence from experimental psychology indicating that even small, irrelevant actions can have decisive effects on opinions and behavior. Simply putting a sign promoting a political candidate in one's lawn can produce more positive feelings about that candidate. Using the word "because" in a request can make the person being asked to do something up to twice as likely to respond, even if the reasons being proffered after the "because" are spurious or nonsensical. I would have thought that by now everyone was aware of these effects, which have been thoroughly documented in such famous books as Robert Cialdini's "Influence," but apparently not. The news outlets are quite right to assume a relationship between accepting money from a group and more favorable views toward that group. That's not an unwarranted assumption, given all we now know about human behavior. The unwarranted assumption would be to require some sort of absolute "proof" of a relationship. Given that the relevant events are taking place inside Summers's head, and that Summers himself may not even be aware of them (and would probably deny them even if he was), it's difficult to imagine what proof of no relationship would be required. To say that we can't be suspicious of Summers in the absence of some definite "proof" that his views are colored by having received millions of dollars from the groups he is being asked to regulate and/or bail out is ludicrous. Which brings me to the next question...
4)"How did Larry Summers develop his view on hedge fund regulation?" versus "Is Larry Summers' position on hedge funds a good one or a bad one?" That's an important point, and in general I agree on the necessity of answering a person's arguments before impuning his character and all that. But in this case, how Summers developed his position does have real bearing on how good his position is. Summers knows a great deal more about the issues that we do. I have no doubt that whatever his position, he would be able to come up with a plausible explanation why it was a good position, even an imperative position. We might not have the ability to judge the quality of his plans, especially because any alternates to his plans are, by virtue of not having been suggested by him, simply not present (the suggestions of rouge economists like, say, Nouriel Roubini, are not to be taken seriously). Judgements do not exist in a vacuum. If someone in Summers's position recommends a course of action, others may try to evaluate it "on its merits," but the very fact that Summers recommended it is itself one of those "merits" on which others will evaluate it. Summers is sufficiently skilled, and his office sufficiently prestigious, that whatever plan he endorses will have his imprimatur of authority and all of the trappings of. Any objections can be dealt with by vague murmurings of "systemic risk, systemic risk," or by claims that such-and-such proposed alternative simply isn't possible, and who's to gainsay them? (E.g., who really believes that it was *really* impossible to bail out Lehman Bros last Sept.? Yet Paulson found it easy enough to get away with eliminating a Goldman competitor.) Apparently, the only judgement that matters of whether systemic risk is present is Summers's own. We may have little else to judge his recommendations on except the information that he himself chooses to release. Given this environment, all we have to go on is the "appearance of impropriety."
Again, demanding "proof" of complicity is not germaine here; what is needed is proof of independence. In judging the trustworthiness of regulators, our motto ought to be, "If there's any doubt, there's no doubt." If there's any question they're compromised, they are.
Of course I'm willing to believe that certain events make certain behavior more likely. ("Influence" is sitting on my desk, though I confess I've only stared absentmindedly at the cover...) But I think if you're going to make a claim about someone's behavior changing, it's far more important to have evidence of an actual change than it is to have evidence that change has become more likely. Don't you think?
To your second point: Maybe I just have more faith in human nature. I don't think Larry Summers is an inveterate liar and I don't think the public should get to a free pass on learning about complicated issues. More importantly, there are sources responsible for interpreting public positions -- newspapers etc -- and I'm not sure they get a free pass either. It would be a weird system wherein every public official's position was judged solely by the context in which the position emerged, the person's reputation, etc. Wouldn't you much rather see these things judged on the merits?
and FWIW, there's this (from the Times article I linked to above):
"Even so, Mr. Summers, who, before the crisis broke out, spoke and wrote about the need for greater financial regulation, has not resisted the efforts to tighten up on hedge funds like Shaw. The administration, for instance, is moving toward closing a tax loophole that these funds have long enjoyed. A White House spokeswoman says his actions supporting hedge fund regulation prove he is not biased."
Connor Clarke: "But I think if you're going to make a claim about someone's behavior changing, it's far more important to have evidence of an actual change than it is to have evidence that change has become more likely."
You want evidence of Summers and Geithner's bias in favor of politically connected financial types. Summers and Geithner couldn't persuade Congress to authorize them to give the money center banks $25 billion to bail them out of bad loans to Mexico, so Geithner and Summers misused the Exchange Stabilization Fund to give them the money. When LTCM went into crisis, Summers and Geithner went into action again by arranging assistance to the money center banks that loans LTCM a lot of money. When the broker-dealers gave Summers heat about regulating derivatives, Summers shut down Brooksley Born.
Connor Clarke: "Even so, Mr. Summers, who, before the crisis broke out, spoke and wrote about the need for greater financial regulation, has not resisted the efforts to tighten up on hedge funds like Shaw. The administration, for instance, is moving toward closing a tax loophole that these funds have long enjoyed. A White House spokeswoman says his actions supporting hedge fund regulation prove he is not biased."
Summers has consistently fought against financial regulation. Summers is against tax games, but in favor of financial games. He is a hypocrite.
"If you're going to make a claim about someone's behavior changing, it's far more important to have evidence of an actual change than it is to have evidence that change has become more likely. Don't you think?"
No, I don't. Let's use the example of the Warden in "The Shawshank Remdemption," as it's one we're probably all familiar with. By your reasoning, the fact that the Warden took bundles of cash from local businessmen doesn't "prove" he used his prison labor force to do them favors, it only makes it "more likely" that he did so. If he subsequently claimed there was no connection between him taking their money and him doing favors for them, you would have to accept that there was "no proof" of a connection. After all he might well have "intended" to use the prison workers to do those same things even had he not received the money. The only "proof" by your standards exists inside the Warden's head, to which no one else has access. But fortunately we do not have such exacting standards in the legal system; an "intention" toward graft is not necessary for a conviction, if a functional relationship can be shown.
He may even believe it himself. In fact, he almost certainly does; did you ever meet anyone who thought of himself as an inverate liar? Everybody generally believes they're acting for the best, even if only what's best for himself; the possible contradiction being resolved by whole-hearted belief in an absolute correspondence or identity between "the best" and "the best for onself." I never said he was any kind of liar; I did say his judgement is compromised, which it is. We don't allow people to sit as judge in their own case, no matter how "impartial" or "professional" they may be. No human being is sufficiently impartial or professional enough to judge in matters where he has a personal stake, yet that's what you think Summers can do.
"There are sources responsible for interpreting public positions -- newspapers etc -- "
You are aware that there's a good deal of diversity in the opinions expressed in newspapers, etc.? Krugman wrote that the plan was bad, yet Geithner said it was good. How is one to choose between them? "On the merits"? Any plan promulgated by the government will attract both support and criticism. Sure, let's judge the plan "on the merits." But which merits? Some people are hoping the plan will accomplish one thing, and others hope it will accomplish something else; their assessments of "the merits" will therefore differ. Is there some objective system that can determine whether we ought to pursue X, or Y, "on the merits"? If matters could really be judged strictly "on the merits," I wonder why we have not come to any conclusion regarding the other issues of politics. This fixation on "the merits" is, I think, naive.
Summers, furthermore, is in the unusual position of getting to enforce his opinions, a dispensation denied to Krugman and others who have spoken against his plans. If his plan is a blatant gift to private financial companies, it may be rejected, but if the gift is smaller and more subtly managed (let's say, instead of the government simply buying "troubled assets" directly from banks at above-market prices, what if it loaned money to private companies to buy them at above-market prices, further agreeing to take only 50% of any profits while accepting 92% of any losses?) it may be accepted. Is this really the best deal that could be obtained? We have only Summers's word it is. Could AIG's counterparties have been made to take a "haircut"? We have only Summers's word they cannot. His judgements are in these cases the only "merits" available to consider. That Paulson judged it impossible to rescue Lehmen Bros. is the only "merit" available in any analysis of that event. Many others (with contradicting opinions) have weighed in on it since then, but Paulson's actions cannot be undone, because he, and no one else, was Treas. Sec. last fall. There's a colossal asymmetry between a Treas. Sec. and a newspaper columnist. There may be nothing Krugman or anyone can do if Summers's plans turn out to be excessively favorable to private business. Because we can't change their actions after the fact, we must evaluate in advance the likelyhood that their actions will be beneficial to us. That evaluation is largely based on motives and reputations. If you think it would be a weird system where "every public official's position was judged [...] by the context in which the position emerged, the person's reputation, etc.," well, you're living in it. But I never advocated that they be judged "solely" on motives and reputation, only that those things are relevant data. They are included in the set of "the merits."
What's so absurd about your position is that we make these sorts of judgements all the time. We recognize that whenever there's an asymmetry of information, as between a seller and a buyer, the buyer must rely on factors outside your narrow conception of what constitutes "the merits." The seller of a product is intimately familiar with its flaws, whereas the buyer may not have the knowledge to inspect it closely enough to find those flaws. Therefore the buyer cannot simply accept the seller's pitch, no matter how logical or convincing it may seem. The seller is naturally anxious that the buyer ignore the seller's bias and focus exclusively on "the merits," but the buyer must take into account the seller's motives (and discount most of the sales pitch) and reputation. A seller who has proven trustworthy in the past is more likely to be telling the truth now; does this describe Larry Summers?