Star economist Lawrence Summers—best known as just plain "Larry"—still has the aura of a wunderkind. Not only did he become a tenured Harvard professor at the tender age of 28, Summers had already served as Bill Clinton's Treasury Secretary when, at 46, he was appointed president of Harvard University in 2001.

With his hard-charging ways, and his insistence on shaking up what he saw as the complacent university establishment, especially the powerful faculty of arts and sciences, Summers gained popularity and support from undergraduates and alumni, but antagonized many others. Five years after his inauguration, it all came crashing down amid a series of ugly and highly publicized confrontations, particularly with celebrity professor Cornel West, who went public with his complaints and departed for Princeton after Summers privately questioned his academic output. The coup de grâce came when Summers, in a closed-door symposium, reportedly mused that there might be intrinsic reasons, worthy of study, why women were underrepresented in the science fields. He was forced to resign amid a predictable outcry.

SUMMERS' TIME On the Economy: "Moving beyond a 'trust the market no matter what, what's best for Wall Street is what's best for America' approach to the financial markets, is important." On Echoes of 1998: "This crisis this time is about us, not about them." On Business: "It's a lot less political than Washington, and Washington's a lot less political than academic administration."

These days Summers is back teaching at Harvard—but not, he points out, as a member of the arts and sciences faculty—and dipping his toe in the grubby business of making money while advising Senator Barack Obama's presidential campaign. On Monday, he discussed his life and times in an exclusive interview with Portfolio.com.  

Lloyd Grove: So, first of all, what's your reaction to what has happened with Fannie Mae and Freddie Mac?
 
Larry Summers: Oh, it's a sad story. Something like what Secretary Paulson did was almost certainly necessary, given the problems the economy and those firms found themselves in. To have allowed the general financial failure of those firms would've been to invite catastrophe in financial markets, the housing markets, and the economy. It's a sad thing that things came to this point, and it's a reflection of the eight years of relatively unsuccessful economic performance that has fed through the financial system and the housing market. It's a reflection of the special interests that, over many years, created the "heads I win, tails people lose" privatized-gain-socialized-loss formula for the G.S.E.'s (government-sponsored enterprises, like Fannie Mae and Freddie Mac). And, in a different way, it's a reflection of the fact that their regulator was cheerleading for their capital adequacy until the very absolute last moment. So while it's often said that success has many fathers and failure is an orphan, this unfortunate episode probably does have a fair number of parents.

L.G.: Are you one of them?
 
L.S.: Um, I hope not! During my time as secretary of the Treasury, to the outrage of a very large number of lobbyists in both political parties, I spoke out about the G.S.E.'s as a potential source of systemic risk, and raised questions about the adequacy of the regulatory framework within which they were operating, and pressed for clearer procedures to deal with any financial problems that they might have. Unfortunately, I was sorry at the time that there wasn't more Congressional responsiveness to those expressions of concern.
 
L.G.: Do you think if you'd been any more persistent or louder or more rabid on the subject that you would've been able to break through and counteract the well-oiled political machine?
 
L.S.: Oh, I think we'll never know. But I think, at that point, the strength that the institutions had and the loyalty that they commanded on Capitol Hill was very, very strong. So I think it would've been extremely difficult to have done anything. My conscience is clear.
 
L.G.: Where do we go from here?
 
L.S.: My hope is that we will use the next 18 months to find an appropriate and much more explicit division of responsibility between the private and the public sector. There almost certainly is a need for the public sector to take an explicit role in doing some of the things that the G.S.E.'s were doing, providing an emergency backstop for the mortgage markets, providing support for some lower-income populations. There are other areas where there's no need for a public institution, and certainly not for public guarantees that benefit primarily shareholders. And so fostering the right division of labor between private and public institutions, thinking about the broad questions—if there are going to be government guarantees, should there be only two enterprises that are able to benefit from them?—these are all questions that will need to be carefully debated over the next year.

L.G.: And obviously it's going to be the job of the next administration. You've suggested that they might be broken up and sold off in pieces. What do you think should happen?
 

L.S.: I think it's going to require a great deal of study and it's going to require exploration, seeing how the mortgage market functions over the next while before one's in a position to make any judgment: I don't think this is a moment for market fundamentalism. Anyone who looks at the performance of the subprime markets and the jumbo markets where the G.S.E.'s were absent, over the last year, has to see that the calls of many for simply privatizing and shrinking these institutions may well be taking a large risk with a crucial part of the financial system. At the same time, you can't keep going the way we've been with privatized gain and socialized loss. So I think it's a very technical and complex question and it's premature to suggest a blueprint at this point.

L.G.: By the way, do you feel like you're done with government work? Or, should Obama win, would you like to have a hand in fixing this problem? 

L.S.: Oh I'm—I certainly have strong opinions on a range of public-policy questions, but I'm very happy right now doing what I'm doing, teaching and consulting and writing on public-policy issues.
 
L.G.: So you don't think much of Henry Kissinger's idea that you should be given a permanent job in the White House to fix flabby policy ideas?
 
L.S.: I'm happy doing what I'm doing and flattered by Henry's observation.
 
L.G.: You're "happy," that's such a political answer, what everybody's supposed to say. But if you were offered such a thing, you're so happy doing what you're doing that you wouldn't take it?
 
L.S.: I think I answered your question, Lloyd. I said as much as I'm going to say.
 
L.G.: Okay, fine, I hear you. So about how long have you been advising the Obama campaign on economics?
 
L.S.: The last few months.
 
L.G.: How did that come to pass? I notice that you've given pretty much equally to Obama and Hillary in terms of your campaign contributions. Were you initially with Hillary? I notice that your contribution to Hillary was after her campaign effectively ended.
 
L.S.: Precisely, yes. I was neutral during the process, just focused on hoping we got a strong Democratic candidate. And as people sought my advice on economic questions, I've provided it. And a number of people from the Obama campaign have sought my advice, and I've tried to be helpful.
 
L.G.: Have you had some chats with Obama about policy?
 
L.S.: I don't get into the details of private conversations. I was part of what I thought was a very impressive meeting that he had with a group of economic advisers several weeks ago, where we reviewed both the current financial difficulties and some of the challenges that a new administration was going to face.
 
L.G: Tell readers why and in what ways the Obama economic policy is superior to the McCain economic policy.
 
L.S.: Look, I think after a period during the 1990s, when the economy grew rapidly and a very large fraction of Americans shared in the prosperity and America's influence and respect in the world were expanded, we've been in a period in recent years when economic expansion has been less strong; when its fruits have gone to only a very small share of the population and where our position of trust and respect in the world has been very greatly eroded. So I think the question is whether we're going to change course or whether we're going to stay on the course. And I think aggressive response to recession through fiscal stimulus, including through rebuilding infrastructure in a strategic way, is important, and that's something that's been a focus for Senator Obama. I think moving beyond a "trust the market no matter what, what's best for Wall Street is what's best for America" approach to the financial markets is important if the economy is to work. That's what Senator Obama favors. I think we're in a time when wage growth has lagged far behind productivity growth, and when there's been a large-scale movement of income and wealth toward the top 1 percent. That may be hard in some ways for government to fix, but surely government should not reinforce it with its tax policies. And so I think making the focus of tax reduction be on the vast majority of American families, rather than on a very privileged few, is the right and responsible economic policy. I think that for the medium and longer term, it is essential that we have responsible budget and fiscal policies that maintain confidence in our economy and support high levels of investment. That's what we did in the 1990s. The three and a half extra trillion dollars that the Tax Policy Center estimates that Senator McCain will issue in debt over a decade will have a very substantial adverse impact on investment and growth and incomes, in my view. I think we've got to have a more focused and a more public approach to assuring health-care availability, so that we're in a position to contain costs. And that's what Senator Obama has advocated.
 
L.G.: Are you concerned about the deficit?
 
L.S.: Yeah, I am. But during a recession, the top priority for the near term isn't deficit reduction. For the medium term, an economy with almost no national savings, with the baby-boom generation starting to retire, fiscal responsibility is essential. Senator Obama, by talking about serious health-care reform, by talking about the need to address the Social Security issue, by focusing on making sure that each new initiative is paid for, has put forth a fiscally responsible program in the tradition of the approach that was taken during the 1990s. The other side has mostly described the additional taxes it's going to cut for the top 1 percent. And those several trillion dollars of deficit—it's not my estimate, and it's not some Democratic adviser's estimate, it's think tanks that review both sides' proposals—those extra several trillion dollars are, I think, likely to be quite burdensome on the economy. They took a risk with foreign confidence in our system, they took a risk with our vulnerability at a time when for the first time in history, really, the world's greatest power has made itself the world's greatest debtor.

L.G.: The Republicans generally seem to have had a lot of success in boiling down what they're doing to this very attractive idea of four words really: "low taxes, small government." Those are simple concepts to communicate in the next 58 days or whatever it is. Is there a simple, elegant, campaign-ready way to communicate the Obama plan?
 
L.S.: You know, I try to do policy, not spin. Yes, it may be that policy over the last eight years has been simple to describe, but the descriptions haven't fit the reality, since spending has gotten completely out of control on bridges to nowhere and much else, and the consequences for ordinary families have been disastrous. So I prefer thoughtful economic policy that may take whole sentences to describe over simple economic policies that can be summarized in four words, but the four words don't actually correspond to what's done, and the consequences are pretty serious. I think Obama's economic policies would involve government providing a foundation and the necessary... assistance to enable people to maximize their potential in the marketplace. And I think that's a much sounder approach.

L.G.: Do you have any idea where the bottom of the housing crisis is? Have we reached it yet or do you think it will be, as Yale economist Robert Shiller has said, perhaps worse than the Great Depression?

L.S.: Oh, I don't minimize at all the seriousness of our economic problems. There are a zillion statistics you can compare. I don't think it's realistic to suggest that somehow America is going to suffer in the way that it did during the Great Depression, when the unemployment rate was 25 percent and more than half the homes in the country were foreclosed. At the same time, I fear that we've got some significant room to go in the housing market, and I'd expect further price declines for another six to nine months.
 
L.G.: How does the current global credit crisis compare with the Asian and Russian crises of 1998 that you had to deal with?
 
L.S.: Well, I think the central difference is that this crisis this time is about us, not about them, and that makes it that much more immediate and painful. Some of the very same mistakes—of excessive budget deficits, failure to regulate financial institutions, excessive leverage—that led to those problems, are what led to our problems. That's why we were so focused in the 1990s on fiscal prudence, on proper regulation of financial institutions, you know. I think one thing we learned in the course of responding to those crises was that you never see the end of a crisis. You can usually date the end of the crisis to the first moment when a public official makes a forecast that proves too pessimistic. And I think, unfortunately there's been some tendency of the administration, and certainly of Senator McCain, to cheerlead their way through the situation by talking about how strong the economy is, and I actually think the moment will come when we address this crisis, when it's described in frank terms. It's from that point that you can begin to see repair, but I think there have been some real failures of recognition and acknowledgment in the response over the last year.

L.G.: But isn't that just human nature at work as well?
 
L.S.: Sure. Hindsight is always twenty-twenty. And I'm sure with the benefit of hindsight, in some areas, we no doubt would've made different judgments. But I think if you look at the responses and the comments that Chairman Greenspan and Secretary Rubin and I tried to use during the 1990s—President Clinton above all—we didn't try to minimize or deny problems that everybody saw were there. I think it's an important part of addressing these problems, and so I've been surprised by the political figures who said that this was just whining or the political figures that said the economy was really strong, or that this was a temporary dip. This is something the United States can manage, but I don't think we'll manage it successfully by minimizing its significance.

L.G.: You mentioned Alan Greenspan. A lot of fingers have been pointed at him, as you know, for helping create the conditions that caused the subprime crisis to happen. Do you think that's a fair or unfair criticism of his role?
 
L.S.: Lloyd, I think, looked at over 17 years, Alan Greenspan had a tremendous record as Fed chairman. It's easy to look at things with hindsight, and often decisions look different with hindsight than they do with foresight. And, unfortunately, you have to make them with foresight. Battlefield medicine is never perfect, and that's certainly true in the financial sector. But I think if you look at Alan Greenspan's record in its totality, it's a strong one.

L.G.: I was intrigued to read a comment of yours on the death of Milton Friedman, that in some sense we're all Friedmanites now, in the same way Nixon said we're all Keynesians. What did you mean by that?
 
L.S.: I mean that I think we've all come to a much greater appreciation of the role of prices, the role of incentives, and the role of markets. I mean, to take just one example, now the pro-environmental alternative is a cap and trade system or a tax on carbon emissions. I tend to support a cap and trade system, and I think if we ever make progress against global warming,—as I hope we will, as we need to—it will come through some kind of cap and trade system. Well, that's relying on markets, and that's a very different place than where the country was, and where thought was, when I went to college or graduate school, when the assumption was, to address a problem like that, you would use command and control regulation. And it was only a few isolated people who would support the use of market instruments in the same way. Almost everyone today supports charter schools and some elements of competition within education. That was a heretical notion a generation ago. So I think the kind of emphasis that Friedman has brought on what markets can do has gained quite wide acceptance. Where I would still very much part company with Friedman is in believing that while market outcomes may be efficient, they may be profoundly unfair, and there's a need for government to do things to redress the balance—and in believing that a market system can only work within a broader legal framework that only government can establish.

L.G.: Tell me, you've been involved in an online credit-card venture with Steve Case, as a managing director of this fund, D.E. Shaw, which seems to be part hedge fund and part venture capital. It's a huge thing isn't it?

L.S: Lloyd, since I've stepped down as Harvard president, my primary activity has been as a professor of economics at Harvard, teaching as a university professor in the various schools of the university.
 
L.G: Teaching undergraduates, too, right?
 
L.S.: You know, I practice what I preach.
 
L.G.: God bless you, sir.

L.S.: I put emphasis on undergraduate education when I was president, indeed taught undergraduates while I was president, so I've kept on teaching undergraduates. I've also, on a part-time basis, affiliated with D.E. Shaw, where I provide advice on a range of macroeconomics and strategy questions. Having studied financial markets as an academic, and having been closely engaged with them as a policymaker, it's been enormously interesting for me to get the participants' perspective on financial markets.

And then I've enjoyed being involved with a number of smaller companies such as the Revolution Money venture, which has a potentially very exciting credit-card technology, using credit and debit technology, using the internet that, in a sense, brings together bricks and clicks by providing both a capacity for regular retail transactions and also for online.

L.G.: Is that on the market yet?
 
L.S.: On a partial basis—through certain vendors and certain stores. And then there's a significant number of the cards now accepted at over a million places. A growing number of people are carrying the card, or the technology is providing the backbone for other cards that people are carrying. 

L.G.: On D.E. Shaw, I'm just curious, did you advise them to short Fannie Mae and Freddie Mac?
 
L.S.: Oh, I provided macroeconomic advice, not individual stock advice. Certainly, as goes with the financial-industry standards, I don't talk about the specifics of any advice I provide.

L.G.: And then you invested in Big Think.
 
L.S.: I did. You know, one of the great things about being in a university is the remarkable students you meet and the remarkable friends of the remarkable students you meet. And one of the founders of Big Think was friends with students and colleagues of mine. I was very excited about the idea of raising the level of public dialog, and so found it to be an exciting venture, and so invested on a small scale. We'll have to see how it all works out.

L.G.: You've obviously had a career, or several, in economic theory and public policy and in academic administration. What's it like being in the marketplace?
 
L.S.: It's a lot less political than Washington, and Washington's a lot less political than academic administration. There's pretty clear ways of knowing whether you were right or whether you were wrong. I find that to be satisfying and exciting. For somebody passionately interested in economic questions, you learn a lot by being alongside people who are actively engaged in trying to make profits.
 
L.G.: Is that a bit of a thrill? Do you get a kick out of that?
 
L.S.: Oh, you know, I'm somebody who's not been primarily commercially motivated. That's why I was a professor, then I was a government official, then an academic administrator. Now my primary activity is back to being a professor. But I've learned a lot and gotten a great deal of satisfaction and considerable zest out of these various business ventures that I've been involved with—again, very much, in the case of most of them, on a part-time basis. And I've certainly come to understand many aspects of financial markets better through my work with D.E. Shaw.
 
L.G.: You've mentioned that it's more political, for the sake of argument, let's say at Harvard than it was in Washington. Do you agree with that old saw that the reason academic politics are so vicious is because there's so little at stake? What's your sense of what you learned from that experience?

L.S.: I wouldn't want to deny that there's sometimes pettiness in academic life, but I actually think the stakes in how we organize basic science in the United States, the stakes in what the next generation of leaders are taught during the most formative years of their life, the stakes in what kind of international presence American universities do or do not establish, I don't think these are minor issues at all. And some of the steps that we were able to take during my presidency at Harvard—establishing for the first time for a major American university the principle that any family with income below $60,000 wouldn't have to make any financial contribution to undergraduate education; establishing as a normal expectation in a leading university that students would have an international experience before they graduated; commencing a building program that in total was 17 football fields worth of laboratory space for cutting-edge interdisciplinary science, not done with individual investigators but done collaboratively—I think these are large things that have a large effect on the society. So I would reject the idea that the stakes in what gets decided at universities are always small.

L.G.: You had enormous support from the undergraduate community and other sectors of the university community who didn't want you to go. You were very popular among the alumni, people giving large amounts of money to Harvard. And yet it wasn't sufficient. The faculty was by and large against you. Did you learn anything from that whole crucible?
 
L.S.: Oh, you know, I think as I said in my letter when I decided to resign, I was very proud of what the university had accomplished during my five years as president and the path that had been set. And whether it's in the construction of new science buildings or students studying abroad or extension of financial aid, I've been gratified by the way in which acting President [Derek] Bok and then President [Drew Gilpin] Faust have followed some of the broad priorities that I had set out and thought were very important. I tend to look forward more than I look back. I wish I'd been more successful in having the kind of good relationship with the liberal arts and sciences faculty that I had with the faculty in many of the professional schools. As with any kind of conflict, it's probably a mistake to think that fault is entirely on one side.

L.G.: You've acknowledged that what you said about women and science—which, as you pointed out, has been misinterpreted and oversimplified—was probably very imprudent of you. So you yourself have taken some responsibility.

L.S.: Yeah, and I certainly wouldn't ever claim not to have made mistakes, not to have done things that if I had it to do over again, I wouldn't have done. I don't think what was reported was a very fair reflection of my views, but the existence of the controversy didn't help the university. And my job as president was to help the university. That's why I said that I regretted the words. At the same time, I think the catastrophic, important thing I regret is that if other scholars take from the response to my remarks that there are any subjects that are not suitable for research or beyond discussion or not appropriate for speculation. Because it seems to me that if universities should stand for anything, it should be openness to all arguments, no matter how controversial.

L.G.: The other things—your set-to with Cornel West and also your remarks about the troubling rise of anti-Semitism on college campuses. On that point, do you see that's changed at all? Is it less troubling to you now, the anti-Semitism that you pointed out?
 
L.S: There still are things that give cause for concern, and certainly outside of the United States, where British university faculties, as a collective faculty union, voted not to engage with Israeli scholars, and there's certain European academic journals that don't accept submissions from Israeli scholars. I think the "divest companies that invest in Israel" movement, which had some strength on American college campuses, my sense is that has faded away. And that's reassuring, because it seems to me, whatever you think about the merits of Israeli foreign policy or Palestinian foreign policy—certainly from my perspective, there's much to criticize on both sides—the idea that one side should be demonized and become the object of divestiture continues to seem profoundly misguided to me.

L.G.: Well, I guess the thrust of all these questions about the past is when you were in Washington, you were famously brilliant and equally famously hard-charging and not a paragon of tact and diplomacy. And I'm wondering whether you've mellowed at all?
 
L.S.: I think we all become wiser as we age, and I think I learned a lot in Washington. And certainly I'm sure I learned a lot during my five years as president of Harvard, and I've certainly learned a lot in the last couple years, and I hope that I will always keep learning and improving. At the same time, I'm somebody who wants their errors to be of trying to do too much rather than trying to do too little, trying to make as large and as constructive a difference as I can. That's a perspective that I bring to whatever I try to do.

L.G.: And some people were surprised that you actually took up a faculty position at Harvard after all that, but I guess that says that you weren't bitter about the experience.
 
L.S.: Oh, I didn't take a position within the faculty of arts and sciences, as I say—
 
L.G.: You're a university professor.
 
L.S: Yeah, I look forward rather than backward. And I've enjoyed the writing I've done, I've enjoyed the teaching that I've done, I have not missed the politics of the university from which I systematically remove myself. I have found it enormously satisfying to get back involved, thinking about economic-policy questions at a moment when, Lloyd, I think there are larger policy economic-policy questions that will get resolved in the next election than in any election over the course of my lifetime.
 
L.G.: So if somebody came to you and said, "Would you be president of our university?"—you would say?
 
L.S.: I suspect the academic administration phase of my career is over.