Interview With Larry Summers

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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.

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?
 

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