By Nathan Tankus, a student and research assistant at the University of Ottawa. You can follow him on Twitter at @NathanTankus
Many thousands of words have been spilled explaining just how horrible Lawrence Summers is and how terrible he would be as chair of the Federal Reserve. While this is true, I don’t think enough has been said on the precise ways he would be able to influence policy in a negative way.
Given the place the Federal Reserve holds in the imaginations of Americans, it is obvious that Summers’ influence on monetary policy would and has gotten the most focus. In truth, I don’t think this is the most important issue right now. There is a consensus among policy economists (including Summers himself) that a Zero Interest Rate Policy (ZIRP) should be continued. On the other hand it is widely reported in the media that Summers is a “skeptic” on quantitative easing. Ending quantitative easing will certainly have negative effects (as I outlined here ), but I think there are larger issues to consider when thinking about Summers being chair of the Federal Reserve.
The most important in my mind is clearly the Fed’s position as a crucial regulator in the ecology of regulators. Larry Summers of course doesn’t have a good history in regulation, famously blocking (long with Alan Greenspan and Robert Rubin) Brooksley Born from asking questions to banks about derivatives that might maybe, possibly lead to a review of regulations concerning future derivative contracts . However, we don’t even need to focus on regulation in the abstract. The most important concrete issue involving regulation is still Dodd-Frank. Like Obamacare, which Lambert has been covering with painstaking detail, the rulewriting for Dodd-Frank has also been going excruciatingly slowly. See for example this excellent Infographic from Davis Polk (the international law firms need to know what is going on because of their financial institution customers).
At the rate of growth that has prevailed so far, the rule writing around the law will be finished in early 2018. The Federal Reserve is in fourth “place” in terms pages written (a “mere” 1959 pages) but this is misleading. Many rules, like the still-to-be-written Volcker rule have required “consensus” among the regulators. Thus if Summers does indeed become Fed chair he will have enormous influence over how regulators “interpret” the law (not to mention tremendous influence over future legislation both in the bill writing and rule writing phases). As we know from the Born case, he isn’t shy about intervening in regulatory matters that he hasn’t been called on by other regulators or the law to comment on so this is a very real issue.
In reality however, the situation is much worse than this. As we know from the lead up and the aftermath of the financial crisis, regulators have enormous latitude to not enforce regulations. Sarbanes Oxley is a prime example of this. To remind readers of Sarbanes Oxley, here is Yves from two and a half years ago:
Since Sarbanes Oxley became law in 2002, Sections 302, 404, and 906 of that act have required these executives to establish and maintain adequate systems of internal control within their companies. In addition, they must regularly test such controls to see that they are adequate and report their findings to shareholders (through SEC reports on Form 10-Q and 10-K) and their independent accountants. “Knowingly” making false section 906 certifications is subject to fines of up to $1 million and imprisonment of up to ten years; “willful” violators face fines of up to $5 million and jail time of up to 20 years.
The responsible officers must certify that, among other things, they:
(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuer’s internal controls as of a date within 90 days prior to the report; and
(D) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date
This law has been more or less killed, not by new laws, but by lack of use. The regulators who have refused to use Sarbanes Oxley since 2002 have made the law more and more difficult to use because it now has developed little case law behind it and much more stigma. Larry Summers could easily do this to all of Dodd-Frank, not just those elements that have yet to have rules written. Further, it is not implausible to imagine him stymieing regulation for a generation. What tough rules against financial institutions could withstand Summers from the fed chair? Whether it is passing laws, rulemaking, or enforcing laws, an influential anti-regulator like Larry Summers would have the ability to maim (and possibly kill) anything remotely bank unfriendly in the crib. If you thought Hurricane Katrina was a disaster, wait till you see the havoc Federal Reserve Chairman Lawrence Summers could wreak.