Larry Summers versus Dodd Frank

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.

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    1. psychohistorian

      I just read a great quip which said that folks should put John Kerry in charge of getting Summers appointed……GRIN!

  1. Harry Shearer

    Dear Nathan: If by disaster resulting from Hurricane Katrina, you refer to the widespread damage and minimal death toll on the Mississippi Gulf Coast, that’s an accurate usage. If, however, you’re engagng in the much more common usage of identifying Katrina as the cause of thw much more catastrophic desteuction, and the deaths or thousanda, iin New Orleans, you are prepetuating a serious historical error. According to the only two independent forensic engineering i vestgations made of the event–the ILIT and Team Louisiana reports sun arizw eir findings– the proximate cause of the death and destruction in New Orleans was the catastrophic failure, in more than 50 locations, of the “hurricane protection system”, built but never completed over more than four decades by the US Army Corps of Engineers. Had the mistakes, miscalculations and misjudgments by the Corps not occurred, according to the co-author of the ILIT report, the worst Katrina would have inflicted on New Oreleans would have been “wet ankles”.

    1. Nathan Tankus Post author

      I never said Katrina was a natural disaster. I understand if that was unclear. Has anyone come up with a good shorthand to reference that event yet?

      P.S. Love your stuff!

      1. TomDority

        Man-made disaster – protection systems failed at below design criteria. – I believe the fifth circuit court made the determination.
        Sarbanes Oxley should have, could have and, was not used in the investigation of homeowner harm that Yves / naked capitalism documented – documented actual instances where violations happened yet, nothing was referred or prosecuted.

      2. Walter Map

        A simple shorthand, and useful mnemonic, might be something like the Federal Catastrophic Katrina Tragedy. This results in the acronym FCKT, which is pronounced very much like Dubya pronounced the debacle.

      1. Banger

        I have to say that when I think about Katrina it reminds me of scenes in horror movies where normal people suddenly turn into monsters or Jack Nicholson in the Shining. Katrina was an event I don’t think Americans have fully digested or even looked at just like all the other debacles from the Indian Wars to Iraq.

      2. Another POV


        All due respect, but perhaps those living below the waterline in a hurricane “prone” area like NO based on federal or other “guarantees” should find another name for it at the same time they’re seeking higher ground. “FUCKING STUPID” comes to mind right offhand, but that’s just me.

  2. Walter Map

    At this rate, the Dodd-Frank rule-making industry should surpass automotive manufacturing sometime after the Antarctic ice sheets finally collapse. It’s nice to know the end is finally in sight.

    It seems like rather a lot of non-value-added activity to achieve the simple purpose of obfuscating Dodd-Frank into complete and utter uselessness, but one supposes that this represents the minimum volume required to maintain the illusion of relevance.

    Just imagine trying to explain this dunghill to a court. It sets a wholly new standard of prosecutorial impossibility.

  3. Barbara Roper

    The SEC comes off looking better than it should in the Davis-Polk info-graphic. While the SEC has proposed a lot of rules, it has finalized relatively few. Asset-backed securities rules first proposed in December 2010 still have not been finalized, nor have credit rating agency rules or most of the derivatives rules it is responsible for writing. The SEC is far behind the much smaller CFTC.

    More importantly, the SEC has proposed rules in key areas, such as derivatives and credit rating agencies, that are far too weak to prevent a return to the abusive practices that led to the crash. On several occasions, most recently on cross-border application of Dodd-Frank, the SEC has issued proposals that undercut stronger proposals from the CFTC, making Gary Gensler’s job that much harder.

    This is not a reflection on your excellent post, of course, just my visceral reaction to anything (like the Davis-Polk graphic) that makes it look like the SEC is on top of things.

  4. clarence swinney

    Clinton ended his 8 years with an 1800B Budget and 5800B of Debt
    Bush ended his 8 years with a 3500B Budget and 11,900B of Debt.
    Obama ended his four years with 3800B Budget And 17,000B of Debt.
    Bush Tax cut primarily for top incomes added 1900B to the Debt.
    Two uncalled for Wars added 2000B to the Debt
    Stimulus added 800B and Payroll Tax Cut ?
    The Debt increased by 6100B under Bush and 5100B under Obama.
    You place the blame wherever it pleases you!

    1. Robert Bostick


      So, if the government spends without taxing, just spends, that’s called deficit spending, say on day one the government just spends a hundred dollars, it’s going to be one of three places. It’s going to be cash in circulation, or in a checking account, or in your savings account, somebody’s savings account. There’s no other choice: the dollar has no other existence, other than those three places.

      And all of this equals the world’s net savings of dollar financial assets. There are 17 trillion dollars or so in the savings accounts and checking accounts and cash equal to the penny to the cumulative deficit spending. That’s how much the government has spent and stuck into those accounts, but hasn’t yet taxed and taken out of those accounts. Spending puts the money into the accounts; taxing takes it out. If you put it in and don’t take it out, it’s a deficit; it’s our savings; it’s held by you, me, China, whoever owns Treasury securities. It’s simple accounting 101, where ever there’s a deficit there’s a surplus. Assets = liabilities.

      There should be a surplus clock to match the deficit clock, both would display the very same numbers.

      1. Another POV

        True as far as it goes. However, you can’t continue to create an infinite money supply without an infinite natural resource base to match. Such is called, I believe, inflation (more money for the same or fewer goods). And sooner or later, it WILL happen.

  5. Tim

    Don’t forget that the Federal Reserve has purchased several trillion in junk assets from the banks (which is why the banks are profitable again), and lots of Federal T bills. Also do not forget that the total world derivative market is over $600 trillion dollars which works out to around $100,000 for every man, woman and child on the planet. What could possibly go wrong with this status quo? I just can’t imagine! The banks are soooo over regulated – your article cries for them having to deal with this burdensome regulation! They are acting so responsibly if going to the casino and using Uncle Sam’s money to gamble is responsible.

  6. Robert Bostick

    Marshall Auerback writes.”The people that are Obama’s main economic advisors right now are the architects of the crisis in the 1990s — Larry Summers, the Bob Rubin-ites — they’re all in power. The argument continues, “This is a financial crisis, and we need experts who are familiar with the markets to deal with this.” And my response has always been, “Well, look, if I go to a doctor, and he botches up my surgery by amputating the wrong arm, I’m not going to go back to him just because he has greater familiarity with my body.” But that seems to be the general consensus, the way things operate.”

  7. participant-observer-observed

    I have a different question about the Summers nomination:

    Why does Obama want him so badly, against nearly all advice, sentiment, and glass-ceiling “go screw yourself” reward for his current employee in line for the job.

    What did Summers do for Obama in the past that gets him so much devotion from Obama? It seems a bit strong for mere campaign donations.

    1. Yves Smith

      Summers is a Rubinite. Obama would not be where he is were it not for Rubin. The Ron Suskind book Confidence Men has Obama promising the Fed chair to Summers long ago (IIRC 2009).

  8. JEHR

    Here are my three financial rules which cover a small part of one page:

    1. Break up all the TBTF banks into separate non-interlocking parts– with investment in one part, deposits in the other and insurance in a third;

    2. Put all derivatives on an exchange;

    3. Eventually do away with “shadow banking.”


    Nationalize all the TBTF banks, try their executives for accounting control fraud and send them to jail;

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