|Should Larry Summers replace Ben Bernanke?
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We interrupt our regular programming to speak out in favor of Larry Summers; he is the perfect candidate to replace Ben Bernanke.
Poor Larry... The critics are on his case. One called him a "high IQ moron."
No one likes to kick a man when he's down. Unless the man on the ground is Mr. Summers...
More on that in a minute...
First, a quick look at the markets. As expected, the Bernanke Fed is fully, squarely 1,000% committed to EZ money. Why? Because huge public policy disasters do not stop until they've gone all the way to the end. Like a real bear market...a forest fire...or a love affair...it has to burn itself out.
Look, as we've been explaining over the last few days, in 1971 the US administration took the world's money in a new direction. It went back to credit-based money ...rather than money that based on bullion.
Credit based money allowed an almost infinite stretch in the amount of, well, credit. From 150% before the switch to over 350% today...debt as a percentage of GDP has gone wild.
Gold is limited. Credit is not. With this new credit card in their pockets people could spend money that they hadn't made yet...money they may never make. They realized, too, that they could spend the earnings of their children and grandchildren far into the future.
A credit based system works well in small, primitive societies. In some tribes studied by anthropologists, credits can be extremely subtle and extensive. A man can make a mistake or a decision. All of his descendants, for generations, may bear the burden of it.
But in a small tribe, people can keep track of credits and debits. They know the creditors. They know the debtors. They know what a piece of meat is worth...or a bride.
But what's a dollar worth? This is a credit-based system. But no one is too sure what the credits are worth. You say you have a US T-bond that matures in 2020? What is that worth? You say it will fund your retirement?
Are you sure?
Or, the Argentines have promised to make a payment on a US dollar bond in 2015. That obligation is part of a sophisticated derivative instrument...which is one of the key assets of Hedge Fund A. It borrowed the money to buy the derivative from Bank B. Now, Hedge Fund A's debt to Bank B is a critical part of Bank B's capital. What happens if the Argentines don't pay?
The collateral in a credit system is debt. And when debt goes bad...the whole system cracks up. The only thing that can stop the crack-up is a gush of more credit. That's what happened in 2008-2009. But this kind of fix is only temporary...and always disastrous. Because it just stretches out the web of un-sustainable credit connections even further.
And you...holder of this credit-based money...you never know what your holdings are worth...or when they might become worthless.
That's why ancient man, at the dawn of civilization, came up with a better idea: money based on precious metal. When you have a gold coin in your hand, you don't care if Argentina pays or not. Your dimwit neighbor can't pay his mortgage? Too bad for him! Your government can't keep the money flowing to zombies? Too bad for the zombies!
But let's leave that subject. Let's turn to Larry Summers...former president of Harvard...former US Treasury Secretary...and now candidate to replace Ben Shlomo Bernanke as the nation's number one money man.
On the surface, Mr. Summers has the right qualifications. He has no idea how an economy really works. Nor does he have any interest in finding out. He has never...as far as we were able to determine...had a job in the business or commercial world. Instead, he has passed his entire career giving bad advice in academia or government.
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Here, Robert Scheer, in The Nation criticized Summers for the wrong reasons:
Former US Treasury Secretary Lawrence Summers, the guy who tops the list of those responsible for sabotaging the world's economy, is lobbying to be the next chairman of the Federal Reserve. But no, it makes perfect sense, since Summers has long succeeded spectacularly by failing.
Summers didn't understand how a credit-based economy works. In fact, he didn't seem to understand interest rates. Bloomburg recalls:
Summers was one of the key players during the Clinton years in creating the mortgage derivative bubble that ended up costing tens of millions of Americans their homes and life savings. This is the genius who, as Clinton's Treasury secretary, supported the banking lobby's successful effort to make the sale of unregulated bundles of mortgage securities and the phony insurance swaps that backed them perfectly legal and totally unmonitored. Those are the toxic bundles that the Federal Reserve is still unloading from the banks at a cost of trillions of dollars.
Summers opined that "the parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies."
During the financial crisis, Harvard lost nearly $1 billion because of some unusual and ill-judged interest rate swaps that Summers implemented in the early 2000s during his troubled tenure as the university's president.
Hey, anyone can make a mistake. But what sets Summers apart is his readiness to make mistakes on a colossal scale, with other people's money.
Interest rate swaps allow borrowers to lock in a fixed interest rate on floating-rate debt, which can be good to hedge against short-term uncertainty. The problem with Harvard was that Summers wanted to lock in interest rates for money that the university hadn't actually borrowed and wasn't planning on borrowing for a very long time.
There aren't a lot of ways to interpret this exotic instrument except as a bet that the future level of interest rates would be higher than the market pricing implied at the time. That bet was wrong, and Harvard lost a billion dollars. Anonymous finance blogger Epicurean Dealmaker puts it well:
"I have rarely encountered a corporate client who feels confident enough about both their absolute funding needs and current and impending market conditions to enter into a forward swap starting more than nine months into the future. Entering into a forward start swap for debt you do not intend to issue up to 20 years in the future sounds like either rank hubris or free money for Wall Street swap desks."
But as far as we can see that gives him all the qualifications you need to be America's top banker. A high IQ moron is just what you need for this kind of work. You have to be smart enough to talk the talk, pretending that you know what you're talking about. But you have to be stupid enough to believe it. You must think you really can improve the financial decisions of 310 million people. And you have to be arrogant enough contradict all of them...putting your own asinine plans into action even though they will almost certainly bankrupt the entire nation.
Summers is the man for the job!
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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