Cantwell to Summers: ‘Do a mea culpa’ if you want to chair the Fed

By:  Seattle Post-Intelligencer – Joel Connelly
Source: Seattle PI

Lawrence Summers will need to “do a mea culpa” and admit his role in deregulatory mistakes that helped cause the Great Recession if the Washington, D.C., financial mandarin wants to be chairman of the Federal Reserve Board, U.S. Sen. Maria Cantwell, D-Wash., said in Seattle on Thursday.

Cantwell sits on the Senate Finance Committee, which must approve any nomination for Fed chairman, and is frankly suspicious of the former secretary of the treasury. “Nobody is going to get my support unless owning up to mistakes of the past,” she said after a Seattle news conference.

Sen. Patty Murray, D-Wash., at the same news conference, appeared to back away from an earlier declaration that Janet Yellen should be the new Fed chair.

Yellen is currently vice chairman of the Federal Reserve Board, a former governor of the Federal Reserve Bank of San Francisco, and headed the Council of Economic Advisers in the Clinton administration.

President Obama has strongly defended Summers, who was an architect of bank deregulation in the 1990s.

The Wall Street Journal reported on Wednesday that the White House is signaling dissatisfaction with Senators who oppose his nomination. Obama is expected to make his pick after Labor Day.

In Washington, D.C., last month, Murray said: ”Janet Yellen has impressed a lot of us in the Senate with her experience and her focus on getting workers back on the job. And she would certainly be a great and historic choice.” (Yellen would be the first woman to head the Fed.)

On Thursday, however, Murray declined to say whom she supports for the job, say only that “there are a number of really great people” possible for the key financial posting.

She also dodged a question about whether the White House is dissatisfied with Democratic senators who have been supporting Yellen. It was not one of Murray’s stronger moments.

Not so Cantwell. She argued that the Federal Reserve Board needs to give Wall Street greater scrutiny and not adopt the let-the-good-times-roll attitude that prevailed under the long Fed chairmanship of Alan Greenspan.

“We need to usher in a new day,” she said. “We need to usher in some daylight.”

Cantwell is the second Northwest senator to be outspoken on the question of Lawrence Summers. Summers is a key figure among the Washington, D.C., insiders portrayed in the new bestseller “This Town” by Mark Leibovich.  He was memorably portrayed as Harvard University’s overbearing president in “The Social Network.”

“I have serious doubts that Lawrence Summers, who as a committed deregulator, drove policies that set the stage for the Great Recession is the right person for a key regulatory position,” Sen. Jeff Merkley, D-Oregon, recently told the New York Times.

In 1999, at the Treasury Department, Summers signed off on the Gramm-Leach -Bliley Act. It repealed the Depression-era Glass Steagal Act, which had mandated separation between America’s investment banks and commercial banks.

“With this bill, the American financial system takes a major step toward the 21st century,” Summers aid at the time.

The deregulation measure proved an invitation to excess. In a widely quoted tweet, singer Bette Middler said of Summers: “The architect of bank deregulation, which turned straightlaced banks into casinos and bankers into pimps, may be the next Head Fed: Summers.”

Cantwell has a particular bone to pick with Summers. “I will be very focused on how we get a new approach on regulating derivatives,” she said. ”We have to have a policeman on the beat and we need to have a (Fed chairman) who is much more aggressive.”

Derivatives are financial instruments with no intrinsic value, but which derive value from the value of an underlying asset, index or interest rate. Derivative transactions helped drive Wall Street in the early 21st century, defined in such terms as swaps, debt obligations, futures, caps, swaps, floors, collars and combinations.

Cantwell has become a specialist in this complex subject and fought for oversight as a provision of the 2010 Wall Street reform legislation, the Dodd-Frank Act.

ln the late 1990′s, the head of the Commodity Futures Trading Commission, Brooksley Born, wanted a public examination of derivatives. Summers worked with his then-boss, Treasury Secretary Robert Rubin, and with Greenspan, to head it off.

Michael Greenberger, a University of Maryland law professor — who worked for Born — recently related in the Washington Post a phone call received from Summers:  “I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II.”

The rest, as they say, was history: Deregulation gave America the worst financial crisis since the Great Depression.

“He (Summers) has never said they made mistakes,” Cantwell said.

Cantwell is worried, however, that President Obama might use a Summers Fed nomination to court Senate Republicans, and isolate Democratic critics.

“My fear is that this will galvanize the Republicans (in support),” she said.

After all, the authors of bank deregulation — Sen. Phil Gramm of Texas, and Reps. Thomas Bliley of Virginia and Jim Leach of Iowa — were all Republicans, and the legislation was approved by a Republican-controlled Congress. It was signed into law by President Clinton, cheered on by Lawrence Summers.