Job, the 2010 documentary directed by
Charles Ferguson, takes a closer look at what brought about the financial
meltdown and shows how the study of economics has been corrupted.
This is the section of the documentary about the Subversion of Economics.
Charles Ferguson, the director of Inside Job, explains the Subversion
Larry Summers and the
Subversion of Economics
By Charles Ferguson
The Obama administration
recently announced that Larry Summers is resigning as director of the
National Economic Council and will return to Harvard early next
year. His imminent departure raises several questions: Who will replace him?
What will he do next? But more important, it’s a chance to consider the
hugely damaging conflicts of interest of the senior academic economists who
move among universities, government, and banking.
unquestionably brilliant [was Madoff brilliant?], as all
who have dealt with him, including myself, quickly realize. And yet rarely
has one individual embodied so much of what is wrong with economics, with
academe, and indeed with the American economy. For the past two years, I have
immersed myself in those worlds in order to make a film,
Inside Job, that takes a sweeping look at the financial crisis. And
I found Summers everywhere I turned.
Consider: As a rising economist at Harvard and at the World Bank,
Summers argued for privatization and deregulation in many domains, including
finance. Later, as deputy secretary of the treasury and then
treasury secretary in the Clinton administration, he implemented
those policies. Summers oversaw passage of the Gramm-Leach-Bliley
Act, which repealed Glass-Steagall, permitted the previously illegal merger
that created Citigroup, and allowed further consolidation in the financial
sector. He also successfully fought attempts by Brooksley Born,
chair of the Commodity Futures Trading Commission in the Clinton
administration, to regulate the financial derivatives that
would cause so much damage in the housing bubble and the 2008 economic
crisis. He then oversaw passage of the Commodity Futures Modernization Act,
which banned all regulation of derivatives, including exempting them from
state antigambling laws.
After Summers left the Clinton administration, his candidacy for
president of Harvard was championed by his mentor Robert Rubin, a former CEO
of Goldman Sachs, who was his boss and predecessor as treasury
secretary. Rubin, after leaving the Treasury Department—where he
championed the law that made Citigroup’s creation legal—became
both vice chairman of Citigroup and a powerful member of Harvard’s
Over the past decade, Summers continued to advocate financial
deregulation, both as president of Harvard and as a University
Professor after being forced out of the presidency. During this time, Summers
became wealthy through consulting and speaking engagements with financial
firms. Between 2001 and his entry into the Obama administration, he
made more than $20-million from the financial-services industry. (His
2009 federal financial-disclosure form listed his net worth as $17-million to
Summers remained close to Rubin and to Alan Greenspan, a former
chairman of the Federal Reserve. When other economists began warning of
abuses and systemic risk in the financial system deriving from the environment
that Summers, Greenspan, and Rubin had created, Summers mocked and
dismissed those warnings. In 2005, at the annual Jackson Hole, Wyo.,
conference of the world’s leading central bankers, the chief economist
of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first
prominent warning of the coming crisis. Rajan pointed out that the
structure of financial-sector compensation, in combination with
complex financial products, gave bankers huge cash incentives to take
risks with other people’s money, while imposing no penalties for any
subsequent losses. Rajan warned that this bonus culture rewarded
bankers for actions that could destroy their own institutions, or even the
entire system, and that this could generate a "full-blown financial
crisis" and a "catastrophic meltdown."
When Rajan finished speaking, Summers rose up from the audience and
attacked him, calling him a "Luddite," dismissing his concerns,
and warning that increased regulation would reduce the productivity of the
financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also
in the audience.)
Soon after that, Summers lost his job as president of Harvard after
suggesting that women might be innately inferior to men at scientific work.
In another part of the same speech, he had used laissez-faire
economic theory to argue that discrimination was unlikely to be a major cause
of women’s underrepresentation in either science or business. After
all, he argued, if discrimination existed, then others, seeking a competitive
advantage, would have access to a superior work force, causing those who
discriminate to fail in the marketplace. It appeared that Summers had denied
even the possibility of decades, indeed centuries, of racial, gender, and
other discrimination in America and other societies. After the resulting
outcry forced him to resign, Summers remained at Harvard as a faculty member,
and he accelerated his financial-sector activities, receiving $135,000
for one speech at Goldman Sachs.
Then, after the 2008 financial crisis and its consequent recession, Summers
was placed in charge of coordinating U.S. economic policy, deftly
marginalizing others who challenged him. Under the stewardship of
Summers, Geithner, and Bernanke, the Obama administration adopted policies as
favorable toward the financial sector as those of the Clinton and Bush
administrations—quite a feat. Never once has Summers
publicly apologized or admitted any responsibility for causing the crisis.
And NOW HARVARD IS WELCOMING HIM BACK.
Summers is unique but not alone. By now we are all familiar with the role of
lobbying and campaign contributions, and with the revolving door between
industry and government. What few Americans realize is that the
revolving door is now a three-way intersection. Summers’s
career is the result of an extraordinary and underappreciated scandal in
American society: the convergence of academic economics, Wall Street, and
Starting in the 1980s, and heavily influenced by laissez-faire economics, the
United States began deregulating financial services. Shortly thereafter, America
began to experience financial crises for the first time since the Great
Depression. The first one arose from the savings-and-loan and junk-bond
scandals of the 1980s; then came the dot-com bubble of the late 1990s, the
Asian financial crisis; the collapse of Long Term Capital Management, in
1998; Enron; and then the housing bubble, which led to the global financial
crisis. Yet through the entire period, the U.S. financial sector grew larger,
more powerful, and enormously more profitable. By 2006, financial services
accounted for 40 percent of total American corporate profits. In large part,
this was because the financial sector was corrupting the political system.
But IT WAS ALSO SUBVERTING ECONOMICS.
OVER THE PAST 30 YEARS, THE ECONOMICS PROFESSION—in
economics departments, and in business, public policy, and law schools— HAS BECOME SO COMPROMISED BY
CONFLICTS OF INTEREST THAT IT NOW FUNCTIONS ALMOST AS A SUPPORT GROUP FOR
FINANCIAL SERVICES and other industries whose profits depend heavily
on government policy. The route to the 2008 financial crisis, and the
economic problems that still plague us, runs straight through the economics
discipline. And it’s due not just to ideology; it’s also about
straightforward, old-fashioned money.
PROMINENT ACADEMIC ECONOMISTS (and sometimes also professors of
law and public policy) ARE PAID BY COMPANIES AND INTEREST GROUPS TO
TESTIFY BEFORE CONGRESS, TO WRITE PAPERS, TO GIVE SPEECHES, to
participate in conferences, to serve on boards of directors, to write briefs
in regulatory proceedings, to defend companies in antitrust cases, and, of
course, to lobby. This is now, literally, a
billion-dollar industry. The Law and Economics Consulting Group,
started 22 years ago by professors at the University of California at
Berkeley (David Teece in the business school, Thomas Jorde in the law school,
and the economists Richard Gilbert and Gordon Rausser), is now a $300-million
publicly held company. Others specializing in the sale (or
rental) of academic expertise include Competition Policy (now
Compass Lexecon), started by Richard Gilbert and Daniel Rubinfeld, both of
whom served as chief economist of the Justice Department’s Antitrust
Division in the Clinton administration; the Analysis Group; and Charles
In my film you will see many famous economists looking very
uncomfortable when confronted with their financial-sector activities;
others appear only on archival video, because they declined to be
interviewed. You’ll hear from:
Martin Feldstein, a Harvard professor, a major architect of
deregulation in the Reagan administration, president for 30 years of the
National Bureau of Economic Research, and for 20 years on the boards of
directors of both AIG, which paid him more than $6-million, and AIG Financial
Products, whose derivatives deals destroyed the company. Feldstein
has written several hundred papers, on many subjects; none of them address
the dangers of unregulated financial derivatives or financial-industry
Glenn Hubbard, chairman of the Council of Economic Advisers in the
first George W. Bush administration, dean of Columbia Business School,
adviser to many financial firms, on the board of Metropolitan Life ($250,000
per year), and formerly on the board of Capmark, a major commercial
mortgage lender, from which he resigned shortly before its bankruptcy, in
2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief
economist of Goldman Sachs, praising securitization and derivatives
as improving the stability of both financial markets and the wider economy.
Frederic Mishkin, a professor at the Columbia Business School, and a
member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000
by the Icelandic Chamber of Commerce to write a paper praising its
regulatory and banking systems, two years before the Icelandic
banks’ Ponzi scheme collapsed, causing $100-billion in losses.
His 2006 federal financial-disclosure form listed his net worth as $6-million
Laura Tyson, a professor at Berkeley, director of the National
Economic Council in the Clinton administration, and also on the Board of
Directors of Morgan Stanley, which pays her $350,000 per year.
Richard Portes, a professor at London Business School and
founding director of the British Centre for Economic Policy Research, paid
by the Icelandic Chamber of Commerce to write a report praising
Iceland’s financial system in 2007, only one year before it collapsed.
And John Campbell, chairman of Harvard’s economics department, WHO
FINDS IT VERY DIFFICULT TO EXPLAIN WHY CONFLICTS OF INTEREST IN ECONOMICS
SHOULD NOT CONCERN US.
But could he be right? Are these professors simply being paid to say what
they would otherwise say anyway? Unlikely. Mishkin and Portes showed no
interest whatever in Iceland until they were paid to do so, and they
got it totally wrong. Nor do all these professors seem to make policy
statements contrary to the financial interests of their clients. Even more
telling, THEY UNIFORMLY OPPOSE DISCLOSURE OF THEIR FINANCIAL
The universities avert their eyes and deliberately
don’t require faculty members either to disclose their conflicts of
interest or to report their outside income. As you can imagine, when
Larry Summers was president of Harvard, he didn’t work too hard to
Now, however, as the national recovery is faltering, Summers is being eased
out while Harvard is welcoming him back. How will the academic
world receive him? The simple answer: Better than he deserves.
While making my film, we wrote to the presidents and provosts of Harvard,
Columbia, and other universities with detailed questions about their
conflict-of-interest policies, requesting interviews about the subject. None
of them replied, except to refer us to their Web sites.
Charles Ferguson is director of the new documentary Inside Job …
My reaction: I have known for a long time that the
study economics was completely corrupt.
Charles Ferguson’s Inside Job confirms this corruption and does a great
job of explaining how it happened.
Eric de Carbonnet