The burden of being Summers
By Julian Delasantellis
Sometimes attributed to the early 20th-century Harvard University president, A
Lawrence Lowell, is the quote, "There's a Harvard man on the wrong side of
every question." He ought to have known, coming down on the bonehead side of a
number of noted issues.
In 1916, Lowell opposed president Woodrow Wilson's nomination of Louis Brandeis
to the Supreme Court, wrongfully accusing the noted jurist of being a Zionist
zealot. In 1926, appointed by the Massachusetts governor to lead a fact-finding
commission in the matter of Sacco and Vanzetti, two Italian communist immigrant
laborers charged with a murder of an armored car guard, Lowell displayed none
of the doubt coursing through the community
about the fairness of the convictions to enthusiastically recommend their
eventual execution.
Lowell maintained racial segregation in the dormitories, conducted secret
witch-hunt tribunals against suspected homosexuals, and, in maintaining a quota
system that limited enrollment of Jewish students, probably caused many to die
unnecessarily in the Nazi Holocaust.
In 2002, then Harvard president Laurence Summers, now President Barack Obama's
Director of the National Economic Council, apologized for Lowell's homosexual
kangaroo courts, which led at least three of the expelled students to eventual
suicide. "I want to express our deep regret for the way this situation was
handled, as well as the anguish the students and their families must have
experienced eight decades ago. ... We are a better and more just community
today because those attitudes have changed as much as they have."
And because of the tenure of Laurence Summers, the most recent "Harvard man on
the wrong side of every question", it's a dammed poorer community as well.
Down at Harvard South, otherwise known as Washington DC, as usual under any
Democratic administration such as the current one of Barack Obama, they're
tying themselves up into conniption fits. Displaying the same political
philosophy that will soon whelp onto the world a hobbled jackass called health
reform - which is now being guaranteed to win the Kentucky Derby - the whole
issue of financial market reform, involving the enactment of necessary policies
to prevent the past three nightmarish years from ever happening again, has
boiled down to one issue - whether to anoint Federal Reserve Bank chairman Ben
Bernanke as the nation's official super regulator
The arguments are fairly clear; putting the Fed in the role of the proposed
system-wide super regulator only de jure ratifies the current de facto
situation, where dialing "911" in any financial company board or trading room
inevitably just gets picked up in Bernanke's office.
On the other side is the growing prairie fire rebellion that has basically
decided to oppose any and all policy proposals emanating from off the mighty
Potomac. As I described last month (see
Bernanke's neck on the line, Asia Times Online, November 25, 2009), an
amorphous, vague, inchoate fury regarding the structure of all the financial
system bailouts - that is to say, banks and bankers are getting all of it, with
pig farms and pig farms getting none of it - has coalesced to the point where
their local congressman believe that being a public burr on Bernanke's saddle
will anesthetize their voting constituency against all the solon's long years
of parasitic servitude to those very grossly monied interests.
But 700 kilometers northeast, at the Harvard faculty dinner parties in
Cambridge, the merlot is poured with uncertain hands. The tea-party movement is
being seen as exactly what it is, a populist, largely grass roots rebellion
against the sort of technocratic, permanent governing elite Harvard can be
relied on to send out the factory door to Washington each spring.
Why? Why the hostility, the hatred? Maybe because it's being proven again that,
underneath all the verbiage and balderdash, the elite's argument for the
legitimacy of their perennial rule rings about as tinny as one of the gasping
little chokers they use for horns on their 10-speed bikes around Harvard
Square.
In the 400 years since Harvard's establishment as the Oxford College of the New
World, 32 men and one woman (the current president, Drew Gilpin Faust) have sat
in the president's chair. Up until very recently, this was a fairly easy gig,
for all it involved was finding a sufficiently docile White Anglo-Saxon
Protestant (WASP), say an Episcopalian or Methodist coupon clipper, to
apologize to the masses for the wealth and power of privilege that they, and
most other members of the Harvard Community, enjoy.
The practical measure of this workday philosophy would be, if the Barbarian
Horde was announcing they were besieging the modern language department in
order to boil the scholars in oil, it would be the Harvard president's
responsibility to ascertain whether they wanted to serve the Italian faculty
with chianti or pinot grigio.
It was the same with money. Their ancestors may have been involved up to the
neck in trade in soaps or slaves sufficient to get the progenitors into
Harvard, and then to lubricate the greasy pole to the presidency, but usually
the presidents wanted little or nothing to do with the malachite monster .
Still, they knew that they had to raise and keep plenty of it sloshing around
in the college's operating accounts.
But when Lawrence Summers was inaugurated as Harvard's 21st president in 2001,
there was every reason to believe that the observers would see less test
cricket in favor of steel cage wrestling. Summers, then a brash 47-year-old
economist (in 1993, he was awarded the John Bates Clark medal for being the
most prominent American economist under 40 years of age), spent the last 18
months of Bill Clinton's second term as Treasury secretary; by his arrogance
and overweening pride, he gave every indication that he felt he absolutely
deserved the famous Time magazine cover proclaiming him, along with then Fed
chair Alan Greenspan and his predecessor at Treasury, Robert Rubin, as the
"Committee to Save the World".
At Harvard, the fireworks started early, Summers publicly accused
African-American Studies Professor Cornel West of missing too many classes,
proving an insufficient commitment to academics; West's allies replied that,
although he had been stuck in New York on September 11, 2001, with no egress
available from Manhattan island, he still managed to do so and be in his
classroom in Cambridge, 350 kilometers away, the next morning.
But that was all just the opening fight on the card compared with the main
event, Summers versus the feminists. At a January 14, 2005, meeting of the
National Bureau of Economic Research, Summers found a new, or, more accurately,
returned to an old, rationale for the under-representation of women in science
and technical fields - they just weren't smart enough to do the math.
"It does appear that on many, many different human attributes - height, weight,
propensity for criminality, overall IQ, mathematical ability, scientific
ability - there is relatively clear evidence that whatever the difference in
means - which can be debated - there is a difference in the standard deviation,
and variability of a male and a female population."
Hiding in behind the statistics lingo is the case that women lack the "IQ,
mathematical ability, and scientific ability" to do advanced math; in
diversity-obsessed Cambridge, with Massachusetts Institute of Technology just a
subway stop down the road just full of world-class female math scholars, this
was the same as bringing a side of barbecue beef into a meeting of violent
animal rights activists.
Summers barely survived a university-wide no-confidence vote, but he knew he
had irretrievably poisoned his place at Harvard, and he resigned the presidency
on February 21, 2006. Former president Derek Bok took over on an interim
appointment, but he still left the investments on Summers' autopilot.
Like doves returning to dovecotes, most of Clinton's economic team had, after
George W Bush took over at the White House in 2001, returned to
well-remunerated positions on Wall Street to await the return of the Democrats'
dominion in Washington. Summers, who had moved to Harvard, now accepted over $5
million a year to work one day a week for the DE Shaw hedge fund.
In much the same way that we describe a rich person as eccentric while
describing a poor person displaying the same questionable behavior as crazy, we
might accept the unpleasant presence and experience of a loud-mouth jerk who
can actually apply his brilliance to practical aims, like making money, while
dismissing the loud-mouth jerk with average skills as, yes, just a loud-mouth
jerk. Recently, we've learned just how firmly Summers belongs in the latter
camp.
In many ways, private colleges and university budgets are run very similarly to
family budgets. Most families will have a checking account, from which they
fund the daily necessities of life such as buying groceries and cashing
paychecks, and another, more long-term investment vehicle such as an Individual
Retirement Account (IRA) or 401k. For colleges, the equivalents are a
short-term cash operating account, and their long-term investment accounts,
called the endowment.
It is the endowments that usually earn the bulk of the press ink. Designed as
the institution's long-term capital funding program, it is the place, usually
funded from alumni contributions that can range from a couple of bucks a month
into the billions, where college presidents can compare each other like
adolescent schoolboys in gym class - the endowment measures show how studly
each college is endowed.
Much like 401ks and IRAs, investment in endowments is handled mostly by
professional investment managers; Harvard was an exception to this, with its
in-house endowment management subsidiary, the Harvard Management Company. Its
chairman from 2005-2007, Mohamed El-Erian, wrote the recent When Markets Collide
- Investment Strategies for the Age of Global Economic Change" which I
reviewed earlier this year for this site. (See
Show me the exit! Asia Times Online, February 21, 2009.)
Most college presidents, confused by the gobbledygook and jargon of modern
economics and finance, usually give the investment side of the business a wide
berth, letting the investment managers do what they do best - investment
management - while devoting themselves to what they do best, such as
translating medieval poetry from nursemaids in Alsace
Not Lawrence Summers. From day one of his tenure he was a constant presence in
the money management side of the business. His counsel was always the same -
"more". More involvement in leverage, in selling off staid and low volatility
plays in favor of high volatility "beta" plays, in risky investments like the
Triple-A rated, super-leveraged lies then just beginning to be spun out with
passion by the looms of Wall Street's great houses of mortgage finance.
Going back to his service as one of Bill Clinton's Commanders of the Kingdom,
one might see the seeds of Summers' hubris. The years 2001-02 saw the US
economy suffering the sniffles of a very minor economic pullback brought on by
the bursting of the dot-com bubble, with a little added downward shove from the
September 11, 2001 attacks.
Still, Summers, blinded by the thousand shining suns of his arrogance, must
have continued to believe that his Clinton comrades had, in fact, discovered
the alchemist's dream, the ability to promote technology as the spur for the
productivity growth that would finance almost limitless economic expansion for
all the nation's of the world, for as far as the eye could see, and for as long
as the mind could count. The popular name for this strong private markets/weak
government interference strategy was the "Washington Consensus", and they made
dammed sure you knew who was in charge in Washington when it was adopted.
As we all know, for a while it worked - the value of university endowments
surged along with the bubble economy from the middle of the decade. As the one
true motto of the arrogant must be that nothing succeeds like excess, Summers
decided to take on even more risk. He decided to dedicate most of the balances
of the general day-to-day operating fund to Wall Street turbofinance.
Why was this bad? Well, Investopedia.com's online dictionary defines
"diversification" as "A risk management technique that mixes a wide variety of
investments within a portfolio. The rationale behind this technique contends
that a portfolio of different kinds of investments will, on average, yield
higher returns and pose a lower risk than any individual investment found
within the portfolio."
With the crash in world stock markets that commenced in 2007, I'm sure that
there are many round-the-world trips not being taken by retirees, or additions
to houses not being built. But, unless there was a job loss involved, all this
should not have meant that people are going hungry, or going cold from lack of
fuel, due to losses in stock accounts. People should not have bet the mortgage
or electric bill on credit default swaps or collateralized debt obligations -
as Lawrence Summers did.
Now that the dust is settling, the damages are being counted up, to the tune of
an average 17% loss among major endowment funds.
But did the penetrating perspicacity of Summers' canny countenance lead to
better investment returns? Far from it, Harvard's endowment was down a full 30%
peak to trough. Worse than that was a similar haircut in the cash accounts,
which, if the university had just kept in conservative money market or
short-term bond investments, should have barely depreciated at all. This
necessitated Harvard going into the chaotic non-government guaranteed money
markets of the past year to borrow the difference, about $2 billion, as well as
institute an emergency round of layoffs and cutbacks.
The obvious easy lesson to be learned here is, even after the markets careen
from side to side and top to bottom, learning the rules of proper
diversification is critical in order to keep even novice investors safe and
warm and dry as others are foundering.
This does not mean diversifying by owning the same 10 large mutual funds, all
owning the same stocks, that everyone else does. It does not mean owning 10
investment properties all within walking distance of each other. It does not
mean owning oil at every stage of its production, from companies that pump it
out of the ground to those that sell it at your local gas station.
What it does mean is that structuring an investment portfolio that possesses
true diversity, from where the companies are headquartered to what
socio-economic slice of the consumer market your companies' products are
targeted to, and everything in between, is perhaps the only way to survive
one's whole working life in the markets.
Sure, the diversified may have watched with some degree of envy as the
all-in-the-housing-bubble crowd blew by them right up to the top; then again,
the diversified probably still have their house and car and dreams - much in
contrast to the high riskers, still trying to figure out how to impress a girl
in a singles' bar half his age with a bus pass.
But a more interesting question exists. Does the sheer, gargantuan
momentousness of the hubris inherent to his character fundamentally disqualify
Summers from public service?
A recent Boston Globe article on Harvard's investments during the Summers era
notes that, even as he was ramping up both portfolios to assume more risk, he
had to face down others who objected to the move on the grounds of its
prudence, from El-Erian and others.
Of course, Summers ignored these. To him, these calls must have been seen not
as a difference over investment strategy, but as a comprehensive refutation of
the peace and prosperity he and his Olympian pantheon brought to the markets
through the sheer, Herculean impact of their brilliance in the 1990s.
Most of us are accursed, in that we must slog through our pedestrian lives
without the liberating force of Summers' brilliance. Can he understand us, our
travails and tribulations, or the joys and jubilations, of our lives, or is
that sort of like me imagining what life is like for my cats? If every White
House policy discussion in which Summers participates turns into a death match
between Summers' admiring acolytes and his treasonous detractors, you can see
why so little has been accomplished during the first year of the Obama
administration.
In 1692, another former Harvard president, the Reverend Increase Mather, asked
this rhetorical question as the Salem Witch Trials consumed the Massachusetts
Bay Colony in controversy and suspicion. Implying that only God knows who is
truly evil and who is virtuous, Mather asked, "O what makes the difference
between the devils in hell and the angels of heaven?"
Wait a minute - somebody's raising their hand, saying they know as much as God.
"Yes, Mr Summers?"
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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