Did Larry Summers Really Save the World?

When you think about the overall and ever-changing Fed, it's important to pay attention to every detail, especially now, while the president's decision on who will succeed chairman Ben Bernanke is postponed, writes MoneyShow's Howard R. Gold.

President Obama has postponed his decision on who will succeed Ben Bernanke as Federal Reserve chairman, with former Treasury Secretary Larry Summers, and current Fed vice chair Janet Yellen, the front runners.

Some senators and many rank-and-file Democrats back Yellen, while Summers has the strong support of White House economists and Wall Streeters. Former Deputy Treasury Secretary Roger Altman, now executive chairman of Evercore Partners, states the case that Summers is "battle-hardened" and would be a good firefighter-in-chief in future international crises:

"…Summers had the key role in the Clinton Treasury during both the Asian financial crisis and the Mexican default. And, later, in the Obama White House during the huge credit crisis in 2009."

Leaving aside Summers' close financial ties to Wall Street firms he would oversee as Fed chairman; his role in deregulating banking and derivatives in the late 1990s, and his disastrous tenure as president of Harvard, did he really "save the world," as his supporters claim? Or did his actions pave the way for something much worse?

Summers' reputation as a crisis manager was burnished in a February 1999 Time cover story, featuring him, Rubin, and then-Fed chairman Alan Greenspan as The Committee to Save the World.

I recently reread that famous story. Written by Joshua Cooper Ramo, it was a piece of staggering puffery, full of the myopic triumphalism of the late Clinton era. Here's one example:

"In late-night phone calls, in marathon meetings, and over bagels, orange juice, and quiche, these three men—Robert Rubin, Alan Greenspan, and Larry Summers—are working to stop what has become a plague of economic panic…

"What holds them together is a passion for thinking and an inextinguishable curiosity about a new economic order that is unfolding before them like an Alice in Wonderland world."

I could go on—especially the part when Rubin says "the joy of working with Greenspan lies in both the power of his intellect and the sweetness of his soul"—but I won't.

In his autobiography, The Age of Turbulence, Greenspan called the three "economic foxhole buddies" who met for long breakfast meetings each week, for more than four years.

These "foxhole buddies" spent the mid- to late 1990s going from Mexico to Thailand to Russia, bailout buckets in hand, saving the global economy from itself.

Read Howard's take on how U.S. investors got burned in emerging markets on MoneyShow.com.

But the Committee's most enduring legacy may have been the rescue of Long-Term Capital Management, which probably undermined whatever was left of moral hazard on Wall Street.

LTCM, launched by legendary Salomon Brothers trader John Meriwether (of Liar's Poker fame), included two Nobel Prize winners, Robert Merton and Myron Scholes. But as world markets seized up following the Russian currency crisis of August 1998—15 years ago, this month—the private partnership, betting heavily on risky assets and leveraged 55 to 1, found itself hemorrhaging hundreds of millions of dollars overnight.

NEXT: Panic on Wall Street

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