The Reeducation of Larry Summers

Summers is generally said to suffer from smartest-kid-in-the-class syndrome. He has heard the criticism so many times he has a slightly wounded, misunderstood air. Unlike some people who pretend to listen, Summers says he actually does listen—but he admits to an unfortunate tendency to look bored or impatient, which he acknowledges can seem rude. Summers can be playful and charmingly irreverent. But he can also just be rude.

Everyone has a Larry story, it seems. Princeton economist Alan Blinder recalls head-on collisions with Summers in the '90s. "As everybody knows, Larry is very smart and he likes to show it," says Blinder, who served on Clinton's Council of Economic Advisers and later as Fed vice chair. "Early on we had a pretty vicious debate—which Larry won, by the way—over whether the Clinton administration should be pushing large-scale 'capital account' liberalization on countries like Korea. I thought we weren't ready for that."

After he left Washington, Summers brought a similar hubris with him to the presidency of Harvard. Summers was forced to resign in 2006 after the faculty rebelled against his brusque management style. Recklessly for a university president, he tried to play the intellectual provocateur by asking whether the paucity of women in the top ranks of mathematicians and scientists was rooted in innate gender differences.

Some of the stories go well beyond complaints about his manners. Brooksley Born, chairwoman of the Commodity Futures Trading Commission, received a call in March 1998 in her office in downtown Washington. On the other end was Deputy Treasury Secretary Summers. According to witnesses at the CFTC, Summers proceeded to dress her down, loudly and rudely. "She was ashen," recalls Born's deputy Michael Greenberger, who walked in as the call was ending. "She said, 'That was Larry Summers. He was shouting at me'." A few weeks before, Born had put out a proposal suggesting that U.S. authorities begin exploring how to regulate the vast global market in derivatives. Summers's phone call was the first sign that her humble plan had riled America's reigning economic elite.

Rubin, Fed chairman Alan Greenspan and Summers were concerned that even a hint of regulation would send all the derivatives trading overseas, costing America business. Summers bluntly insisted that Born drop her proposal, says Greenberger. According to another former CFTC official who would recount the episode only on condition of anonymity, Born was "astonished" Summers would take the position "that you shouldn't even ask questions about a market that was many, many trillions of dollars in notional value—and that none of us knew anything about."

Arthur Levitt, who was head of the SEC at the time of Born's proposal, today admits flatly that she had things right about derivatives while he, Rubin, Greenspan and Summers didn't. ("All tragedies in life are preceded by warnings," Levitt says. "We had a warning. It was from Brooksley Born. We didn't listen.") Summers told NEWSWEEK: "I believed at the time, and believe much more strongly today, that new regulations with respect to systemic risk were appropriate and necessary, but expressed the strong view of Secretary Rubin, chairman Greenspan and SEC chief Levitt that the way the CFTC was proposing to go about it was likely to be ineffective and itself imposed major risks into the market." (At the time, the Rubin Treasury Department argued against the Born proposal by maintaining that the CFTC didn't have legal jurisdiction.) Still, Summers allowed that "there's no question that with hindsight, stronger regulation would have been appropriate" before the financial crash. He added: "Large swaths of economics are going to have to be rethought on the basis of what's happened." In the past year Summers has refashioned himself as a champion of intensive financial regulation. In his last column for the Financial Times before joining the Obama administration, Summers said the pendulum "should now swing towards an enhanced role for government in saving the market system from its excesses and inadequacies."