For the past two years, former Treasury secretary Larry Summers has begged, berated, and bullied federal policy-makers to suck as much wealth as possible, as fast as possible, out of the economy. He just never meant, you know, his wealth or his friends’ wealth.
When Silicon Valley Bank (SVB), which caters to venture capitalists and tech start-ups, collapsed last week, Summers rushed to protect his professional colleagues and fellow elites from the consequences of policies he’s pushed for. In Summers’s eyes, when tech moguls make obvious mistakes, it’s catastrophic for them to face consequences for their actions. But when workers want debt relief, sick days, or higher wages, they’re destroying the whole economy with their greed.
Since 2021, Summers has consistently argued that our present bout of inflation is a result of American workers’ enjoying too-high wages and too-generous government benefits from the Covid-19 relief bills. Summers claims that this aid caused money to circulate throughout the economy faster than companies could produce goods and services to purchase. In turn, he says, this caused the price spikes we’re enduring today, which can be lowered only by making workers poorer and more desperate for work.
To achieve this goal, Summers has taken every opportunity to focus government policy on emptying the wallets of the working class. On July 22, he castigated the moratorium on student debt payments, because every dollar that doesn’t go to paying loans might go to groceries, clothes, or other consumer goods. When railroad workers threatened to strike for paid sick leave last September, he told the Biden administration “to pay attention to holding costs down rather than rewarding workers,” and added, “I worry about provisions that seek to enshrine high wages, for example, in those who are producing goods related to the environment.” He showed particular anger at the idea of reshoring manufacturing jobs. (Summers engineered many of the free-trade deals in the 1990s, which hollowed out American manufacturing in the first place.)
He found a giddy audience in Fed Chairman Jerome Powell. After his reconfirmation by the Senate last year, Powell began rapidly ratcheting up interest rates to slow down business lending and suck more money out of the economy. It takes months for economic actors to feel the effects of interest rate hikes, yet Summers has screamed for Powell to keep up the pain, taunting that stopping early risked the Fed’s “credibility.”
Last Thursday, the country saw the biggest visible impact of these interest rate hikes thus far. SVB collapsed in a matter of days after a classic bank run. In the months before the Fed started its rate hikes, SVB had loaded up on low-rate Treasury bonds. As the Fed raised rates, SVB’s bonds became worth a whole lot less. Then, last week, a lot of SVB’s clients asked to withdraw cash all at once, and the bank couldn’t raise enough dollars from selling its les-valuable bonds. This triggered a Great Depression–style run: SVB asked investors for more cash; investors and clients took that as a sign that the bank was insolvent; they all tried to pull their money out at once, and the whole bank folded.
Silvergate Bank, a separate bank with ties to the cryptocurrency industry, went under one day earlier. Silvergate lent directly to ultra-risky crypto companies and faced the same interest-rate shocks as SVB. The panic from Silvergate’s collapse likely fed into the run at SVB.
Within hours, the economic media was asking Summers for his take. The logically consistent thing for him would have been to argue that SVB and Silvergate depositors—mostly venture capitalists, tech bros, and Silicon Valley bajillionaires—ought to follow the typical process for these things: accept that they risked this happening by putting massive uninsured accounts at one bank.
But Summers argued precisely the opposite. “What is absolutely imperative is that however this gets resolved, depositors be paid back and paid back in full. I don’t see anything in any aspect of this situation that would be a basis for that being called into question,” he said on Friday morning. Later that day, he reasserted that “the consequences really will be quite severe for our innovation system” if depositors can’t get all of their cash on Monday morning.
Moreover, Summers claimed that it was inappropriate to even question the wisdom of bailing out the techies. “I don’t think this is a time for moral hazard lectures, or for talk about teaching people lessons. We have enough strains and challenges in the economy without adding the collateral consequences of a breakdown in an important sector of the economy,” Summers said.
But this is actually precisely the time for moral hazard lectures. Summers’s actions indicate that he thinks only certain classes of people ought to be on the hook for those “strains and challenges in the economy.” Namely, those greedy working-class sponges have to get cut back down to size, but the venture capitalists and start-up founders of the “innovation system” deserve every break they can get.
What can explain this hypocrisy? Class solidarity, for one. But there’s also the very real question of how much exposure Summers actually has to a financial crisis in the start-up world.
For nearly a decade, Summers has advised and partnered with so-called “fintech” (financial technology) startups and their venture capital funders. He was on the board of LendingClub, a digital small-dollar lender that buckled amid scandal, from 2012 to 2018. He is currently on the board of the payments company Block and the digital high-interest lender Afterpay, and advises the online used-car market Beepi (whose mission, he said, was “profoundly important”). And he is part of the “network” at NYCA Partners, a fintech-focused venture capital firm that claims that its well-connected allies can help its portfolio firms find big clients.
But Summers has shown particular interest in cryptocurrency. In 2016, he became an adviser to the Bitcoin trading conglomerate Digital Currency Group (DCG), a decision that one longtime crypto journalist later credited as a key moment for legitimating cryptocurrency in the eyes of regulators, investors, academics, and the media. DCG invested in Silvergate Bank last September, just before DCG itself started to tank amid a broader crypto downturn. He also advises Atlas Merchant Capital, which tried to outmaneuver disclosure rules and take the crypto company Circle public. Circle’s value plummeted over the weekend, since it had billions stowed in SVB. I wouldn’t be surprised if more connections emerge in the coming weeks, or if Summers has relationships with other crypto and fintech firms which simply don’t advertise it.
Is it possible Summers’s business partners asked him to use his political and media clout to secure bailouts for these banks’ depositors? Perhaps he simply saw how the whole fintech and crypto industries could go belly-up if the feds didn’t bail out these banks. Perhaps both. These are questions that enterprising reporters ought to be asking one of the most quoted figures in economic punditry today—indeed, that they ought to have been asking years ago.
One of the arguments for raising interest rates is that tightening credit means that unworthy borrowers won’t get money that they would have wasted anyway. The United States determines consumer creditworthiness through racist, classist, bigoted systems. But some business borrowers in a time of loose money are, indeed, pure fat: unproductive, mismanaged companies that lead to speculative bubbles and don’t generate anything of value for the rest of the world.
The clearest examples of this over the past few years have all been in the tech start-up scene, from Theranos to WeWork to the absurd boondoggle that is cryptocurrency. Certainly not every business client at SVB or Silvergate was a useless company. But the whole venture capital industry, who were SVB’s primary clients, thrives on hype unrelated to fundamentals. A 2021 analysis found that over 90 percent of tech companies valued over $1 billion lost money in the previous two years, and over half of those losing companies had been around for over 10 years.
Odds are that dumb, unproductive firms were at least overrepresented in the companies affected by these banks’ collapse. These are exactly the firms that Summers would want to see fail if he were honest about his inflation arguments: They’re just there to spend other people’s money, not to create actually useful products and services.
The FDIC could override its $250,000 threshold for guaranteed funds only if failure to do so could cause a total economic collapse—if it posed a “systemic risk” to the financial system. The depositors ginned up a panic. They claimed that if they weren’t made whole, every business in the country would make huge withdrawals from their bank accounts, triggering a slew of bank runs. This scenario would be possible only if every other business in the country ewer as ignorant about basic FDIC insurance rules as the techies were. Summers himself told Bloomberg on Friday, “Right now it looks like this is not a broad, systemic issue.”
But Summers wanted the depositors bailed out. On Sunday, he tweeted, “It is a clear imperative that all #SVB segregated assets and uninsured deposits be fully backed by Monday morning.” Assuming that the former Treasury secretary and 2008 crisis guru knows how deposit insurance works, he should know what he was saying: that the whole financial system might collapse if the venture capitalists and startup CEOs couldn’t get all of their money guaranteed by Monday. One of the most respected economists in mainstream Democratic politics was helping his business partners deliberately induce a banking panic for their own material interests.
Summers is perhaps the most prominent neoliberal free-market capitalist of the past few decades. More than any other Democrat, he claims to believe that markets engender discipline: that they force business leaders to run companies well or face the consequences, and they let everyone compete fairly instead of allowing a lucky few to exploit their political connections for personal gain.
This same man turned around and demanded that the government give billions of dollars to his favored members of the wealthy and powerful class on essentially false grounds. He helped executives who made an obvious and preventable error to face zero consequences for their poor financial management. And he did it all while still demanding that the working class immediately become poorer and more desperate so that prices start to drop.
All of this indicates something quite simple—indeed, something progressives have known about Summers for decades. He isn’t an independent observer of economic trends, or a believer in market discipline. He’s a hack on the take, and an apologist for the class that pays him. He may have had fancier job titles, but he’s essentially Jim Cramer for people who think they’re too smart for Jim Cramer.
There are many lessons to learn and many policies to reevaluate in the wake of the SVB collapse. Policy-makers are already working to reverse the 2018 Crapo bill, which erased banking regulations that likely could have prevented this whole affair. (It’s a perfect denouement for the saga of SVB President Greg Becker, who personally told Congress in 2018 to kill the precise regulations that could have saved his company.)
But one of the lessons ought to be clear: Do not trust Larry Summers. It’s a lesson the ruling elite have failed and failed to learn for decades. They will continue to fail for as long as they need him to justify their greed to policy-makers—and to themselves.