Could a Larry Summers Gaff Send Markets Tumbling?

Larry Summers has a potentially serious problem.† He has shown that sometimes he canít†tell how his remarks will be received by the public. This is dangerous in someone who could be the next U.S. Federal Reserve Board Chair.

Markets can move dramatically on the interpretation of the slightest comment of a Fed Chair. That means the person in the job needs perfect pitch. It has been shown repeatedly that a comment from the Fed can cause a sharp drop in stock prices erases billions in assets in the U.S. and more when world markets inevitably follow the US market down. The numbers are staggering.

Summers is pretty handy with a flippant remark. Summers has demonstrated on more than one occasion that he will say things he probably should have known would get him into trouble. Comments that someone with better pitch would have noticed were off-key. Summers has described his remarks on one occasion as sardonic. The ability to be sardonic or ďscornfully or cynically mockingĒ is just something you look for in a Fed Chair.

Take for example a memo he signed in 1991 when he was Chief Economist at the World Bank. Summers signed a memo about encouraging moving polluting industries to developing countries.† Summers has since said that the memo was meant to be sarcastic or better yet sardonic.

Letís give him the benefit of the doubt and say he meant the comments as sarcasm, and were in jest. The difficulty is that when the Chief Economist at the World Bank writes a position you donít expect stand-up comedy. †Summers wrote that ďhealth impairing pollution should be done in the country with the lowest costĒ implying that the World Bank should support moving high polluting industries to developing countries.

If Summers meant this as sarcasm, the reaction of the Brazilian Ambassador to the United States at the time shows how far he failed get his point across. The ambassador called Summersí remarks ďsocial ruthlessness and the arrogant ignorance of many conventional economists: and added ďIf the World Bank keeps you as vice president it will lose all credibility.Ē If Larry was trying to be funny, he bombed.

The next case is was as President of Harvard University. There he made some even more infamous remarks when he wondered whether women had same the innate abilities to do Math and Science as men. This caused a nationwide controversy. Many felt the intensity of the controversy helped persuade him to resign as president of Harvard.

Summers antenna again failed him. He did not realize the storm of reaction he would receive. This is almost inconceivable for anyone like Summers who lived through the most recent feminist revolution.

In both instances a better tuned internal editor might have saved Summers a great deal of trouble. While itís true that a large portion of the Fed chairís public comments are scripted, reviewed and thoroughly vetted, it is also true that a significant number are not. The head of the Federal Reserve must answer questions ad lib during his Senate and the House committee appearances and he or she must answer questions at regularly scheduled press conferences. It is on these moments that the market will be fixated. Even now Fed watchers focus minutely on every word of the Fed and a word can move markets, so a poor choice in an ad lib remark could be costly.

We canít say the chairís remarks should never move the markets. Recently stocks dropped when current Chair Ben Burnanke †raised the issue of cutting the Fedís bond purchases. †That had to be said. It is the question of moving the markets over something that didnít need to be said or was poorly worded that should be a concern. †With Summers as Fed chair it night be a constant concern.

The head of the Federal Reserve must have exceptional communication skills. Larry Summers doesnít. Thatís what makes him such a perplexing choice for the head of the Federal Reserve.