I just finished Paul Blustein's excellent book "The Chastening" -- about the Asian financial crisis -- last night. First thought: Great read. Should be required reading for all Econ Ph.D's. I give the book high marks even though the case studies were not as well-developed as I would have liked (I need more graphs and statistics!), and some of his analysis was second-rate. Grown men should not be fooled by the old "moral hazard" argument -- the argument that the government should not bail out countries b/c then private agents haven't recouped the necessary losses. In the book, Blustein argues that one major negative result of the Korea bailout was moral hazard in Russia, where the government was paying 100% interest on loans maturing in 6 weeks. That indicates to me that the market had priced in a likely default, it does not indicate to me that the market was stricken by moral hazard. Nevertheless, the book was well worth a read.
There were several interesting things about Larry Summers in the book as well. The first thing that suprised me was how much power he was able to accumulate in the Clinton administration, particularly in foreign policy and in usurping the IMF. It looks like he was able to just steamroll everyone. He's a solid manipulator. He's great at convincing people he's the smartest guy in the room. And he gets his way. He comes across as a very shrewd bureaucratic operator. And someone who is not afraid to delve into policymaking outside his area of expertise: e.g., when he pushed for regime change in Indonesia. And yet, even though the IMF has gotten hell for what it did (or didn't do) in Asia, Russia, Argentina, and Brazil, somehow Summers has gotten off scott-free. It's really something when you think about it.
The second interesting point is that Larry Summers really just comes across as a typical free-market conservative. It comes out very clear in the book that he thinks that government should involve itself in financial markets as little as possible. This is something that Paul Blustein second-guesses him on time and again... See my early post on Summers in the Korea crisis. I can't help but feel driven toward the conclusion that this ideological bias in Summers is part of what is driving him now to advise Obama not to nationalize the banks. In China, right now, bank lending is up, b/c the government is just telling banks they have to lend. In the US, on the contrary, bank lending has dropped sharply, even at banks who are getting billions in TARP money. But, why, if these banks need TARP money, should the gov't not also make them loan it out? Hard not to blame Summers' ideology here...
Also, there was a Summer's article in the WSJ yesterday. Of course it's not on-line, but the gist of the article is that Summers is not only bringing in some heavy hitters, but he's lined his staff w/ people who have close working relationships with Obama. So, it really looks as though he's consolidating power. Add this observation to the reality that every policy decision out of the Obama White House seems to have Summers fingerprints on it, and it really looks like Larry Summers is the Dick Cheney of the Obama White House.
All of this portends a very ill wind...
In Defense of the Conventional Wisdom
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