Sunday, January 3, 2010

The Summers Conundrum...

I just happened across this old Nation article on Summers by Mark Ames... There was this graf:
He worked for 10 months as a top analyst in President Reagan's Council of Economic Advisers when his mentor, Martin S. Feldstein, was running it, and his colleagues don't recall him venting anti-Reagan heresies then....

"One of the ironies of this business is that Summers's economics are quite close to Feldstein's," said William A. Niskanen, who was a member of the Feldstein council.
Some fifteen years after Summers's stint in the Reaganomics war room, he reappears as one of the key villains fighting to suppress the regulatory efforts of a top official, Brooksley Born, who was trying to call attention to the dangers of the unregulated derivatives, such as credit swap defaults, which today are considered the key to the current economic crisis.


  1. Fedlstein writes things are to me seem quite insane, like his article in the the Financial Times in which he wrote that a core function of government economic policy is to ensure that house prices are never below average:
    «How to shore up America's crumbling housing market»
    «The current decline of house prices is the natural result of the bubble that by 2006 had raised house prices to 60 per cent above their long-term trend. The sharp decline since then means that today~s prices are about 15 per cent above the trend level. But while a further 15 per cent decline may be inevitable, there is nothing to stop prices declining even further. House prices that could overshoot by 60 per cent on the way up could also overshoot substantially on the way down. During the past 12 months, house prices across the nation fell by an average of 16 per cent. The large overhang of unsold homes continues to create pressure for further price declines.»
    «A policy is needed that will permit the appropriate 15 per cent additional decline in house prices but end the risk of a further downward spiral.»

    The competitive markets are for labor and other suckers -- the markets in which heroes of productivity and creativity make money fast with real estate capital gains should be backstopped by the government, that's the standard conservative position by Feldstein, even when comically expressed in a Lake Woebegonish way.

    Summers seems to have learnt that position very well.

    BTW as to the Born story, there are some articles and interviews of pro/against derivative regulation here:

    The positions of those opposed and in favour of derivative regulation seems very clear: those opposed were arguing that no regulation would mean lots more business and profits and bonuses for he financial sector, and those in favour were arguing that no regulation would mean very high systemic risks would materialize and require a lot of money to sort out.

    Both were right of course :-).

    Fist time I saw these essential links mentioned here:

    in which there is also this typical quote:
    «In early 1998, according to the Times story, one of the guys, Larry Summers, called Born to "chastise her for taking steps he said would lead to a financial crisis.»
    «"Despite that event," the Times reports, " Congress (apparently as a result of Greenspan & Summer's urging, influence-peddling and pressure) "froze" Born's Commissions' regulatory authority.»
    «If there is any accountability left in our system, Greenspan, Rubin and Summers should not be telling anyone how to run anything.»

    of course there is accountability left in our system, and our three heroes of productivity and creativity have been very, very well rewarded with money and power for helping other heroes of productivity and creativity to make money fast on derivatives, and for making sure the eventual costs be borne by suckers.

  2. Following the references the original article for some of the quotes above is:

    But the debate on is far more interesting, because several involved principals speak directly, and how right they were all; with some exceptions of course like:
    «Alan Greenspan noted in his Coral Gables, Fla., speech, government must "enunciate clearly" the public policy objectives for the regulation of derivatives. These so-called "professionals" use OTC derivatives as an integral part of managing their firms' financial business. They are subject only to the remedies imposed by contract law, which have apparently been sufficient since the number and size of derivatives-related defaults are statistically insignificant Accordingly, it is not clear exactly what public policy purpose government regulation is serving.»

    BTW one of the best predictions was:

    «Avoid the British experience. As the professional market legislation also proposes, U.K. regulators concentrated on the politically correct goal of protecting small punters, leaving professionals to their own devices. Knowing the relevant history, a U.S. politician worth his or her salt should wonder if the Conservative government's approach to market oversight has something to do with the number of Tory resumes on the street, and if a vote to duplicate U.K. market regulation communicates this disease, brought on by a rapid succession of Barings, Morgan Grenfell and Sumitomo problems, to name a few. British regulation, now recovering and making adjustments, failed not only to protect the public from the industry, but the industry from itself. Not a good idea in the United States.»

    Well, instead of "Tory resumes on the street", we have seen Summers, Greenspan and Rubini being eagerly rewarded for their work on the side of the deserving producers and creators by the street.

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