The World According To Larry

Simon Johnson summarizes Larry Summers view of crisis:

1. All crises must end.  The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions.  Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.

2. We will get out of the crisis by encouraging exactly the kind of behaviors that “previously we wanted to discourage” two years ago.  It is “this insight, this view” particularly with regard to leverage (overborrowing, to you and me) that “undergirds the policy program in the United States.”

3. There is a critical need to support financial intermediation and to ensure it is adequately capitalized, with a view to the risks inherent in the current situation.  He then said, with a straight face, that the current bank stress tests are designed with this in mind.

4. Growth in the 1990s and more recently was based too much on finance (this appears to be a relatively new thought for Summers).  The high and rising share of finance in corporate profits “should have been a warning”.  The next expansion should be based less on asset bubbles and more on investment in key public services.

5. The financial regulatory system “in fundamental respects has been a failure”.  There have been too many serious crises in the past 20 years (yes, this statement was somewhat at odds with the low frequency of major crises statement in point 1).Simon, predictably, wasn't impressed.