| QUOTE |
| “The president made two things clear to us early on,” recalls Summers, who answers my questions in full, idea-packed paragraphs, rocking gently back and forth in his seat as he gets into the flow of an argument. “He would do what he had to to fix the banking system, to get the economy out of the rut in which he was inheriting it. But he had run for president to do long-run, fundamental things, like fixing healthcare, like having real energy policy, like reforming education. And we weren’t going to be distracted from those things.” Obama’s most important political calculation has been this decision to press ahead on all these fronts at once – and the success or failure of his administration will rest largely on whether that was the right call. This combination of long-term reforms and an immediate crisis reminds me of the last global financial meltdown I watched Summers, then deputy secretary of the Treasury, help navigate. It was 1998, the year of Asian contagion and Russia’s default and devaluation. Emerging market veterans of that crash have taken a certain bitter pleasure in pointing out that this time their former rescuer and scold – the United States – is at the centre of the world’s crisis, and in observing that Americans seem markedly less keen on their own unpalatable medicine now that they are the patient. “I don’t think I would quite accept the characterisation that we’re in the position that the Russians were in in 1998,” Summers says when I draw the comparison. “The crises that we addressed during the 1990s internationally, in almost every case, took the form of a foreign lack of confidence in a country that led to a mass withdrawal of funds and made reassuring foreigners the central priority. That’s why interest rates often had to be increased. The American problem this time has more in common, at least qualitatively, with the Japanese post-bubble problem, where the issue was not reassuring foreigners but maintaining sufficient domestic demand to push the economy forward.” He does, however, concede that fire-fighting feels different when it is your own home that is alight: “There have been moments, certainly, when I understood better some of the reactions of officials in crisis countries now than one was able to from the outside at the time. It is easier to be for more radical solutions when one lives thousands of miles away than when it is one’s own country.” |
| QUOTE |
| The chief intellectual casualty of the current crisis has been the “efficient markets” school – the theory, associated with such erstwhile laisser faire gurus as Alan Greenspan, that market participants are governed by rational expectations and markets are self-correcting. As an academic economist, Summers has studied the shortcomings of that approach but, working on Wall Street gave him, he says, a more visceral understanding of the “self-referential” character of markets: “Markets are concerned with the ultimate health of economies and the like but they’re equally or more concerned with what the likely judgments of other market participants in the short run are.” Might this “more textured understanding” have caused Summers to reconsider some of his views from the 1990s – a time when he and former Treasury secretary Robert Rubin led a pro-market faction in the Clinton administration that some critics believe is partly to blame for the current crisis? (They cite, for example, Summers’ support for the 1999 repeal of the Depression-era Glass-Steagall Act, which had separated commercial and investment banking.) Summers’ reply amounts to a qualified yes: “I think I always had the sense that our regulatory system was about the protection of individual institutions, and the important problems are often about the protection of the system. I was very worried in the 1990s about predatory lending, about systemic risk, about the stability of Fannie and Freddie. But the political constellation at that time didn’t offer a chance really to do more than report and warn about it. It’s a different world today. As Keynes famously said, ‘When the facts change, I change my mind.’” Onward, then, to the toughest economic challenge Summers faces today: the recession. Here, Summers turns sombre: “I don’t think the worst is over ... It’s very likely that more jobs will be lost. It would not be surprising if GDP has not yet reached its low. What does appear to be true is that the sense of panic in the markets and freefall in the economy has subsided and one does not have the sense of a situation as out of control as a few months ago.” As the panic has subsided, the trendy new economic issue has become “exit strategy” – as in, when and how do governments shift from costly and aggressive intervention to levels of spending and taxation that are sustainable over the long term? Summers rejects the premise of the question. “I actually think that the right measures for doing the right things about the long-run deficit will also increase confidence, hold down long-term interest rates and capital costs, make mortgages cheaper, make mortgage rates lower and so will contribute directly to recovery. So I don’t buy the notion that there is some conflict between the budget imperative for growth and some other budget imperatives.” So far, so orthodox. What is different about the Obama team’s economic vision is their aspiration that once this crisis is over, the US economy will be in different, and better, shape than it was before the bust. This new American economy, Summers hopes, will be “more export-oriented” and “less consumption-oriented”; “more environmentally oriented” and “less energy-production-oriented”; “more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented”; and, finally, “more middle-class-oriented” and “less oriented to income growth that is disproportionate towards a very small share of the population”. Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift. Summers admits that this rosy scenario depends on a lot more than the White House. Foreign policy watchers have tended to focus on the security issues this administration faces – the wars in Iraq and Afghanistan, the challenges of Iran and North Korea’s nuclear ambitions. But Obama’s most important international assignment may turn out to be coaxing the rest of the world into accommodating this reshaping of the US economy. As Summers puts it, “The global imbalances have to add up to zero and so, if the US is going to be less the consumer importer of last resort, then other countries are going to need to be in different positions as well.” On this possibility, Summers is bullish. “The very great enthusiasm for accumulating reserves that one saw globally is likely to be a smaller factor over the next decade than it has been in recent years,” he predicts. |
| QUOTE (JohnDough @ Jul 13 2009, 09:48 PM) |
| Neat. |