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We Love Markets, Says Larry Summers

ARCHIVEPH-OBAMAGOV.jpgThat, in a nutshell, was the message of his speech to the Council on Foreign Relations today. "In the long sweep of history," Summers said, "Franklin Roosevelt’s policies, denounced by many at the time as a radical attack on capitalism, are today understood to have helped preserve the market system." So too with this administration.

The most novel argument Summers made was that the administration has sought to mirror a working market. It has provided secure loans when possible and offered non-secured debt and preferred stock investments when not. It has sought to conduct bankruptcy in the traditional way and, when pressed, aimed restructuring efforts at the eventual realization of profit on the private market rather than the realization of policy objectives favored by the administration. It has avoided nationalization of the banks and got Chrysler back into the private market as quickly as possible.

The administration has proceeded from the assumption, in other words, that the market was in a temporary period of crisis and so incapable of performing its functions. And so, like an unhappy grandparent who has to step in when the parents are otherwise disposed, officials have tried to mimic everything the market would have normally done, while leaving space to leave as soon as possible.

Is it true? Sort of. Summers says that there were those who believed "that the government should use its stake in automobile companies to advance environmental objectives." The administration sold Chrysler to Fiat with the pretty explicit understanding that Fiat would revitalized the aging automaker's cars with almost futuristically fuel-efficient engines. Was that in service of environmentalism or profit? Or both? Similarly, when the government essentially decided to cover the debts of the banking system, it wasn't acting as the market. It was changing the market. The market's response to a banking system that the government won't let fail is not the same as the market's response to a banking system that the government will let fail.

But Summers's larger point is true: The government hasn't seen itself as replacing the market. It's seen itself as saving the market. And so much as possible, it wants out. This is all part of the run-up to next week's planned unveiling of the administration's financial regulation proposals, which Summers previews in his speech. The principles look good, and you can read them here. But this address was about the framing. Some will try and paint these proposals as the government seeking a continuing role in the markets. But according to Summers, the administration doesn't want a new regulatory structure so it can keep interfering in the market. It wants a new regulatory structure so it can finally stop.

(Photo credit: Bill O'Leary, The Washington Post)

By Ezra Klein  |  June 12, 2009; 6:06 PM ET
Categories:  Financial Crisis , Financial Regulation , Solutions  
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Obama has EXPLOITED the crisis to push his domestic agenda. Obama circumvented bankruptcy laws to shaft the bondholders and reward the UAW. Treasury wouldn't allow banks to pay back TARP loans, because that would have meant less control. Contracts mean nothing, and the Democratic Congress pass laws that are retroactive and punitive. Health care reform and cap-n-tax will harm business. Swaths of the economy are now dictated by gov't, the same gov't that has bankrupted the country. Yet Summers can say with a straight face: we love markets. Oh yeah, tell us another one, Summers.

Posted by: johnhiggins1990 | June 14, 2009 1:40 AM | Report abuse

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