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Larry Summers's Unified View of Recessions

From Ryan Lizza's profile:

In the fall of 2007, [Summers's] Financial Times columns took on a more urgent tone, starting with a piece on November 25th, titled “Wake Up to the Dangers of a Deepening Crisis.” There had been at least six major financial crises that affected the United States over the past twenty years: the 1987 stock-market crash, the 1990 savings-and-loan crisis, the Mexican-peso crisis, the East Asian economic crisis, the failure of Long Term Capital Management, and the tech-bubble crash. Summers had a theory that tied them together: whereas for many decades most recessions were caused by the Federal Reserve’s attempts to curb inflation, the Fed’s recent mastery of keeping inflation in check had given rise to the financial crisis. Summers explained that, just as the success in curing infectious disease will allow some people to live longer only to die of cancer, the success in battling inflation will prolong an economic expansion only to lead to overconfidence and a financial crisis.

By Ezra Klein  |  October 5, 2009; 4:31 PM ET
 
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Comments

Ezra,

many people correctly point to the current recession and the fact that the Fed held interest rates down to a point where people that have no financial ability to own a home now do so (at least until its forclosed on). To that point the Fed is a party to the crime by holding down interest rates. The only positive to come to this is that its shining a light on their activities and thanks to the likes of Ron Paul, Barney Frank and many many others the Fed will soon be audited and we can finally see behind the sheet and the Fed can be shown as the fraud that it is. Markets work and its only when markets are artifically affected by government intervention (holding down interest rates to curry votes) that we had the crash in the first place. You can blame all the banks that you want but the mortgage crisis goes straight to the Fed artifically holding down rates as it has for way too long now.

Posted by: visionbrkr | October 5, 2009 4:39 PM | Report abuse

to that extent inflation is a good thing when it comes to interest rates. It makes an appropriate barrier to things like homeownership that haven't been there for years and gave people the idea that they could afford a home (or a second home) or the ability to be a property manager when their incomes didn't warrant it.

Posted by: visionbrkr | October 5, 2009 4:49 PM | Report abuse

Please stop quoting Lizza's puff piece of Summers. It's getting embarassing, especially since the article itself is embarassing.

John

Posted by: toshiaki | October 5, 2009 5:01 PM | Report abuse

"Summers had a theory that tied them together ... the success in battling inflation will prolong an economic expansion only to lead to overconfidence and a financial crisis"

In other words, Summers finally heard about Hyman Minksy's Financial Instability Hypothesis. No wonder everybody says Summers is a genius! (of course Minsky wrote about it in 1974, and unabashedly built on ideas that go back to the 19th century).

"In the fall of 2007, [Summers's] Financial Times columns took on a more urgent tone, starting with a piece on November 25th, titled 'Wake Up to the Dangers of a Deepening Crisis.'"

And he saw it so early - only two months after the fall of Lehman and the AIG bailout! Such incredible insight.

Of course Dean Baker had been warning about it since 2002, and Paul Krugman for several years. But they're not Rubin acolytes, so who cares?

The article is just another puff piece about Summers, who's obviously a genius because everybody keeps writing puff pieces that say he's a genius.

The bottom line is that Summers has been wrong about almost every major policy decision he's been involved in:

1. In the 1990's he was a staunch advocate of the "shock therapy" for Russia that worked so well it almost gave the country back to the Communists.

2. Following his mentor Robert Rubin (who later made millions helping to drive Citi into the toilet) he promoted the strong dollar policy. That created the trade deficit that not only decimated US industry, but supplied the money for the housing bubble.

3. Along with Rubin and Greenspan he vehemently opposed the regulation of derivatives.

4. As president of Harvard he pushed for involvement in derivatives that lost the university $1B.

And this is the great financial mind that our country depends on? Lord help us.

Of course on a personal level it's different - just before joining the Obama team he made millions working one day a week for a hedge fund (not to mention millions he'd previously made in Wall St. speaking fees). No conflict of interest, right?

Posted by: alex50 | October 5, 2009 5:38 PM | Report abuse

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