In "Summers calls for boost to demand", Barack Obama's lead economic adviser and Robert Rubin protege/ally Lawrence Summers bizarrely recalls the single most ridiculous quote to come out of the Vietnam War, which was made by a U.S. Major named (itself bizarrely) Booris: "We had to destroy Ben Tre (the village in question) in order to save it".
From this Financial Times article:
The US administration had no choice but to take strong public action to “save the market system from its own excesses”, he said.
The article goes on to quote Mr. Summers as follows:
“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers.
“There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.”
While the US and other western nations should return to living within their means in the medium term, everyone should raise spending sharply now.
“The right macro-economic focus for the G20 is on global demand and the world needs more global demand,” said Mr Summers.
He also said:
“This notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times . . . there’s a need for extraordinary public action at those times.”
Let's comment, starting with the last first.
The idea that what's going on is a rare event is an endlessly repeated misstatement; some might call it a lie. This crisis began in 2007. Exactly 100 years earlier, the U.S. Government suffered a financial crisis in the "Panic of 1907", where J. P. Morgan banged the heads of other bankers to cobble together financing for the Feds.
The U.S. suffered intermittent booms and depressions, culminating in the major post-WW I Depression of 1920-21. Banks failed regularly in the 1920s. Then came the Depression. The smashing victory in WW II gave a quarter of a century of breathing room. Starting in the 1970s, we have had crisis after crisis. Third-world countries required money-printing to deal with oil price surges. Citibank was insolvent in 1980, as were other money-center banks that did the Fed's bidding in recycling the printed money to these countries. They were allowed to earn their way out of insolvency. Every Texas bank went under in the oil bust of the 1980s. Vast amounts of S&L equity vanished in the 1980s, all over the country. Many money center banks were in deep doo-doo in and after the 1990-91 recession.
Bottom line: The U.S. regularly suffers from economic busts and banking crises. What's different now is how politically well-connected the losers are this cycle, and how much they lost outside of traditional activities involving depository functions.
Moving on to the beginning quotes, let's leave matters at this:
The U.S. Government is going to excess with massive deficits and general histrionics. There was NO panic till the Government panicked late last summer and fall and began with a "sky is falling" attitude, rather than having worked out a plan last year when the Bear, Stearns failure should have awakened everyone. This business that in the short term, we should stay addicted to debt, but we'll detox in the medium term is too ridiculous to dignify with much more commentary. Just try saying that sort of stuff in an Alcoholics Anonymous meeting and see what sort of comments you get!
Larry Summers' solution is the classic solution of the financial industry: more borrowing, with the U.S. Government more or less the only allegedly credit-worthy borrower left, and more consumption from the "shareholders" of this entity. The Merchants of Debt will if possible suck the taxpayer dry till the Federal Government is on the brink of default.
A more prudent solution is to start living within our means, consume less than we produce so that we can actually rebuild our savings as a society, and "come reason together" LBJ-like to quickly have a fair and comprehensive resolution of the debt situation.
And do away with the bear-villains such as Citigroup and AIG who in this fairy tale are eating Goldilocks up.
Some un-asked for and of course to-be-unheeded advice to Mr Obama: you need a new economic advisor. Try Paul Volcker. Send Tim Geithner packing, either to State or to Goldman, Sachs or Citi.
And, especially, don't ever again "dis" bloggers (per the recent interview). The blogosphere is the only part of society that foresaw this financial mess. Try reading us. For a change. In which you can believe.
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