Enough about Krugman! What about Larry Summers?

[Kurt_and_Hunter]

Current US economic policy is whatever Larry Summers says that seems politically palatable to president Obama.

There is always an individual who is "the man" on an area of policy. No president knows everything. They pick the advisory voice that sounds trustworthy and right to them and run that leading voice through their own internal filters. And it seems to be accepted today that Summers is "the man."

I have nothing major against Larry Summers, but he is a neo-liberal type with a strong tendency against government intervention. I am probably also a neo-liberal and in most circumstances would agree with Summers.

But Larry Summers has found himself in the peculiar position of being a top guy during the beginning of this crisis, and at the grim denouement.

Our current woes are the ongoing unwinding of the internet bubble, an unwinding prolonged by the incredible amount of un-targeted but MASSIVE Bush-era unter-Keynesian stimulus. (When you have a bad economy cut taxes, increase defecit spending, lower interest rates and, if all else fails, start a war. Mission accomplished!)

The internet bubble is the dog that didn't bark. It was the biggest bubble ever, even in relative terms, and bubbles always wreck the host economy. But between Bush's kleptocratic instincts and Greenspan's irresponsible "loose money is the fix for every possible problem" we have been pumping this thing like mad on the way down. (Note that we slashed interest rates because of 9/11, which was perhaps necessary but extrinsic to the normal flow of the economy.) And the bubble has flowed (or perhaps been squeezed) from stocks to real estate to commodities (food, gold, oil) in a thrashing search for returns. When oil finally collapsed that was the last act... cash was the only asset left standing and once people "invest" in cash it's lights out for the economy.

(One can debate whether the incredible Bush defecits and Greenspan cash-pump made for a somewhat softer landing or built up tensions for a snap-collapse. Either is arguable because what we are seeng today is both very bad and nothing compared with where this thing might go.)

I cannot blame any politician for not pricking a bubble because nobody ever does, at least not without being bounced out of office. It is difficult to imagine the leader of any democracy saying, "This economy is too hot even though there's no inflation. We need to raise rates to crush the stock market!"

So I don't condemn Summers or Clinton for failing to stop the internet bubble that led to where we are today. (The Fed is supposed to be independent, so I do blame Greenspan.)

But after Greenspan, Summers was "the man" during the most ridiculous and predictably catastrophic economic event of any of our lifetimes. For what that's worth. (Summers was only Sec Treas for the last twenty months of Clinton's presidency, but the horrific NASDAQ run to 5000 was on his watch.)

So this is two phases of one crisis where Larry Summers is running the show and preaching against (in relative terms) big interventions.

On the other hand we have Paul Volker who we know has the guts for big intervention, but in a scary way. The really bad recession of 1981-1982, the worst thing those of us who missed the depression have seen so far, was intentionally induced by Volker. And it worked. Core inflation wrung from 10% down to 4%. Inflation has been a non-factor ever since. (Though now we face deflation so some relative inflation might be welcome.) I don't know Volker's specific thinking on the appropriate scale of intervention since we have run out of interest rates to manipulate, but he has a bold history.

None of us are in the room, but based on what we have seen so far I think Summers is still relying on the market to render our current situation a cyclical and largely self-correcting event... seeking to soften the blow while riding out the crisis.

And that is the great divide. I also think it is probably largely self-correcting, but with features that raise the possibility of a depressive feedback-loop that would take down the whole creaky edifice.

And "probably" is not good enough when the stakes are high. (I can squeeze off a shot at my head with a six-shooter with one bullet in it and have an excellent 83% chance of escaping harm, but you don't do things like that!)

If the chance of catastrophe is much as 10% we have an obligation to act to prevent it, even knowing that most of the time we will have turned out to have over-reacted. You can not gamble with such things. (If we over-react we might get some inflation and/or uncomfortable interst rates down the road that will require some relative austerity. If we under-react we get to live under a bridge.)

Are there ANY non wing-nut economists willing to say categorically that there isn't a 10% chance of deflationary collapse?

But I fear that Summers is inclined to gamble, to over-estimate the intrinsic stability of the system, based in part on his prior equanimity during the inflation of an incredible bubble that many sober-minded people saw for the bubble it was at the time.

[Thrill]

1. I think Summers was good on ABC yesterday. I liked when he said

The Republicans supported Bush's policies for the last 8 yrs. So he doesn't need a lecture on history from them. lol

[Baikonour]

2. Larry Summers is a pretty ugly guy.

I find Krugman much easier to look at.

[Kurt_and_Hunter]

3. Ben Bernanke is dreamy!