I no longer know what to make of Lawrence Summers.
As President Obama's top economic adviser, he should be presenting a cogent analysis of the current crisis, and some sensible solutions.
Instead, according to his interview with the UK's Financial Times, Summers now thinks that the market system is in crisis because of "its own excesses" from which it needs to be "saved" by the world's leaders pumping "more public money into the economy in a co-ordinated effort to boost demand and lift the world out of recession". In other words, the problem was "excess", and we need to save the world from "excess" by providing MORE "excess"!
It is a remarkable thing for Summers, who was Bill Clinton’s Treasury secretary in the 1990s,and is generally regarded as one of the most pro-market voices now in the White House, to opine that "the view that the market is inherently self-stabilising has been dealt a fatal blow....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.”
If Summers has come around to the view that the market is indeed NOT "self-stabilising...a few times a century" then it would be most interesting to know what new statistical and historical evidence underlies his change of view. What would be even more interesting for us to understand is his current view of the conditions under which the market loses its ability to stablise itself.
But the fact of the matter is that no new statistical and historical information has come to light, and Mr Lawrence the economics scholar has been overtaken by Mr Lawrence the political animal.
We are simply being told lies. The first lie is that free markets are self-stabilising (markets are never totally free, so they cannot be self-stabilising OR non-self-stabilising). The second lie is that the current collapse was simply an accident of the sort that happens for reasons we do not understand (the reasons why the markets collapsed are very clear: non-transparent speculation caused a sudden, entirely unnecessary and historically unprecedented rise in global commodity prices which caused people on the margins of society who should never have been sold mortgages to become unable to meet their monthly housing-related financial commitments; this, in turn, caused a fall in housing prices hitting the historically unprecedented mountains of leverage sitting on the bet that house prices would continue to rise even when it was clear to everyone that there was a bubble - but all the financial players suffered from the illusion that they were smart enough to pull out "just in time" to avoid losses on their leveraged bets while maximising profits from their leveraged bets. As the institutions making these leveraged bets found themselves unable to pay for their leveraged bets, their own liquidity and viability came into question - wiping out, according to today's reports of the Asian Development Bank's estimates, $50 Trillion in the value of financial institutions worldwide).
If 50 trillion has in fact been wiped out, then we know that we are near what would have been wiped out in normal times in the eventuality of these leveraged bets going wrong as they have. Technically, therefore, we could be perhaps not very far from the floor of the problems for financial institutions taken as a whole worldwide. But these are not normal times - and we are entirely dependent on market psychology. Of course there could still be sour assets sitting somewhere that could surface at any time. Meanwhile, an enormous amount of damage has been done to the real economy - and that damage needs to be reparied.
So we come back to the question: is Mr Summers correct that what is needed now is simply to pump more money into the system?
Undoubtedly, pumping more money could help. But neither Summers nor anyone other official has given us any reason why all the money which has already been pumped into the system has not restored the system to health.
The real reason for the system's declining health is continued lack of transparency, because of which we still do not know if any country, municipality, pension fund or company is sitting on what quantity of sour assets.
Till such transparency is created, no one will know whether their potential business partners are, or are not, able to meet their business commitments.
Without such confidence in one's potential business partners, all the money that all the world's presses can produce are not going to restore health to the system.
And, as I have already argued, the only rules that need to be put in place are:
(1) all exotic financial instruments and deals should be required to be registered in the same way as normal financial instruments and deals - but on separate exchanges so that there is complete transparency about the total size of these markets and regarding how and with what structure they are growing;
(2) the number of such special exchanges for exotic instruments and deals should be at least 7 worldwide, maintained by public regulation and private investment as necessary and useful from time to time - purely in order to ensure cost-effectiveness and business-efficiency;
(3) no company or other entity engaging in any sort of business activity should be allowed to grow to more than 0.5% of the total value of the area or country in which the company is registered - so that no company is too big to rescue.
Any legislation over and above these is not only entirely unnecessary but is also an infringement of liberty.
Once the three fundamentals are in place, Mr Summers may find that pumping more money into the system is ENTIRELY unnecessary to restore health to the existing system for the moment.
The question of whether the current system is adequate for the challenges of our times is a separate question - on which I have written earlier, for example, in my Open Letter to President Obama which you can find both on this Blog and elsewhere by Googling for it.
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