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February 06 2014

20:47

Larry Summers Asks For Fiscal Prudence, Better Airports

Our February 6 interview with former U.S. Treasury Secretary and big all-around economic thinker of many hats Larry Summers covered a lot of ground. From his fears of a “secular stagnation” to his thoughts on New York City’s troubled J.F.K. International Airport (he finds it embarrassing).

Larry Summers in the WBUR studios. (Jesse Costa / WBUR)

Larry Summers in the WBUR studios. (Jesse Costa / WBUR)

Here are some highlights from our conversation with Summers.

 

Summers on inequality, entitlement reform, and the deficit:

Larry Summers: If we are able to increase the growth rate of this economy by two tenths of a percent, some people would say it was three tenths, but between two and three tenths of a percent for the next 75 years, that eliminates the entire deficit problem as it is now projected. And I ask you which is a better strategy, a more positive strategy, a more politically attractive strategy, a strategy that will have great other benefits? Doing all the things, tax reform, immigration reform, removal of barriers to private investment, necessary public infrastructure investment, to raise the growth rate by a quarter of a percent a year, or to launch an attack on programs that are giving people thirty thousand dollars a year, thirty five thousand dollars a year at maximum, at maximum. If you get the maximum social security benefit you possibly can get—

Tom Ashbrook: The entitlement reform question?

LS: Social security reform. The largest social security reform you can get. You pay the maximum in every year for your whole life time, it is less than 40,000 dollars a year. And so at a time of rising inequality, making the focus of our national effort to fix our economy be bearing down on social security beneficiaries, I just don’t think is the right approach.

On whether or not he takes any responsibility for the 2008 financial crisis, could the 2008 crisis happen again, did he supporting the deregulationist in Congress in the 1990s, and his thoughts on US Commodity Futures Trading Commission chair Gary Gensler:

LS: I think all of us who served in-who’s been involved one way or another in the financial sector wish that we had foreseen all the things that took place in 2008 and been able to put in place preparations and contingencies that would have dealt more satisfactorily with those problems.

TA: Were they outgrowths of mistakes made by you in the 90s?

LS: I think there is much- I think with respect it is a very complicated tale. A wide variety of regulatory proposals that would have addressed many of the serious problems: putting derivatives on exchanges, doing something about predatorily mortgages, fixing Fannie and Freddie, that I and others put forward during the 1990s were not accepted by the Congress. The Congress at that point was in the thrall of aggressive deregulationists who would only pass legislation in one direction and of one kind—

TA: Weren’t you in their corner?

LS: No I was not in their corner with respect to a variety of proposals that I put forward, particularly with regard to predatorily lending, but also with respect to other issues that were reject. Now I was not someone who was willing to oversimplify the issue into the view that all regulation is good and all reductions in regulations are bad. And so there were measure that I believe were constructive that operated to reduce regulations that weren’t functional.  And I did support those in the 1990s and I don’t believe you can make a case that the regulations whose removals or adjustments I supported were contributors to the 2008 financial crisis in any large way?

TA: The whole derivatives bubble and meltdown?

LS: There were important derivatives issues, but if you look at what was being done before the legislation and after the legislation it is not that the legislation addressed the things that were at the center of those derivatives problems. The derivatives problems, Tom, had to do with what are referred to as credit default swaps. Credit default swaps essentially were in their very infancy at the time when the Clinton Administration left office. The issues in derivivates were things that were entirely different during the time of the Clinton administration. The question is why nothing was done about credit default swamps and their various consequences over the subsequent eight years. That is an important question, but it is not one that should be addressed to those of us who served during the Clinton administration.

TA: Is that fix today? Is that risk fixed today, as we talk today are we still vulnerable to another 2008 kind of meltdown? You talk throughout here about the risk of that returning.

LS: Generals always fight the last war. And there is always a risk that while a number of those particular issues that were pointed up by the 2008 crisis have been address—are there continuing risks of financial instability? Yes. Has the last word been written, on regulation? No. Do we need to address, for example, a shadow banking system that is still very much in the shadows, as far as regulation is concern?

TA: swamps, derivatives…

LS: Absolutely. Are there continuing challenges with respect to derivatives? Yes there certainly are. But I do believe that important progress has been made and I certainly was very pleased to have, looking back, to have been very strongly supportive of the appointment of Gary Gensler at the CFCT and of the various things that he was able to accomplish that I do think make the system safer than they were before.

On the advice he would give to the new Chairman of the Federal Reserve, Janet Yellen:

TA: Janet Yellen stepping into the Fed, you’re not. What’s your one word of advice to her.

LS: Prudence.

TA: Prudence!

LS: Prudence! And I’m sure she’ll bring it.

07:31

Larry Summers’s Stagnation Warning

Former Treasury Secretary Larry Summers is warning of deep economic stagnation, or “secular stagnation.” He’ll explain, plus his thoughts on the debt and deficit, income inequality, Bill Gates and more.

Larry Summers (Courtesy Larry Summers)

Larry Summers (Courtesy Larry Summers)

Guests

Larry Summers, former U.S.  Treasury Secretary under President Bill Clinton, former director of the White House National Economic Council for President Barack Obama, professor and former President of Harvard University. (@LHSummers)

From Tom’s Reading List

New Yorker: Is Larry Summers Right About “Secular Stagnation”? — “The argument that the economy is currently being held back by inadequate demand isn’t controversial—at least, it shouldn’t be. Since the recovery began, in the summer of 2009, G.D.P. has expanded at an annual rate of just two per cent, which is pretty feeble compared to previous recoveries. This weak growth reflects the decisions, by households and firms, to economize on their expenditures in the wake of a big asset-price bust; at the same time, the government (federal, state, and municipal taken together) has also been trimming budgets and laying people off, after an initial burst of spending during the Obama stimulus. ”

Washington Post: Strategies for Sustainable Growth – “The challenge of secular stagnation, then, is not just to achieve reasonable growth but to do so in a financially sustainable way. There are, essentially, three approaches. The first would emphasize what is seen as the economy’s deep supply-side fundamentals: the skills of the workforce, companies’ capacity for innovation, structural tax reform and ensuring the sustainability of entitlement programs. ”

Wall Street Journal: The Economic Hokum of ‘Secular Stagnation’ — “There are many problems with this neo-secular stagnation hypothesis. First, it implies that there should have been slack economic conditions and high unemployment in the five years before the crisis, even with the very low interest rates—especially in 2003-05—and the lax regulatory policy.”

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