Larry Summers: Who me? Couldn't be (Hyungwon Kang/Reuters)
I spent this past weekend up in Bretton Woods at the INET conference, a shin dig put on by the George Soros funded Institution for New Economic Thinking, which is a group dedicated to figuring out new and better ways to run the global economy. You may have seen the outrage over the conference on Fox News and in the Wall Street Journal last week. Plenty of conservative types are angry that they haven’t been invited up here to try and figure out how to get the world back on track. The general feeling amongst the crowd of liberals here – which included Soros, Larry Summers, Paul Volcker, Gordon Brown and many other notables – seemed to be “you did enough damage already, thank you very much.”
That said, there has been plenty of interesting post mortem crisis analysis amongst the liberals themselves. No Greenspan-ish mea culpas, but lots of looking back and considering what should of, could have, been done differently. I’ve been particularly interested in Summers comments on that score. Here’s why:
Certainly, plenty of people close to him while he was head of the Treasury Department under Clinton would say that he didn’t think deeply enough (at least back then) about the possibility that markets weren’t efficient, that economic players had their own biases and irrational behaviors, and that finance thus needed tighter regulation.
Summers himself would, not surprisingly, disagree. “Ok, maybe there’s some charitable recollection here on my part,” he admitted during one panel in which he was asked what had changed in his economic thinking over the last ten years. “But I’ve always been interested in behavioral finance.” What he did concede was that his belief that simply growing the economic pie would mean growing middle class incomes had turned out to be wrong. “Inequity has risen in the last decade, and it will continue to rise,” said Summers, echoing what many at the conference see as the biggest challenge to the global economic order.
Of course, one of the other big questions was what, if anything, Summers would have done differently in terms of regulating the banking system. The answer – not much. “I’ve been more cautious than many about constraining financial innovation,” he said, adding that he didn’t believe the financial crisis had its roots in “new-fangled financial instruments” but rather in a simple real estate bubble. Hmmm—tell that to Iceland. One thing Summers said that most of the crowd could agree with is that “anger and dissatisfaction with the financial system doesn’t constitute a [coherent regulatory] policy.” That, three years on from the crisis, we’re still waiting for.