Many people inside the Washington beltway – including, unfortunately, President Obama – think that Larry Summers is a genius.
Of course, Summers was one of the people most responsible for gutting the Depression-era banking laws which helped protect our economy, allowing the big financial institutions to speculate and gamble using insane amounts of leverage, and insisting that toxic derivatives be left completely unregulated.
Arianna Huffington, Naomi Klein and others have argued that – even if smart – his ideas are toxic.
But Friday, Summers proved that he’s really not that smart. On Friday, Summers basically said we should continue to do the exact same things which got us into this mess because:
All crises must end. The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions. Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.
Um . . . sorry to break it to you there Larry, but a group of economics professors has recently demolished the “self-equilibrating economy” theory:
If one browses through the academic macroeconomics and finance literature, “systemic crisis” appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon. In our hour of greatest need, societies around the world are left to grope in the dark without a theory. …
The implicit view behind standard models is that markets and economies are inherently stable and that they only temporarily get off track. The majority of economists thus failed to warn policy makers about the threatening system crisis and ignored the work of those who did. …
The confinement of macroeconomics to models of stable states that are perturbed by limited external shocks and that neglect the intrinsic recurrent boom-and-bust dynamics of our economic system is remarkable. After all, worldwide financial and economic crises are hardly new and they have had a tremendous impact beyond the immediate economic consequences of mass unemployment and hyper inflation. This is even more surprising, given the long academic legacy of earlier economists’ study of crisis phenomena … This tradition, however, has been neglected …
And when economist James Galbraith spoke at a recent panel on the causes of the financial crisis, the first thing he listed as the main cause of the crisis was “The idea that capitalism … is inherently self-stabilizing.”
Summers a genius?
Note: The quote from Summers’ speech comes from former chief IMF economist Simon Johnson. Others have confirmed Summers’ statements.