Larry Summers: "History Will Overwhelmingly Approve QE"
For anyone who still suggests, incorrectly, that Larry Summers was the "wrong" choice for Fed Chairman just because he would promptly end QE the second he was elected as the erroneous popular meme goes, we have one soundbite from his recent Bloomberg TV interview refuting all such speculation: "if you had to say, should we have used this tool or should we not have, I think the answer is overwhelming that we should have." He had some other amusing logical fallacies (including discussing whether the market is in a bubble) all of which are transcribed below, but the best one is the following: "I think it does bear emphasis that the people who were most appalled by it are the people who have been predicting hyperinflation around the corner for four years now and they have been wrong at every turn." And let's not forget that "subprime is contained" - until it isn't. Then again, the last time we checked, the history on the biggest monetary experiment in history - one in which both the Fed and the BOJ are now openly monetizing 70% of gross bond issuance - has certainly not been written. Finally, in the off chance Summers is indeed correct, what history will instead ask is why instead of monetizing all the debt from day 1 of the Fed's inception in 1913, and thus pushing the stock market into scientific notation territory, did the Fed leave so many trillions of "wealth effect" on the table?
Full Bloomberg TV interview below:
Summers on whether quantitative easing has worked:
"I don't think there's any question that the Fed's efforts to provide liquidity to the markets made a huge difference in getting us out of this crisis and preventing what could have been a depression scenario. I don't think there's much doubt, looking at the slow growth of output that we have had, the failure to achieve escape velocity, the fact that inflation is still trending down, that the right bias of policies towards accelerated rather than towards the break. Are the problematic aspects of QE? Of course. Are the reasons why it cannot be maintained forever? Of course. But if you had to say, should we have used this tool or should we not have, I think the answer is overwhelming that we should have. I think it does bear emphasis that the people who were most appalled by it are the people who have been predicting hyperinflation around the corner for four years now and they have been wrong at every turn. You can debate different views. I am not going to try to make a precise judgment as to just when tapering ought to take place. But on the question of whether the Fed stepping up and providing liquidity when no one else would was the right thing to do, I think historians will judge that about 98 to 2."
On whether Washington understands that QE has benefited the financial industry:
"I'm a Democrat. My primary concern is not with the Street. It is with the incomes of the middle class. But sometimes doing the right thing has had some beneficiaries. That is not the motivation for doing QE. I think the primary consequence of QE is that we have avoided the bottom falling out of the economy in the way that it did when they did not do QE in 1930 and 1931 and made the depression great. As a consequence of saving the economy, has it been better for Wall Street? Yes, it has been. Is that a reason not to save the economy? I surely don't think so. Would it be better if we were growing the economy in other ways? Should we be investing in fixing Kennedy airport which is in shambles at a time when we can borrow money cheap, at a time when construction unemployment is in double digits? Of course. Should we be doing something about 25,000 schools across the country where the paint is chipping off the walls? Of course. Should we be allowing a situation where the brightest young scientists who can't get research funding until they are 40? Of course we shouldn't be. Quantitative easing is not the best tool for growing the economy, but to say that because it has been a good time for Wall Street we need to put the brake on instead, would be to do grave damage to our economic future and I don't think that is the right way to frame the question at all."
On how he would tackle wealth disparity:
"I would be growing the economy. I would be starting to grow the economy by putting many more people to work, doing the things that build the economy. We have deferred more maintenance in the last five years than any time in the country's history. We will pay for that. The next generation is going to pay for that. It is going to mean larger budget deficits in the future. Why isn't this the time when we have so much unemployment, such cheap building materials, and the ability to borrow money and next to nothing -- why isn't this the time to be doing something about that? And that would mean a large number of middle-class jobs. We have pursued policies that have led to a lot more investment in derivatives and a lot less investment in fixing potholes than we should make as a country. Those policies are not defense policies. Those policies are the abdication of the responsibility to invest in the future that has been the consequence of our fiscal policies. A bunch of it is the public sector. The potholes, the failure to fix the airports, the fact that we still have an air traffic control system that relies on vacuum tubes like an old black and white TV -- that is a large part of it. But it is also the case that we have a regulatory framework where it takes forever to cite anything and to get anything done. When you drive in from the airport in London or Beijing, you can talk on your cell phone and it does not get interrupted. That is not true when you drive in from LaGuardia or Kennedy airport as you well know. That is not the public-sector's fault except in so far that it is the fault of a range of regulations that create great uncertainty."
On whether he believes we need bubbles:
"I don't believe in bubbles. Obviously almost when you say something it's a bubble, you are saying it is not that great. What I did say and what I believe very profoundly is that it has been a long time since we have had rapid, healthy growth in this country. When we had growth prior to the financial crisis it was growth that was reliant on bubbles. We have a framework that may well not produce growth in the absence of bubbles. That is not an argument for bubbles. That is an argument for changing the framework. When I spoke at the IMF about the risks of what economists call secular stagnation, what I was calling for was not a resumption of bubbles, I was calling for a framework that would make bubble free growth possible."
On whether he sees any bubbles right now:
"I think that under confidence is a much larger risk than overconfidence in the American economy today. Do I see certain developments, do I hear the word covenant-lite more frequently than i would like to? Yes I do. Are there spreads that look at little tight? Yes, there are. But in the fullness of it, I think the risks we are having too little confidence, too little lending, and too little spending our much greater than the risks of the reverse. Responding wisely and effectively to financial crisis requires -- it is a very difficult thing for people to appreciate and people to recognize. This goes to almost every financial error. Almost every financial error takes the form of doing today what you wish you would have done yesterday. That is what bubbles are about. People see a stock go up and they wish they had bought it yesterday so they buy it today. And it goes up more and there's a bigger bubble. Similarly with respect to panics. What caused this crisis is that there was overconfidence and complacency, excessive borrowing and lending, and unsustainable spending. That is what caused this crisis. But now, after the crisis, the only way we will get the economy back to normal is if we have more confidence, more borrowing and lending and more spending. It is that human tendency to do today what you wish you had done yesterday that can often lead us in the wrong direction. That is why i keep stressing the importance and emphasizing the accelerator rather than the brake, the importance of public and private spending, the importance of maintaining the flow of credit. Those are the things that need to be our priorities."
On whether Washington is to blame:
"I think there are clearly excesses and I think that in particular in financial regulation, as with health care, policy has run ahead of execution. There are aspects of the execution that create great uncertainty. People cannot know what they will be prosecutors for. People make agreements and they cannot rely on those agreements completely holding. I think that is problematic. On the other hand, I don't think there's any question that our financial institutions need to hold much more capital than they were before this crisis and that was the right step. I don't think there is any question that if we are going to avoid the panics and runs that we saw him that there needs to be tighter liquidity requirements. I think the broad thrusts of the change in financial policy are appropriate, but I think there are real things that need to be done."
On whether corporate America would be investing more if there was less gridlock and political uncertainty:
"I'm sure they would be. I'm sure they would be investing if there was more rapidly functioning and more predictable regulatory frameworks around everything from citing to the choice of fuels to the nature of reporting to the rules of immigrants. I am someone who has been for public investment. I have also been someone who has said that confidence is the cheapest form of stimulus. That is a very important principle for government to remember going forward and we need to pay more attention going forward to increase business confidence."
On whether austerity measures in the UK worked:
"I don't think the right reading of the British situation would emphasize austerity. I think the British economy is not as strong as the way you just spoke would suggest. I think insofar as it is, it goes to easy monetary policy and it goes to the consequences of a much weaker pound. It goes to a number of structural reforms. I don't think you'll find many economists taking the position. I don't think you'll find many objective observers making the case that it was the austerity that was responsible for anything that's positive that's happening in Britain."
On whether Washington is open to proposals from Wall Street regarding Fannie Mae and Freddie Mac:
"I think Washington should be and I suspect is open to advice from any quarter. I think the idea that somehow the right thing to do is to privatize these institutions to a coalition of hedge funds who have bought up the stock at a very low price and expect to earn an inordinate return. The idea that that is the right thing for public policy strikes me as being at the edge of ludicrous. It is not something that I would remotely support. It is not an argument against listening. There's a big difference between listening and taking extraordinarily self-serving advice. I think one would have to recognize that how could it be otherwise that those who purchase large amounts of the securities that make proposals that would raise further the value of the securities, that their advice is anything but disinterested or detached."
On why he pulled himself out of the running for Federal Reserve Chairman:
"Given the context and the controversy, I thought it was the right thing for the Federal Reserve for me to withdraw. I thought it was the right thing for the national economy. I don't think that either would have been well served by the controversy that would have continued had I remained a candidate."
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