Goodbye to the Bulls?

'We Need Greater Transparency'
Lawrence Summers
On industry regulation: I think we are going to need more regulation in certain areas of the finance industry. For several years, you've had a Republican Congress and a Republican executive branch that have given freer reign to market forces, and have been less interested in the role of government in these issues. I think now we're going to see more insistence on better disclosure of risk, and more pressure on [banks] to maintain some kind of relationship with those to whom they lend.

On sovereign wealth funds: There's no question that we're better off in the United States because sovereign wealth funds have infused new capital into our financial institutions. One of the main threats to the economy at the moment would be a turn toward protectionism. That said, in the United States, we don't allow our government to invest the Social Security trust fund in companies because of the potential for politicization of investment. It seems appropriate to ask other governments making commercial investments to give commitments that those investments are being made on a commercial rather than a political basis. We haven't had problems yet, but the more the markets are politicized, the less well they perform. It's not an issue of transparency—it is up to the individual governments to decide how often they report on the progress of the funds to their citizens. But we should seek commitments that investments are being made on a commercial basis.

On a recession: There's a good chance that we are in a recession, and I think it's possible, though not probable, that it will be prolonged, and that it will have implications for the rest of the world. The effect could be quite serious for Europe, Japan and Latin America. There will also be some fallout in developing Asia.

On the correct response: The United States is at the root of the current market problems, and it should be at the center of the solution. I would like to see U.S. officials engaged in efforts to strengthen and enhance fiscal confidence and stability in the short and medium term. For starters, we could use more accurate pricing of assets. You've got bonds that are priced one way in one American bank, and another way in another American bank, and a third way in a European bank, and a fourth way in a hedge fund. We need greater transparency. There should also be further steps to avoid excess mortgage foreclosures in the United States. Mainly, that would include more provisions for writing down the value of mortgages—not just the interest, but the total value. This would help the innocent victims.

On central banks: In general, the independence of central banks is a very good thing. But it can be counterproductive if it inhibits international cooperation or domestic collaboration. Central banks probably should become more cooperative institutions in the years ahead. In terms of where we go from here—now that we've got strong fiscal and monetary measures in place, we should turn our attention back to the financial sphere. We need more pressure for greater capital requirements in financial institutions. And we need more thorough and accurate marking of financial assets to markets.

Summers is a professor of economics at Harvard University and a managing director at D.E. Shaw & Co.

'The Prospect of Stagflation'
Sri Mulyani Indrawati
On lessons from history: The lesson from the Asian financial crisis is that when [corrective] decisions are made fast and the [policy] prescriptions are potent, a severe or prolonged crisis can be prevented. What happened in South Korea shows that economies can pick up again very fast. Their severe adjustments lasted just one year. Yet the Indonesian economy remained sluggish for five to seven years because [corrective policies were] too long in the making and too weak. The United States is the world's biggest economy, and one that's more complex than Thailand, South Korea or Indonesia. But the lessons are the same. We do hope that decisive action will not be delayed so the damage to the global economy is minimized. Whether we are talking about one financial institution or the U.S. economy as a whole, policymakers need to get things moving quickly again.

On the theory that Asia's economies have decoupled from the American consumer:From a trade point of view, I don't think decoupling is really there yet. If we look at capital flows, the regions are not decoupling at all but becoming more linked to each other. When we issued [government] bonds in early January, buyers from the U.S. were quite dominant. I don't think there has been any diversification in the way the United States finances its deficit with funds from Asia, or any increased ability by Asia to invest our reserves [elsewhere] that would constitute decoupling. I think the financial links are very close and very strong.