Lawrence Summers: ‘A Long Way From The 1970s’

Should the government have bailed out Bear Stearns? Is there a moral-hazard problem?
I think the Fed had one fundamental decision to make: it was either going to do extraordinary, unprecedented things, or it was going to do the experiment of seeing what would happen to the financial system if a major [institution] fell apart. They made the right decision.

What is the lesson for other banks: Don't buy risky debt? Acquire liquidity sooner?
A fairly constant lesson in the financial industry is the importance of liquidity. It's not enough to have a positive net worth. One has to appear impregnable even if, for no rational reason, there is a rush to the exit by those who have lent you money. Those who walk near the edge by borrowing short term and maintaining low levels of capital are much more likely to be pushed into the abyss when stormy winds blow.

Is this the 1970s all over again?
Anyone who studies the economic history of the 1970s has to be struck by … the very high wage inflation—particularly in relation to slowing productivity growth. I don't see any evidence today of growing labor power or unsustainable wage demands. We're a long way from the 1970s. That doesn't mean that inflation is not a matter of concern, but the analogy is wrong.

Should we worry about foreigners snapping up ownership stakes in the banks?
Life is about choices. It would be better if our banks needed less capital. But given their needs, I don't think we have attractive alternatives to foreign investments. The key issues when you talk about foreign governments to me don't involve the word "foreign"; they involve the word "government." It's important to make sure that they are investing to maximize the value of their investments rather than pursue any kind of national strategic objective.

© 2008