>Larry's a Keynesian. He thinks--I believe rightly--that if you try to
>eliminate "moral hazard" by making financial institutions that made bad
>investments eat all their losses then deflation will take hold, financial
>systems will collapse, investment will fall to zero, next to nothing will
>get investment going again, and you will have what made the Great
>Depression great.
He's right, of course, but what about the flipside? Would the Asian bubble have expanded to the proportions it did without the Mexican "bailout" of a few years earlier? Would foreigners be buying Russian bonds if it weren't for their implicit IMF guarantee (which would probably be rated F- on their own credit merits)?
And speaking of Summers, faithful to his Keynesian roots, he (co)-wrote quite a few papers on noise and excess volatility in the financial markets (i.e., markets systematically over-react, getting way out of line with fundamental values on both the up- and downsides, and an awful lot of market participants trade on "noise," not signal, rumor and perception rather than fact and solid analysis). At the Treasury now, and at the World Bank earlier, Summers has had no small role in turning global economic policymaking over to the noise traders. Do you think Summers perceives a contradiction here?
Doug