By Lawrence Summers
It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August. Staggering increases in the prices of oil and other commodities have brought American consumer confidence to new lows and raised serious concerns about inflation, thereby limiting the capacity of monetary policy to respond to a financial sector which – judging by equity values – is at its weakest point since the crisis began. With housing values still falling and growing evidence that problems are spreading to the construction and consumer credit sectors, there is a possibility that a faltering economy damages the financial system, which weakens the economy further.
After a period of intense activity at the beginning of the year with the passage of fiscal stimulus legislation, strong action by the Federal Reserve to cut rates and provide liquidity and the introduction of anti-foreclosure legislation, policy has again fallen behind the curve. The only important policy actions of the past several months have been those forced on the Fed by the Bear Stearns crisis. It would be a mistake to overstate the extent to which policy can forestall the gathering storm. But the prospects for a more favourable outcome would be enhanced if four actions were taken promptly.
First, the much debated housing bill should be passed immediately by Congress and signed into law. It provides some support for mortgage debt reduction and strengthens the government’s hand in its troubled relationship with the government-sponsored enterprises – Fannie Mae and Freddie Mac. While it is an imperfect vehicle – too limited in the scope it provides for debt reduction, insufficiently aggressive in strengthening GSE regulation and failing to increase the leverage of homeowners in their negotiations with creditors through bankruptcy reform – it would contribute to the repair of the nation’s housing finance system. Failure to pass even this minimal measure would undermine confidence. Read more
Privatisation was one of the great achievements of the Thatcher era. But it is becoming increasingly evident that the transfer of monopolies into the hands of regulated companies that own, run and develop the assets is flawed. This is excessively costly to consumers. It is also an obstacle to investment in risky long-term assets such as airports, nuclear power , electricity and gas networks.
This is not to argue that privatisation is devoid of benefits. Where competition could be introduced into the newly privatised industry, as in the case of telecommunications, the gains were huge. Elsewhere, privatisation was the way to allow essential activities to escape from the dead hand of Treasury curbs on public investment. Private finance was more expensive, but investments were at least made. Read more
Today, almost two-thirds of humanity lives in high-income or high-growth countries. That proportion is up from less than a fifth 30 years ago. Unfortunately, the remaining 2bn live in countries with stagnant, or even declining, incomes. What makes this even more important is the worrying fact that some two-thirds of the 3bn increase in global population expected by 2050 will live in countries today enjoying little or no growth. Read more
By Lawrence Summers
After a modest interval with no big financial shocks, policy attention is turning to the task of preventing future crises and managing those that occur. While the deliberations will take quite a while to play out, there is some time pressure – because of the moral hazards created by the Federal Reserve’s extension of credit to investment banks and authorities’ desire to act before the sense of alarm created by recent events abates and complacency returns.
Proposals for changes in regulation and crisis response have come from many quarters, including the US Treasury and private sector groups. They offer important ideas on rearranging regulatory responsibilities – such as the Treasury’s suggestion of an enhanced role for the Federal Reserve with respect to investment banks and its call for a consumer financial regulator – and raise critical issues, such as that of procyclicality induced by regulation. They also contain a certain amount of essentially content-free calls for worthiness. So far missing from the debate has been a set of principles describing the properties of any desirable regulatory regime, against which proposals can be evaluated. Different observers will assign priority to different issues – here would be my list of six principles. Read more