09/26/07
On the subject of "moral hazard" noted in yesterday's DR, one of the major figures in establishment finance is weighing in… and there's no doubt on which side of the issue Clinton Treasury Secretary Larry Summers comes down:
The world has at least as much to fear from a moral hazard fundamentalism that precludes actions that would enhance confidence and stability as it does from moral hazard itself.
Translation: Wall Street big shots are entitled to their bailout, and anyone who says otherwise is a crank.
Cranks, to the mind of Summers, and Ben Bernanke, and Hank Paulson, are the types who say things like this:
I think we have a very narrow understanding about what moral hazard really is. Because I think moral hazard begins at the very moment that we create artificially low interest rates which we constantly do. And this is the reason people make mistakes. It isn’t because human nature causes us to make all these mistakes, but there is a normal reaction when interest rates are low that there will be overinvestment and malinvestment, excessive debt, and then there are consequences from this. My question is going to be around the subject of how can it ever be morally justifiable to deliberately depreciate the value of our currency?
Bernanke had no coherent answer to that question from Rep. Paul this week, nor does Summers address the question: The words "dollar" and "currency" appear nowhere in his column, and certainly not "devaluation." All that matters to him is that Wall Street big shots are entitled to their bailout. And just in case there was any misunderstanding on that point, Summers wraps up his piece thus:
[P]rudent central banks will make judgments during financial crises not on the basis of “avoiding moral hazard” but rather by asking themselves three questions.
First, are there substantial contagion effects? Second, is the problem a liquidity problem where a contribution to stability can be provided with high probability or does it involve problems of solvency? Third, is it reasonable to expect that the action in question will not impose costs on taxpayers? If the answers to all three questions are affirmative, there is a strong case for public action.
Let's see if I have this right… "Public action" (lovely euphemism for a bailout) is warranted if it does not "impose costs on taxpayers." But if, in trashing the dollar, it imposes costs on ordinary people who pay more for food, clothing, shelter and transportation… well, that's just peachy keen. Never mind that most of those people are also taxpayers, so it's simply a matter of whether they get screwed in an obvious way, or a less-obvious way.
I can't decide whether Summers is being disingenuous or ignorant. If it's the latter, he should stick to expressing his opinions on matters where he's more qualified to speak out — like whether women can ever equal men's achievements in the physical sciences.
Dave Gonigam
Treading a fine line between contrarian thinking and conspiracy theory, Dave Gonigam explores the nexus of finance, politics, and the media for Agora Financial's 5 Minute Forecast. He joined kindred spirits at Agora Financial in 2007 after a 20-year career as an Emmy award-winning writer, producer, and manager in local TV newsrooms nationwide.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
I am, by Summer’s definition, a crank. A massively huge crank.
It appears Bush wasn’t the only one born with a silver foot in their mouth.
I am a new/converted crank. Keep up the great insight!
OMG, this is THAT Larry Summers? Yuck!
Nice to see that Summers is universally stupid in both the areas of economics and science education. He was a pox upon Harvard and the Treasury.
Perhaps the answer to our economic and public education woes is to send him to be the economic advisor and academic in say one of the BRIC countries? I’m sure they’d ‘benefit’ in much the same way we have from his ‘expertise’.