Let's be clear. Whatever Summers' strengths or weaknesses he's not the arsonist.

The Ownership Society of Bush is the policy perp. for the housing bubble, with aiding and abetting by Greenspan and possible negligence in Congress (but you cannot point to Barney Frank on this except as accessory after the fact of the bubble).

Over-leveraging credit goes to Cox, who is thus the primary policy perp. for the subsequent credit mess and institutional failures.

That some fraction of homeowners (and I don't accept 20%) owe more than the current market value of the property is not relevant as long as they can afford to stay there. The big problem is that with job losses and economic contraction, some people will no longer be able to afford the house, WHETHER underwater OR NOT.

Oil going to $140/bbl and thus driving up gas and other fuel costs is one of the main problems for Detroit, but Detroit thumbed its collective nose and continued to produce too many gas hogs.

Maybe this is an unfair question, but how do you rate Paulson and his Republican predecessors of the past 7 years?

I'd really rather not see trashy polemics here.

Keeping interest rates low always leads to malinvestment. Glaivester

The critical word is "keeping" meaning that the Federal Reserve is manipulating the interest rates and preventing them from responding to consumers' spending patterns as they otherwise would.

During the late '90s and then, after 2000, Americans wished to spend their money rather than save it. They exhibited a high time preference.

Under normal circumstances borrowers could expect to compete for the limited savings and interest rates would rise, naturally. The higher interest rates rise the less will economically unpromising investments get funded.

"Malinvestment" is defined as any investment whose expected rate of return cannot be justified under the naturally prevailing interest rate.

By keeping interest rates artificially low (that is, by pumping money into the banks), the Federal Reserve guaranteed that these funds would be spent on malinvestments (for example, dark fiber, stock speculation, overpriced residences, etc.) in addition to excessive consumer spending.

I would predict that Barack Obama's administration is going to be for liberals and progressives what structured debt products have been for shareholders.

Larry has problems. There does not seem to have been much scrutiny of the alternatives. Dean nominates Sheila Bair. She's a woman and maybe she's doing a good job at FDIC. Where does that leave her on the issues of high policy? I don't know. Does anybody.

The more likely substitute is Tim Geithner. I don't know anything about him either, except he's a Federal REserve technocratic type. Is this the change we've been waiting for? I kind of doubt it.

Larry has problems. But he thinks big and maybe he's capable of evolution, so we could get really good or really bad outcomes.

What's the alternative?

From a CFR roundtable with Paul Volcker and Larry Summers:

QUESTIONER: -- relating to it. I don't know if there's any engineers or scientists in the room, but every engineer and scientist knows that any system that doesn't have a negative feedback loop blows up. And today, carrying on with your quote, there is no market-based self-correcting mechanism on increasing financial leverage.

So I'd like to ask Dr. Summers and Mr. Volcker, what contingency plan do you have, does the government have, does anybody have, when the dollar finally blows up? (Laughter.)

VOLCKER: I never had to face that contingency, so we'll turn it over -- (laughter) --

SUMMERS: I'm -- I think the history of the extrapolation of engineering lessons to economics -- (laughter) -- is at a minimum mixed. So I would resist rather strongly the basic implication of your question that we're automatically headed for doom.

I think what your question does raise is how to think about -- it does raise an aspect of how to think about certain kinds of adverse shocks. And there is in all modern economies a safety net to at least some extent under a certain kind of financial problem, which is that if liquidity dries up in a world where there is a printing press, the central bank does have the capacity to provide liquidity, and that can be enormously availing, as it was after October 19th, as it was in 1998 and 1999, as it was in the immediate aftermath of -- in the immediate aftermath of September 11th. And for very good and very conscious reasons, that process is surrounded with a certain amount of mystery and uncertainty, which is that it has a little bit the character of paying ransom. On the one hand you want everybody to believe that it will never happen and rely on the fact that it's not going to happen so that they're very careful. On the other hand, once the adverse event has happened, you actually do want to fix it in the best possible way. So that's one part of the answer.

But there is a very serious potential contradiction, which I think will increasingly be at the root of the most serious financial crises and which in many ways we saw in Asia in the late 1990s, and that is if a country has two problems -- one is all the foreigners are trying to take their money out because they've lost confidence and they don't believe in the sustainability, and the other is that the domestic banks are failing and that the assets are coming out -- then the central bank has two problems. It has an external problem, which is that people don't want to hold your money -- you should print less of it; and there's an internal problem with the banks failing. You can't very well -- contracting liquidity can be catastrophic, as it was in the United States in 1929 and 1930. And with a single instrument, it's very difficult to hit two targets. And so the most serious risk in the system is the kind of crisis that arises when there is a simultaneous failure of both internal and external confidence. And that's why people will debate forever what the Bank of Indonesia or the Bank of Korea or the Bank of Thailand should have done, should have been encouraged to do by the IMF and so forth, because there was no very good answer in the face of that internal contradiction.

And that's why certainly one of the risks in the current situation does lie in the magnitude of the U.S. current account deficit and the buildup of foreign claims on the United States. And it's a very difficult question to know whether those who are now holding a large portion of those claims -- foreign governments and central banks -- are, in the market parlance, strong hands, who will continue to hold all the way through, or weak hands, who will tend to liquidate at the first sign of trouble. Both what are they, and what are they perceived as being, because if they're perceived as being weak hands then others will find ways to liquidate even if they don't. And I've said at another point that in important respects, today's system relies on a kind of financial balance of terror, that the incentive isn't there to liquidate because if you liquidate, the value of all the stuff you own goes way down in value and that it's hard to know how to think about a system based on a financial balance of terror. On the one hand, as we saw, systems based on balances of terror can often have tremendous stability. On the other hand, as the term "balance of terror" suggests, there's good reason for them to make one feel uneasy."
-------

The above dialogue was in May 2007.

For the whole session (which is a good intro to Larry-thought circa 2007):

http://www.cfr.org/publication/13468/bretton_woods_ii.html?breadcrumb=%2Fbios%2F451%2Fpaul_a_volcker

I don't see any scintilla that he was prepared to deal with the true gist of the question..not a good sign in a conference devoted to a Bretton Woods II re-assessment.

In the context of Summers mentioning Indonesia, Korea, and Thailand in the above quote, I noticed this blog this morning:

Can you resist financial globalization?
http://rodrik.typepad.com/dani_rodriks_weblog/2008/11/can-you-resist-financial-globalization.html

Yes you can, and Asia has been doing it. I am in Bangkok for a Bank of Thailand conference, and among other interesting contributions (by Jose Antonio Ocampo, Raghu Rajan, and Arvind Subramanian) is a nice paper by the BIS's Robert McCauley and Guonan Ma called "Resisting financial globalization in Asia." The paper documents how fours countries (China, India, South Korea, and Thailand) have thrown "sand in the wheels of finance" to varying extents. Interestingly, those countries that have done the most resisting are the ones that are the least affected by the crisis.
The paper makes the following points in particular:
• Asian-style resistance to financial globalization has taken the form of limiting the role of foreign banks in the domestic banking system and of restricting cross-border arbitrage in foreign currency, money, bond and equity markets.
• Evidence from prices and quantities shows the most limited globalization in China, followed at a distance by India, followed in turn by Thailand and then Korea.
• The extent to which countries have been hit by the recent crisis follows this ranking (in reverse order) almost exactly. In particular, Korea has been the country hardest hit despite many other preventive policies (including large reserve build-up) before the onset of the turmoil.

So far as I see, everyone surrounding Obama believe, axiomatically, in the efficacy and legitimacy of globalization, free trade, financial markets, and "neo-liberal" economics in general. They are not going to be able to think outside the box. None of these policies are what built the United States, contrary to the myths promulgated by movement conservatism and market fundamentalists, and the overwhelming majority of economics professors in the world today. See "Classic Senate Speeches, Henry Clay, In Defense of the American System, February 2, 3, and 6, 1832" at http://liuzhao.info/artandhistory/history/common/generic/Speeches_ClayAmericanSystem.htm

Prediction accuracy ought to count for something.

http://query.nytimes.com/gst/fullpage.html?res=9A03E6DF143DF930A25752C1A96F958260

The New York Times, November 13, 1999:

President Clinton signed into law today a sweeping overhaul of Depression-era banking laws. The measure lifts barriers in the industry and allows banks, securities firms and insurance companies to merge and to sell each other's products.

''This legislation is truly historic,'' President Clinton told a packed audience of lawmakers and top financial regulators. ''We have done right by the American people.''

The bill repeals parts of the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act...

''The world changes, and Congress and the laws have to change with it,'' said Senator Phil Gramm...

''With this bill,'' Treasury Secretary Lawrence H. Summers said, ''the American financial system takes a major step forward toward the 21st Century -- one that will benefit American consumers, business and the national economy.''

Meanwhile, recognizing the arson:

http://www.thenation.com/archive/detail/14239331

The Nation Magazine / Nov 15, 1999 edition:

For their money, the finance industry bought not only the end of the Glass-Steagall Act but also the partial repeal of the Bank Holding Company Act. These landmark pieces of legislation, recognizing the inherent dangers of too great a concentration of financial power, barred common ownership of banks, insurance companies, and securities firms... the misnamed Financial Services Modernization Act will usher in another round of record breaking mergers... PAVING THE WAY FOR FUTURE TAXPAYER BAILOUTS OF TOO-BIG-TO-FAIL FINANCIAL CORPORATIONS.

Score that: The Nation 1, Establishment 0.