Larry Summers Wants to Fix the Economy, but You Can’t Fix Stupid
Apparently, experts never learn. Larry Summers writes:
“The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.” (The Financial Post)
What he really means is that the only way to save the old dying economy is to revive the principles that brought it into being in the first place. But who wants it? It was a phony (bubble) economy in the first place — a housing bubble created by exactly the things Larry mentions. Obviously, if you want an economy that is based on ever-rising home prices, then you have to repeat what created that economy in the first place. Some people get so addicted to the sugar of the past that they just can’t live without it. (I notice Larry is looking a little pudgy in the face lately.)
Larry Summers Lays out His Vision to Fix the Economy
Summers goes on to write,
“Most policy failures in the United States stem from a failure to appreciate this truism.”
What truism — the truism that we must create a huge supply of very-low-interest credit with terms so easy that those who cannot ever pay their debt can still get loans if we want to accelerate the economy? Sure it works. We’ve seen it work. It’s like putting gasoline in a diesel engine. It runs real fast! For a short period of time.
It’s a lot of fun while it lasts, though. If you like big bangs.
Some people can’t take the pain of redesigning an economy from the foundations up. They just want the good times back. Larry Summers is such a man. He continues…
“Most significantly, the nation’s housing policies especially with regard to Fannie Mae and Freddie Mac … have become a textbook case of disastrous … policy.”
No, Larry. They already were a textbook case of disastrous policy. That’s how we got here. Now the nation’s housing policies have to be reshaped to a more solid and sustainable policy.
The baby always cries when weened off milk. Such is the case with Larry:
“Annual construction of new single family homes has plummeted from the 1.7 million range in the middle of the last decade to the 450,000 range at present. With housing starts averaging well over a million during the 1990s, the shortfall in housing construction now projected dwarfs the excess of construction during the bubble period and is the largest single component of the shortfall in GDP.”
Of course it has plummeted, Larry. The U.S. could never afford that many new houses in the first place. People bought them with loans that offered low interest up front, followed by more realistic interest down the road — realistic interest that the debtor could never afford. It was guaranteed to default except for one reason — the price of the home would go up enough that the debtor could refinance and get a lower interest loan because of the equity he had in the home or just sell it and buy again. That model assumed housing prices would always go up. They don’t. So, it was guaranteed to crash when the stopped. They did. It crashed.
Secondly, the crash means there are now millions and millions of foreclosed houses on the market. How are banks going to sell all those houses, Larry, if everyone goes back to buying new homes with cheap and easy credit? People don’t want to pay the old and outrageous prices for home, which put them in way over their head (and now, therefore, way underwater). So, they’re going to buy the foreclosed homes, rather than pay to buy a more expensive new one. And we have a lot of foreclosed homes to plow through. So, it’s going to take awhile for new homes sales to climb back up.
Just when you think Larry’s about to get it…
“In retrospect, it obviously would have been better if financial institutions and those involved in regulating them … recognized that house prices can go down as well as up; if more rigor had been applied in providing credit.”
…he fails to grasp anything at all:
“The question now is what should be done to address the housing market, given the drag it represents on the national economy.”
Yes, when an old economy that was based on bankrupt notions of freewheeling fun dies, it does create dead weight on the next economy you want to build. The temptation, then, is to save the old economy from extinction — to start building houses as fast as we were before and loosen credit restrictions again so that can happen. Avoid the pain of real correction. Thus, Larry states,
“FHFA has not acted on its conservatorship mandate to insure that the GSEs act to stabilize the nation’s housing market, and taken no account of the reality that the narrow financial interest of the GSEs depends on a national housing recovery.”
GSE being “Government Sponsored Enterprises,” i.e., Fannie Mae and Freddie Mac. In other words, the only way we can get those good ol’ boys back (Freddie and Fannie, which perhaps should never have existed in the first place) is to start feeding them again. True: the only way to get back to what we had is to do what we did before.
“Unfortunately, for the last several years, policy has been preoccupied with backward-looking attempts to address the consequences of past errors in mortgage extension….”
That is the only way you correct errors, Larry. You look back at the past to figure out what your mistakes were and then resolve not to repeat them. Larry loved the candy and is convinced he needs to get back on his high-sugar diet to be happy again. In other words, now that we have started dieting and eating in a more healthy manner, we feel hunger pains. It would be better, then, in Larry’s mind, to reduce the hunger pains by going back to gorging ourselves. We should, at least, gorge ourselves until the pains are past, and then we can start dieting. Never mind that getting real about our dietary needs will start the pains all over again.
“Instead of focusing on the stabilization of the housing market, its focus has been on reversing its previous policies heedless of changes in the environment”
It is a certainty, Larry, that if you change the policies that created a the old economic environment, the old environment will not stabilize, but will change. The Federal Housing and Finance Authority clearly needed to change because its policies created this catastrophe for the entire world. Change is almost always less comfortable than the status quo. That is why many seek to avoid it. Switching to a healthy diet is rarely as fun as eating all the burritos we want and washing them down by swilling all the beer we want.
The Larry Summers Formula for Fixing the Economy
Here are Larry’s specific complaints in his list of things to be corrected if we are to fix the economy:
“First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and rigorous in America today. This reduces demand for houses.”
Of course, stricter credit standards reduce demand for houses! Why do you think the government lowered credit standards in the first place, Larry? It lowered credit standards to spur demand by increasing the ability of more people to buy through greater debt. If we want fix the old economy so we can have it back, then, yes, we need to return to the principles (or lack of principle) that created it. We need to go back to sloppy loans so more people can buy homes for higher prices. That would be Larry’s preferred solution.
Thus, Larry whines that tightening credit reduces demand for homes:
“This reduces demand for houses, lowers prices and increases foreclosures, leading to further tightening of credit standards and a vicious growth-destroying cycle.”
It is sad to see a world filled with smart people who are so stupid. Of course, tightening credit standards creates more foreclosures because people cannot get out of their adjustable-rate loans by selling their homes for what they had into them. People cannot pay the outlandish original price if credit is no longer as loose and sloppy. If all the non-credit-worthy people cannot get loans and the credit-worthy ones cannot get loans for more than they can afford (as they once so easily did), then demand has to shrink because fewer people have ability to buy at all, and those that can buy have less money to buy with. This shrinkage is the inevitable result of replacing the failed expansionary principles with stronger more sustainable economic principles. You cannot resolve the problem of sloppy credit without ending the economy it created.
Summers wants to solve the old problems by reviving the dinosaurs. The only reason I pick on him is because there are many fat capitalists like him out there suffering the same dietary pains and clamoring to return to the trough of loose credit once again in order to fill their withering bellies. Anything but the pain of correction. Anything!
“Publicly available statistics suggest that the characteristics of the average applicant in 2004 would make an applicant among the most risky today.”
Of course it would, Larry. That is almost a self-evident truth. Those people you have in mind from 2004 were risky back then. That’s why they shouldn’t have been given loans then and certainly shouldn’t be given loans today if we want to put banks back on a solid footing. Larry opines that this risk evaluation is wrong:
“Of course the pattern should be opposite, given that the odds of a further 35% decline in house prices are much lower than they were at past bubble valuations.”
How do you think we got to 2004, Larry? We got there from 2000 when prices were about what they are today. We got to 2004 by giving those risky people of 2000 loose loans until the prices rose to 2004 prices. We employed policies that escalated risk down the road.
You Can’t Fix Stupid
It is not that Larry and those like him are completely stupid or even actually stupid. (He is, after all, a Harvard professor and a former U.S. Treasury Secretary. That explains how we got into this mess in the first place.) Rather, people like Larry suffer from economic denial. Denial blinds us from seeing what we don’t want to see — particularly our own failures. Larry was part of the failure. He helped build the old economy. So, he knows well what it takes to make that old dinosaur live again. There are certain things people don’t want to see because they are not pleasant to acknowledge. The housing market was a bubble that collapsed. Our entire economy was built around housing. So, to expand the economy endlessly, we had to develop real estate endlessly. Larry is for getting that monstrosity up and running again.
There are, of course, many other things an economy can be built on than the endless expansion of new construction in homes. The old economy doesn’t need to be fixed. The economy needs to be changed to an entirely different model that is sustainable.
We will always need some new homes, but we do not need endlessly bigger ones. We need to learn to live within our means — live within debt structures that we can pay off by retirement (not in thirty years) and that we do not have to refinance in five years because of adjustable interest rates. There is no way for the old foolishness to end … except letting it end. You cannot have the old back and create the new.
What we lack now is vision for what the new economy should be. We don’t need to revive the oversized dinosaur that consumed so much and then fell upon so many. Economic recovery needs to come by new thinking — innovation and creativity that realizes a new vision and that seeks to build from this point forward by living within our means.
We spent the last thirty years buying everything with debt … including the welfare we so generously provided to others at the expense of the next generation because we couldn’t afford our own generosity. It feels good to be generous with other people’s money, but it is not sustainable. We must now bear the pain of learning to live within our means.
We need a president who can inspire such a vision. Right now I don’t see any visionary candidates out there. (In 2009, President Obama made Lawrence Summers the Director of the White House National Economic Counsel. No wonder we’re not getting anywhere. Even the man of change picks the same old fools who helped create this mess.)
Further reading for economic idiots like Larry Summers or for those who just need a basic grasp of economics:
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