As Tom talked with Linda Bilmes about the “high-wire economic handoff” to the incoming Obama team, it struck me that Tom’s interview with Larry Summers — now Obama’s top White House adviser on the economy — back in April of last year might be worth listening to again.
In fact, it was prophetic. To take you back, the conversation was on April 3, in the wake of the Bear Stearns bailout, as many were realizing just how dangerous the situation was. Near the top of the hour’s last segment, Tom asks Summers about Treasury Secretary Henry Paulson’s approach to the emerging Wall Street crisis (remember, this was months before the big collapse in September and the $7oo billion bailout). Here’s the exchange:
TOM ASHBROOK: Is Paulson’s proposal sufficient?
LAWRENCE SUMMERS: I don’t think Paulson’s proposal is directed at very many of the major issues that this crisis raised…. It’s not directed at the levels of capital, and the way in which capital is measured. It doesn’t get into the problem of what people in the financial world call “liquidity risk,” the risk that there’ll be a sudden panic and that institutions which are basically solvent won’t be able to come up with liquidity quickly enough.
ASHBROOK: Is it the wrong medicine?
SUMMERS: It’s not the wrong medicine. It’s, you know, if you have a fire you have to decide what kind of fire it is. Is it a grease fire? In which case, spraying water on it is going to make it worse. Is it a more conventional fire? In which case water is the answer. What types of approaches are right to the fire? You have to decide those issues before you decide how the fire department is going to be organized….
ASHBROOK: But it sounds like you’re saying he’s misdiagnosed it.
SUMMERS: No, it’s not misdiagnosed. It’s just not diagnosed. So the secretary is talking about the organization of the fire department, when the more profound questions involve what kind of fire it is, what the causes of the fire were. And whether you organize the department in batallions or companies, or regions, or around different kinds of fires, it’s better to get right than to get wrong. So there’s nothing wrong with it. But it’s not really the central issue that’s involved in the crisis.
ASHBROOK: Are you still waiting then for an answer to the crisis we’re in the midst of, from this administration?
SUMMERS: I think not enough has been done. The administration has put forward these programs, these policies involving collaboration with financial institutions to reduce mortgages, but they haven’t really come to very much. So I think we do need a much more systematic program to prevent foreclosures, to maintain communities when there are the inevitable level of foreclosures, to keep the flow of credit going in the municipal market, to keep the flow of credit going to student loans, to maintain the incomes of people who are really going to lose a great deal as unemployment increases, through increased unemployment insurance. I think we do need a more activist set of responses to the current crisis, if we’re to maximize the chance that it’s contained.
That was on April 3, 2008. We know what happened. We’ll see what happens now.
