Thursday, September 05, 2013

The Deregulators, Smarts and Judgment

by Bill McBride on 9/05/2013 06:55:00 PM

Quiz: who said what (two different people):

1) “Let me be clear, it is the private sector, not the public sector, that is in the best position to provide effective supervision. Counterparties and creditors have more knowledge of their counterparts, more skill in evaluating risk and greater incentives than any public regulator will ever have.”

2) "As we move into a new century, the market-stabilizing private regulatory forces should gradually displace many cumbersome, increasingly ineffective government structures."

Hint: One person partially apologized in 2008: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief."

Of course the 2nd quote from April 1997 - and the admission of error in 2008 - is former Fed Chairman Alan Greenspan.

The first quote is from then Treasury Secretary Larry Summers in March 2000.

I'm posting this as a response to all the recent articles about Larry Summers. Every articles says he is "smart". But intelligence is only part of the puzzle.  Since we never have complete information, or foreknowledge of what will happen, we frequently have to make decisions on partial information (use our best judgment).

Summers is obviously smart, but I wonder about his judgment. I could post many examples of judgment errors - from putting too much confidence in "Counterparties and creditors", to ignoring Brooksley Born, to calling Raghuram Rajan a "luddite" in 2005 for correctly pointing out potential "severe adverse consequences" of the financial system, to the housing tax credit (that I vigorously opposed), to the ludicrous "Summer of recovery" campaign in 2010 (when many of us were arguing the recovery would be sluggish), to the pivot to austerity ... and on and on.  

I think articles should discuss both "smarts" and judgment.

And Zachary Goldfarb at the WaPo points out another issue; the lack of discipline when speaking:

If he’s appointed Fed chairman, Summers will probably have to bite his tongue a lot more than usual, both internally and externally. The words of a Fed chairman can create or cost millions of jobs and send markets up and down. A quieter Summers would ... be crucial if Summers doesn’t want the controversies that have followed him over the past decade to undermine his leadership at the Fed.
Like Goldfarb, I'm concerned about Summers' speaking discipline.  It is important for a Fed Chairman to stick to their talking points, and limit their comments to the responsibilities of the Federal Reserve (Greenspan was terrible about this, overall Bernanke was very disciplined). 

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