Summers on the Shitpile

Lawrence Summers pronounces himself optimistic that actions already taken have set the stage for us to avoid further financial calamities and get back on the road to recovery without major dislocations. But he says we ought to take several further steps, including passing the Dodd-Frank bill to reduce foreclosures, and that efforts need to be made to get financial institutions to raise more capital and for the shareholders in the GSEs to accept more obligations to the public rather than have "their shareholders’ 'heads I win, tails you lose' bet with the taxpayer be expanded for this purpose."

In general, Summers says that "at a time when much is being given to financial institution shareholders and management, action to help the economy and protect the taxpayer should be expected in return." This seems right to me. It doesn't make sense to let large institutions fail purely out of spite at a time when it's possible to rescue them and keep the economy humming along. But with great power to fail in a way that brings down the whole economy ought to come great responsibility to submit yourself to formal or informal regulatory oversight. Meanwhile, we need measures like Dodd-Frank and, in general, a social safety net that works for the broad public and not just for large financial institutions.

Comments

Lawrence Summers pronounces himself optimistic that actions already taken have set the stage for us to avoid further financial calamities and get back on the road to recovery without major dislocations.

Summers is delusional. The FDIC knows what is up, which is why they are bringing agents out of retirement to train everyone for the coming waves of bank failures.

WAMU is dead-man walking. Everyone knows it. They already have extremely high foreclosure rates in their AAA tranches. Once the option ARMs reset, that bank will implode into nothing. I do not call that avoidance of "further financial calamities".

Posted by Walker | March 31, 2008 10:01 AM

"Meanwhile, we need measures like Dodd-Frank and, in general, a social safety net that works for the broad public and not just for large financial institutions."

Paid for with what money? Either you raise taxes to pay for the net, or you borrow even more money and trash the dollar further. We'll be a lot better off when the policy wonkery ends and reality juts its ugly head in through the door.

Somebody has to take a loss, and either you're going to put it on the heads of investors and borrowers, or you're going to spread it out to everyone else in America at a time when everyone in the middle class is freaking out about rising prices and inflation.

Posted by Helter | March 31, 2008 10:08 AM

Somebody has to take a loss, and either you're going to put it on the heads of investors and borrowers,

The investors should be your number 1 source for the loss. Unfortunately, the Fed has spent the past seven years protecting investors, so that is going to be hard to change. Furthermore, given the leverage that has been going on in this industry, the investors are probably not enough to cover losses. That's the real problem.

Posted by Walker | March 31, 2008 10:12 AM

Here’s why you let them (i.e., financial institution and house buyers who made truck loads of $$ using sketchy financial schemes) fail.

The “deal” as I’ve always understood it:

Risks takers can make tons of money (as most have over the past 15 years) but can also lose it all – which is why it’s called taking risks.

Non-Risk takers will never get super wealthy. But that’s fine. They'd rather save conservatively (such as avoiding overheated stock markets or more recently CDO type scams) until they can afford a good down payment on a reasonably priced home.

Right now while the risk takers are getting burnt and real estate values begin returning to sanity, conservative investors - like myself –should look forward to using our strong/saved dollars to purchase a home.

But the Fed/Fed Gov’t has decided prevent that from happening. The Fed is purposely destroying the value of the US dollar to bail out the risk taking financial institutions. The Federal Gov’t (and some State gov’t) is taking actions to keep the over-inflated house prices at their insane levels in order to protect people who took enormous financial risks during the real estate boom.

So, now my savings are being wiped out by inflation AND I will not be able to benefit from house prices returning to normalcy.

Risk takers get the profits. I pay their expenses. I don’t buy this “we have to bail them out for the benefit of everyone.” Self serving crap…

Sensible savers are being punished for the sole benefit of greedy/stupid people.

That’s no way to run an economy.

Posted by hankest | March 31, 2008 10:16 AM

Here’s why you let them (i.e., financial institution and house buyers who made truck loads of $$ using sketchy financial schemes) fail.

This is against the Republican party platform: privatization of profit, socialization of risk.

Posted by Walker | March 31, 2008 10:23 AM

I hear the Fed is working on waiving the laws of gravity. Should meet with about equal success as erasing those governing greed and self interest. I look forward to the largesse and generosity of those in the banking industry willing to forfeit personal wealth and gain for the greater good. Oh, also being able to float in the air unassisted.

Posted by steve duncan | March 31, 2008 10:38 AM

"The investors should be your number 1 source for the loss. Unfortunately, the Fed has spent the past seven years protecting investors, so that is going to be hard to change."

What, exactly, are you talking about? The investors in Citigroup are down about 50% in the last year; the investors in Washington Mutual are down about 75%; the investors in New Century Financial are down 100%; the investors in Delta Financial Corporation are down 100%; etc. No one in Congress is scrambling to bailout those investors, many of whom were middle class -- as well they shouldn't. When you invest, you assume risk. That's true when you invest in real estate too.

Posted by Fred | March 31, 2008 2:22 PM

Re: But the Fed/Fed Gov’t has decided prevent that from happening.

Check again. Housing prices are falling. Nothing the Fed has done has (or can) prevent that.

Posted by JonF | March 31, 2008 2:51 PM

No one is trying to bail out Wash Mutual or Citibank? I don't know about that, don't you think Bernanke dropping interest rates every other day may have something to do with helping Wall St?

Jon, correct, i should have said "decided to try and prevent"...

Yes, housing prices are just beginning to fall – but there’s tons the fed and the federal gov’t can and have been doing to try and stop the fall. Every day we get to see our elected politicians clawing over each other proposing to do more to “save the housing market.”

Those measures come at the expense of fiscally conservative workers and wage earners.

Posted by hankest | March 31, 2008 3:26 PM

Fred wrote, The investors in Citigroup are down about 50% in the last year...

But if the bank would be worth zero if the Fed wasn't protecting it, then your point fails.

Posted by liberal | March 31, 2008 4:02 PM

Call me a class traitor for becoming less conservative as I've gotten older, but I'm starting to think "you bail it out, you bought it" has a nice ring to it.

I'm not a big fan of nationalizing everything in sight, but a one or five big ticket condemnations might encourage the big boys to try some little 'c' conservatism in their business dealings.

Posted by cmholm | March 31, 2008 4:51 PM

Summers on the Shitpile would make a great suquel to Tuesdays With Morrie.

Posted by JB | April 1, 2008 5:22 AM