In 1991 Summers had excellent views on monetary economics. So did most other economists. It’s their current views I can’t stand.

This post is in response to Ashok Rao’s recent post.

Also check out my earlier post.



16 Responses to “In 1991 Summers had excellent views on monetary economics. So did most other economists. It’s their current views I can’t stand.”

  1. Gravatar of Ashok Rao Ashok Rao
    4. August 2013 at 09:29

    Scott, thanks for the tip.

    I’d add that his views on monetary econ may have been similar to other economists, but I was impressed by his understanding of how a financial crisis would play out – that it was still possible (something many others thought New Finance prevented) – and understanding derivative securities were illusory.

    That’s something many others concluded years later.

    I don’t know what Summers’ current views are. If Summers is nominated it might be one of the few Congressional hearings where we might actually learn something valuable.

  2. Gravatar of Geoff Geoff
    4. August 2013 at 09:46

    Summers: “I conclude that technological and financial innovation have probably operated to make speculative bubbles which ultimately burst more likely today than has been the case historically.”

    I wonder where all the trillions of dollars used to finance these speculative instruments came from?

    Savers? Savings rates have gone down over the decades.

    Oh, I know…



    17 million people on food stamps in 2000.

    47 million people on food stamps in 2013.

    They could have gained at everyone else’s expense in a slightly different, more pronounced way: The Fed could have just opened up 30 million more accounts, and issued these individuals checks payable against itself.

    That would have raised NGDP and benefited everyone else even more! Everyone works to produce goods which are consumed by others, not in exchange for goods and services, but for dollars. Mmmm, tasty dollars for breakfast.

    You see, with loans on the other hand, those who need to eat would have to do something productive in order to earn money with which to pay the loan back, and banks are skiddish about lending more to people who need food stamps.

    The US system is far too austerity driven. We all should have direct access to accounts held at the Fed, so that we can sign checks drawn on itself, the amounts of which are of course rationed out, by the Fed overlords, so that we avoid the “bad” kind of inflation, namely, inflation above 5.00036397435983498756398475634% NGDP.

    If anyone dares raising their cash holding time, from the magical status quo, then everyone else immediately gets an increased ration for checks.

    Of course, since we don’t want to make this appear as freebies, we have to demand that those receiving the checks give up something in return. How about their weekly garbage? That has non-zero value. We can have the Fed collect our garbage in exchange for checks drawn on itself. Then nobody can claim anyone is getting something for nothing.

    If we get the Fed to pay “the market value” of garbage, and for some inexplicable reason the price of garbage rises, and so the Fed pays $10,000 per pound, then MMs can continue to brainwash the public that people are not getting free money, but rather are making an equal “swap” of money for garbage.

    It’s pragmatic, politically palatable, and will make me famous, but that’s not the biggest thing. I just want to fix the way the Fed does its “business.”

    Who’s with me?

  3. Gravatar of TravisV TravisV
    4. August 2013 at 10:02

    Paul Volcker – New York Review of Books:

    “The Fed & Big Banking at the Crossroads”

  4. Gravatar of SG SG
    4. August 2013 at 11:08


    I’d trust Congress to come to sound conclusions on particle physics before they came to a reasonable consensus on monetary policy.

    Although, watching a Larry Summers confirmation hearing would be very, very entertaining.

  5. Gravatar of ssumner ssumner
    4. August 2013 at 11:22

    Ashok, I presume Summers’ recent articles reflect his current views. That’s what scares me.

    Travis, I’ve given up trying to read Volcker.

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. August 2013 at 11:49

    In 1991 there was only a relatively recently established consensus that central banks control the rate of growth of nominal GDP (NGDP). So Summers was not stating that central banks should target NGDP, he was only expressing himself in those terms because that is in fact how central banks impact the economy.

    The fact that Summers rejected rules in favor of discretion underscores the fact that he was not in favor of targeting NGDP, since NGDP targeting is itself a rules-based monetary policy. In fact NGDP targeting was one of the rules-based monetary policies discussed by Stanley Fischer in his 1990 chapter on rules versus discretion (“Rules versus discretion in monetary policy,” Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, 1990, pages 1155-1184 Elsevier).

    @Ashok Rao,
    You wrote:
    “If Summers is nominated it might be one of the few Congressional hearings where we might actually learn something valuable.”

    Based on the amazingly insipid questions Congress has consistently posed to Bernanke during his biannual Congressional testimonies these past five years, I seriously doubt that we would learn anything relevant to how Summers would actually conduct monetary policy, something which Congress seems to be blissfully unaware is part of the job description of a Fed Chair.

    Furthermore, given Summers whole strategy seems to be to sail into the job without actually saying anything substantive about monetary policy, I seriously doubt he would volunteer anything without being prodded.

  7. Gravatar of Steve Steve
    4. August 2013 at 12:28

    Marvin Goodfriend disagrees with you:

    “The first time I ran into him [Larry Summers] was in the late 80’s at a conference and I asked him a question about the strategy behind what he was saying about monetary policy at the time and I remember being stunned by his answer.

    Many of us understand monetary policy should be discussed as rules or strategy or long run goals before we talk about tactics, and so I asked him a question like that.

    And he [Larry Summers] answered something like, ‘well, we don’t need principles in monetary policy, we just need to know what we need to do and when we need to do it.’

  8. Gravatar of Jacob A. Geller Jacob A. Geller
    4. August 2013 at 13:39

    Has anyone yet risen to meet the Sumner-Summers Challenge? (I.e. has anyone found a recent article by Summers about monetary policy that makes any sense? Or is 1991 the best anyone has done…)

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. August 2013 at 14:05

    Jacob A. Geller,

    In my opinion the last research article related to monetary policy published that lists Summers as an author or a coauthor was in December 1993:

    I have repeated this claim numerous times to supporters of Summers and so far not one has even bothered to challenge me.

  10. Gravatar of Ashok Rao Ashok Rao
    4. August 2013 at 16:34

    “Ashok, I presume Summers’ recent articles reflect his current views. That’s what scares me.”

    I’m less sure about that: I don’t know why but I always suspect mass-market op-eds by occasional columnists. For example, Paul Krugman pointed out one of his op-eds had a 3-4 paragraph ode on long run deficits and why we have to have reform blah blah. Now these are perfectly reasonable concerns, but are more filler for an audience – we know that Summers likes stimulus.

    In similar vein, one stray comment in such an op-ed about bubbles should not be taken as conveying too much information.

    That said, we know precisely what Janet Yellen thinks of monetary policy, and we know that’s good – so she’s definitely a safer pick.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. August 2013 at 17:08

    Ashok Rao,
    You wrote:
    “Now these are perfectly reasonable concerns, but are more filler for an audience – we know that Summers likes stimulus.”

    We do?

    “The traditional breakdown between the cyclical and structural that is central to macroeconomic thinking has become highly problematic. If there’s anyone in this room who believes that a reasonable forecast for the U.S. or British economy at any future date would be represented by a trend line constructed through 2007 from any previous point, I have a bridge that I would like to sell you.”

    Lawrence H. Summers
    London School of Economics
    March 25, 2013

  12. Gravatar of ssumner ssumner
    4. August 2013 at 17:29

    Ashok, It’s not just one stray comment I object to, it’s a number of things he wrote, and it’s the advice that we know he failed to give Obama. He’s as much to blame for the recession as any other economist in America.

  13. Gravatar of 123 123
    5. August 2013 at 01:12

    “Monetary policy has very little scope to stimulate the economy….”
    Summers, September 28, 2008

  14. Gravatar of ssumner ssumner
    5. August 2013 at 12:51

    Thanks 123.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    5. August 2013 at 14:50

    Here’s a vote for Larry;

    Summers’s recent immersion in the markets could be a huge asset to the Fed. Those of us who were intimately involved in the 2007-08 financial crisis and its aftermath (full disclosure: I was chief economist at a large hedge fund during that time) understand well that the Fed surely would have benefited from more market experience before and during the crisis. Even Ben Bernanke, the outgoing chairman, has acknowledged that the Fed should have acted more quickly to recognize and respond to the cascading financial crisis surrounding the March 2008 collapse of Bear Stearns and, six months later, the collapse and bankruptcy of Lehman Brothers. Financial market experience would have helped to produce a more proactive response, especially after the Bear Stearns crisis.

    Both episodes nearly brought the global financial system to its knees. Markets approached total collapse as counterparties withdrew cash from one other. There was a virtual run on major U.S. investment banks from Morgan Stanley to Goldman Sachs. Even the mighty JP Morgan was at risk, notwithstanding the subsequent denials of its high-flying CEO and chairman, Jamie Dimon.

    And the Fed did make mistakes. The September 2008 collapse of Lehman Brothers defined systemic risk. Yet the Fed was still acting as if it was a normal recession, holding the federal funds rate at 3 percent, while “quantitative easing,” its later controversial bond-buying program, had not even been imagined. Meanwhile, the impression left by the Bear Stearns rescue made market players too slow to reduce risk, thereby helping precipitate and intensify the Lehman collapse.

    Had the Fed better understood the extent of the virulent crisis in 2008 “” perhaps a former Treasury secretary with both real-world and academic experience could have helped “” the substantial costs engendered by the imminent financial collapse, including the severity of the Great Recession that followed, might have been mitigated.

  16. Gravatar of Steve Steve
    5. August 2013 at 17:12


    Summers was just copycatting Krugman. Krugman published the same sentiment on September 22, 2008. It’s called epistemic closure. Or incestuous amplification.

    “And now, with the Paulson plan “” about which I have my doubts “” responsibility is clearly shifting from the Fed to the fiscal authorities.

    So Ben Bernanke came into his current position believing that central banks have the power, all on their own, to fight Japan-type problems. It seems that he was wrong”

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