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Reflections on Economic Policy in a Time of Crisis

Speaker: Lawrence H. Summers, Director, National Economic Council; Assistant to the President for Economic Policy
Presider: Carla A. Hills, Chairman and CEO, Hills & Company; Co-Chairman, Council on Foreign Relations
June 12, 2009, New York
Council on Foreign Relations

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CARLA HILLS:  (In progress.)  You may not know that he earlier served on President Reagan's economic team.  And he also served as chief economic -- chief economist at the World Bank.    

So join me in welcoming this superstar.  We look forward to his remarks.  (Applause.)    

LAWRENCE SUMMERS:  Carla, there's a principle in politics, in which you have utterly failed me, the management of expectations. (Laughter.)  I don't think I can remotely live up to that billing.

When Lyndon Johnson was introduced by someone who, like you, introduced him overly generously, he responded, I wish my parents had  been here for that.  My father would have appreciated it, and my mother would have believed it.  (Laughter.)    

By the way, while we're at this, one of the -- there's a lot that's hard about government service.  But one thing that's nice, if you're in government service and you're an economist, you usually get introduced without an economist joke.  (Laughter.)    

It's not so long ago that I was introduced by the guy who said, Larry, do you know what it takes to succeed as an economist?  And I said no and waited.  And he said, an economist is someone who's pretty good with figures but doesn't quite have the personality to be an accountant.  (Laughter.)    

It was in Moscow, and no one got the joke.  (Laughter.)  And I would suggest to you that in the same spirit, as Tom Friedman's observation that it's been remarked that no two countries with Golden Arches have ever had a war with each other, that thinking about the set of countries where people would get that joke, and the set of countries where people would not get that joke, would be quite interesting and revealing.    

I'm glad to have a chance to revisit the Council on Foreign Relations.  I've spoken here a number of times, in my 20 years as a member, but perhaps at no moment so economically pivotal.    

The economic crisis President Obama inhibited is more serious than any -- than any economic -- inherited.  What did I say?    

(Cross talk, laughter.)    

I hope we are.  I hope we are inhibiting.  I hope we're doing more than inhibiting the crisis.    

The crisis President Obama inherited is more serious than any crisis that a president has inherited since Franklin Roosevelt in 1932.  The president's program at this point appears to be having many of its intended effects.    

While, three months ago, the economy could fairly be described as in freefall, while, three months ago, when we briefed the president each morning, we never brought good news or figures ahead of expectations, the situation is much more mixed today.    

No one should minimize the loss of 345,000 jobs in a month, more than at the peak of the previous recession.  But it also bears emphasis that this is half the rate of job loss just a few months ago. Consumer and business sentiment is improving.  In what is, perhaps, an important indicator over the long term, the fraction of Americans who feel that their country is on the right track has doubled.  This strength has been matched by strong performance of most financial markets in recent months as the stock prices of financial institutions have risen and credit spreads have come down sharply.    

To be sure, we cannot be complacent.  There are always false dawns during financial crises.  But we are in a different place than we were.  

Many things have contributed to the improvement in the economy. Macroeconomic expansion's been pursued more rapidly in response to economic downturn than ever before, in both its fiscal and monetary dimensions.  Financial policy has taken many forms, ranging from expansion of the central bank's balance sheet, to direct infusion of capital into financial institutions, to measures to support the housing market.  These areas of policy have been extensively discussed and debated.  

This morning, I'm going to concentrate more intensively on policies towards individual institutions.  The events of the last two years have been remarkable.  U.S. government has found itself compelled to take extraordinary actions in a number of different spheres, including significant equity positions in such iconic institutions as Citigroup, AIG and General Motors.  

Inevitably, government's role with respect to particular institutions has generated substantial debate.  Some believe that the government has been insufficiently intrusive in the economy, holding that banks should have been nationalized or that government should be taking a much heavier-handed role with respect to institutions in which it has intervened.  Others suggest that the interventions of the last year represent an overreach, a kind of back-door socialism that may threaten the very underpinnings of our market-based economic system.    

Let me be absolutely clear at the outset about two aspects of President Obama's approach here, aspects where he's been consistent and firm since the crisis began while he was campaigning for president.    

The first is an unequivocal recognition that action is appropriate only when necessary to avert unacceptable or dire outcomes.  Barack Obama ran for president seeking to restore America's role in the world, reform our health-care system, achieve energy independence and prepare our children for a 21st-century economy.  He did not, as he has said many times, run for president to manage banks, insurance companies or car companies.    

"The actions we will take," to borrow a phrase that Richard Haass has popularized of late, "will be of necessity and not of choice."  

Second point on which the president has been unambiguous is that any interventions in which we participate will go with, rather than against, the grain of the market system.  Our objective is not to supplant or replace markets.  Rather, it is to protect the market system from its own excesses and to improve the protection of that system going forward.  

You know, in the long sweep of history, Franklin Roosevelt's policies were denounced by many at the time as a radical attack on capitalism, but today are understood to have helped preserve the market system.   

So, too, our approaches are directed at protecting and strengthening, rather than replacing, the market system.  

A few words -- slightly professorial words -- about the market system and the senses in which it sometimes needs protection.  Perhaps one of the two or three most important things we teach students in introductory economics courses is about the self-equilibrating properties of markets.  

We go through a legion of examples about how if there's too much wheat the price of wheat goes down, and people demand more wheat, and people grow less wheat, and then the whole thing re-equilibrates.  And then we talk about the same thing with respect to interest rates and the demand for credit and investment funds, and how the system re- equilibrates.  And that's how we use the metaphor of a thermostat, and we talk about Adam Smith's invisible hand.  

And we do that because that is the right way to think about markets and economics in the vast majority of places at the vast majority of times.  But it was Keynes's great insight that, two or three times a century, perhaps a little more, that insight is wrong. One cannot rely on the self-equilibrating properties of markets, and markets become defined by vicious cycles -- vicious cycles like, for example, the vicious cycle in the housing market, where falling prices lead to more supply rather than less as they generate foreclosures, which then leads to further falling prices and more foreclosures and so forth.    

And there are many other examples of these vicious cycles.  As the economy weakens, the financial system weakens, because people can't repay loans.  That means less new lending; that means a weaker economy; that means a weaker financial system.  As people come to doubt the health of financial institutions, they withdraw their money. That leads others to become nervous that they're going to be the last one in and withdraw their money, and panic results.  

When faced with vicious cycles, the government has no alternative but to respond strongly to restore economic health.  The responses that should and are the first resort are -- the ones that are most protective of the market system -- are those of macroeconomic policy, the general provision of credit and liquidity and the expansion of government demand to support economic activity.  

But macroeconomic policies, while they can make and have made a substantial difference, may -- and in the current case would -- not have been sufficient.  When institutions are substantially interconnected, their failure can lead to the cascading failure of the -- of other institutions, as the experience of bank panics teaches.    

In a world of integrated supply chains, in a world where the purchase of a durable -- purchaser of a durable product has to worry about whether the institution that provided that durable product will be able to meet warranty and other obligations over time, a phenomenon of panic and self-fulfilling prophecy is not one that is confined to financial institutions.  

And that is why government in the previous administration and in the last months has, in certain cases, judged it necessary to intervene in the lives of particular institutions.  What is crucial, and where our focus has been as we have intervened, is on the intervention being temporary, being based on market principles and being minimally intrusive.    

Let me say a little bit about each of these principles.  To ensure that government interventions in individual companies are consistent with the -- with the president's principle of preserving the market -- private market system, we must design them to be as temporary as possible.    

That is why it is encouraging that, in the wake of major -- of the major -- of the stress tests, major financial institutions were able to replace -- raise private capital to replace the government's capital infusions and repay the U.S. Treasury approximately $68 billion -- at, by the way, a significant profit -- in just six months.  

It is also why the president was clear and explicit that his objective is to exit the government's investments in auto companies as quickly as is practical.  

A person who inherits a structurally deficient house faces a choice.  He can make only the necessary structural improvements so the house can pass inspection, or he can take on new renovation projects, with the ultimate goal of moving in.  With respect to government stakes in major enterprises, our approach is clear:  it is the former approach.  We do not want to be owners.  We want to be stewards to structural soundness, and nothing more.  And that is why we will work to transfer government holdings into private hands as soon as is practical.  

We seek -- in part, with that objective, in part for its own sake -- to assure that our interventions are based on market principles. Private market transactions in situations of economic distress take many different forms.  They may involve a wide -- a range of different types of restructuring.  This is also the case in situations of distress where it is necessary for the government to become involved.  

Our approach seeks to parallel what would be a private-sector process.  Where possible, we've provided secured loans, such as the various Fed facilities to support the banking system.  Where this is not possible, we've sought to provide unsecured debt or preferred stock investments, without taking on control rights.  Where institutions are fundamentally insolvent and government has had to provide the finance necessary in the context of bankruptcy, we have sought to do so in the same way a private-sector lender would have done.  

I emphasize this point, because a number of transactions -- particularly the recent Chrysler transaction -- have generated some controversy.  Let me be clear.  

In a bankruptcy reorganization, each class of creditors is entitled to no more than they would receive in a liquidation.  I am aware of no serious argument that, in any transaction in which the government has participated, this criterion has not been met.  

On the other hand, it is standard practice for those providing capital, the lenders of last resort, to make commercial decisions that end up treating some creditors more generously than they would be treated in the context of a liquidation.  

For example, in the steel restructurings that took place a few years ago, the private providers of capital chose to provide greater recoveries to the union health-care trust than they did to companies' other creditors.  Those investors made a business judgment that, to run steel companies effectively in the future, they needed to maintain a -- smooth, ongoing relationships with the representatives of their employees.  

For the same reason, certain creditors of various forms -- warranty holders, (pension ?) holders, for example -- are often treated much more generously than other creditors in standard commercial bankruptcies.  From this perspective, there is nothing that should be seen as remarkable about the ways in which finance was provided during the Chrysler or General Motors transactions.  

This idea of following market principles has shaped what we have done in other respects.  Reasonable financiers in the context of bankruptcies do not provide finance so that enterprises can repeat the mistakes that caused them to go bankrupt in the first place.    

That is why President Obama rejected the first restructuring plans that were put forth by both General Motors and Chrysler and insisted on much more radical restructurings that provided for profitability, even in severe recession conditions marked by 10 million cars sold a year compared to the 16 or 17 (million) that has been historically normal.  That is why, despite sizable government resources, more painful changes, including plant and dealership closings, were necessary.    

And that's why it will be our objective going forward to act just as any market participant would.  

This means, in important respect, we will seek to be minimally intrusive.  And here is where some difference with the private sector does come in.  While we would like to act as a private-sector financier could, in the context of intervention and financial institutions or companies, we cannot lose sight of the fact that the government is very different from a private-sector actor.  The government would be abdicating its responsibility to taxpayers if it did not ensure that financial assistance was deployed in a way that promoted growth and stability.  

But we must recognize that government officials involved with any company are subject to political pressures of many kinds.  They have a much broader -- they are buffeted by pressures from a much wider array of sources than would participants who are purely in the private sector.  For this reason, while it would not be uncommon for a private equity firm that invested in a distressed company to take an active role in its ongoing management over a long horizon, we have judged that a different approach is appropriate for government.  

Our focus -- our approach focuses on ensuring as a precondition of intervening that appropriate management and governance are in place.  It focuses on ensuring up front that a credible and robust restructuring plan is adopted.  It is not an approach that seeks to manage its companies or their operations on an ongoing basis.  

This approach is subject to controversy.  For example, there are those who believe that the government should use its stake in automobile companies to advance environmental objectives or to pioneer new management practices.  This is not the president's approach.  The president believes that automobile companies, in areas like CAFE standards or safety, should be regulated in the same way, by the same agencies, whether or not government has an economic stake in these companies.  

It would be both politically improper and economically unwise to view interventions in private companies as opportunities to achieve broader policy objectives.  And that is why we have insisted on a restructuring of the board of directors and, where appropriate, changes in management, but have resisted, I believe wisely, the temptation to intervene in day-to-day business decisions.  

These principles -- maintaining investments as temporary, following market principles and being as nonintrusive as possible -- do not assure success, nor do they remove the need for judgment.  But they provide a framework in which necessary -- (audio break) -- (painful ?) actions can be taken consistently.

It is too early to know how successful our policies have been. It is not even clear how we will know ultimately whether they have succeeded, because of the difficulty of constructing a counterfactual and knowing what would have happened without intervention.  But if you take one message from what I say today, take this:  Only if government is no longer a major presence in these companies in short order will we have fully succeeded in achieving our critical objectives.

Some final reflections:  It's no accident that there are countless TV dramas about brain surgery and none, to my knowledge, about blood tests.  Brain surgery makes for much better drama, though in terms of the ultimate health of the population a blood test may be much more important.  So, too, I would be remiss if I did not conclude by saying a few words about what is probably a more critical issue than the issue of how we intervene in particular companies in time of crisis.  This is the agenda of crisis prevention through stronger regulation.  

Many in this room, like me, have devoted, in one way or another, a significant part of their energies to the financial sector.  

In the last generation, we've seen in the financial sector a Latin American debt crisis, the 1987 stock market crash, the commercial real estate collapse and the S&L debacle, the Mexican financial crisis, the Asian financial crisis, the LTCM liquidity crisis, the bursting of the NASDAQ bubble and Enron -- all of that before the events of the last two years.  That works out to something a bit over one major crisis every three years.  

Now, in the textbooks we teach that the financial system is a distributor of risk, is a bearer of risk.  We do not teach that it is a creator of risk.  And yet, every three years, for a generation, and dramatically in the last two years, problems emanating from the financial sector have profoundly disrupted the lives of, in the least serious cases, hundreds of thousands of people, and in the most serious cases, tens of millions of people.  Surely, our fellow citizens are right to demand of those of us involved with the financial system greater stability and safety.    

That is why President Obama has made financial regulatory reform a central legislative priority of this early phase of his administration.  That is why considerations of stability, safety and systemic risk have to loom larger in the planning, thinking, the strategizing of every financial institution, going forward, than they have in the past.  

While the details in this area are mind-numbingly complex, some of the principles should be relatively obvious.  Any financial institution that is big enough, interconnected enough or risky enough that its distress necessitates government writing substantial checks, is big enough, risky enough or interconnected enough that it should be some part of the government's responsibility to supervise it on a comprehensive basis.  

We need regulators whose job it is to perform what might be called the free safety function:  looking for the threats not covered by existing and previous regulation in the systemic area.  I think, for example, of the explosive growth of over-the-counter derivatives on a largely unregulated basis over the last several years, and the failure to monitor those markets.  

I would suggest to you that our financial system is not failsafe until it is safe for failure.  We have resolution regimes for banks. We do not have systems for resolving non-banks or even bank holding companies, and that is a large gap.  

Perhaps even more fundamentally, I would venture this generalization.  There has never been -- and see, this is what happens when you're in the government.  What I wrote and what I said was: There has never been a financial crisis in which leverage was not centrally involved.  And someone, looking out for me, has modified the sentence here to say:  There has virtually never been -- (laughs, laughter) -- a financial crisis in which leverage was not centrally involved.  

Archimedes famously observed that if you'd give him a long enough lever, he could move the Earth.  We have seen powerfully demonstrated in financial markets that if you give enough leverage, people can lose, and arbitrarily, a large amount of their own money and that of their clients.  As Secretary Geithner once said when he was asked what's most important for financial stability, the three most important things are capital, capital and capital.  Looking forward, we intend to address capital adequacy as a central element of systemic reform.  

Finally, there are some common-sense points about the structure of regulation, as well.  Can it surprise anyone that if institutions choose their regulators, and regulators compete for jurisdiction, that standards fall and that there's a race to the bottom?  

Instead of sponsoring races to the bottom, we need to drive competition to the top by insisting on strong standards.    

A corollary of the same idea -- that regulators should not compete for institutions -- is the idea that regulation of consumer issues must put the interests of consumers above the interests of regulated financial institutions.  Monitoring systemic risk, implementing resolution authority, ensuring capital adequacy, eliminating regulatory arbitrage, enhancing financial protections.  If we can reform our financial system, we will minimize the recurrence of the situation we all find ourselves in today.    

Now, there's a debate, and there are two sides of it.  There are people who believe that the wrong time to reorganize the fire department is while the fire may still be burning.  Those people believe that this is not the right time, to debate the future of the financial regulatory system, that that debate should wait until this crisis is behind us.    

The president has concluded very strongly that that view is wrong.  He's reached that conclusion for two reasons.  The first is, experience teaches that once the crisis has passed, the will to reform will pass as well.  The second is that if we are to bring about recovery, as rapidly as possible, the way in which we will bring about that recovery is through increased confidence.  And a sense that the system is better controlled, less prone to bubbles and excessive leverage, in the future than in the past, will be a contributor to the creation of that kind of confidence.    

I'm often asked what our -- how I would define our objectives in the economic areas.  Here's the answer that I've learned to give.  My daughter's last year in high school, she studied U.S. history.    

Interesting for somebody my age to observe what they do and do not learn: 1982 recession, not mentioned; 1975 recession, not mentioned.    

Any economic fluctuation in my lifetime, not mentioned; the Great Depression, six weeks of study.    

Our objective:  Make sure that when people study history in 2040, they don't learn about the -- how the economy was performing in 2008 and 2009.  (Laughter.)  

But you know -- and this really is my final point.  (Laughter.) What they did learn about, they did learn about a whole set of laws that were passed in the 1930s that saved the market from its own excesses.  They learned about a whole set of laws that were passed, actually, by both Roosevelts, that responded to the excesses of the market system and enabled the market system to evolve and function better going forward.  

That is what I hope students will be studying a generation from now, when they study this period, as we manage this crisis and we set the stage for a healthier, even better-functioning market system in the future.  

Thank you very much.  (Applause.)  

HILLS:  Well, Larry, I hope you could tell from the applause and the faces that your presence and your words are very much appreciated.    

Let me open it with a first question.  You mentioned that the president thinks that the time to debate future regulation is now. And I seem to recall that 1999, when you were secretary of the Treasury, you strongly supported the pro-competitive passage of the Gramm-Leach-Bliley law, which lifted restrictions on banks offering insurance and investment services by repealing Glass-Steagall.  And some have argued that those restrictions need to be reimposed.    

And I'd be interested, and I know our members would be interested, in your views on that issue.  And if they do need to be reimposed, when?  

SUMMERS:  Gosh, I think I've got a call from the White House. (Laughter.)  

Carla, it is -- it's a vigorous debate.  There obviously are things that should be looked at.  Seems to me there are a number of considerations that would suggest that those restrictions are probably not at the center of this crisis, and that the center of this crisis has much more to do with excessive leverage, has much more to do with unregulated institutions that have no regulation for systemic risk, like the AIGs.  And I guess I'd just make a few points.  

If you think about the financial institutions that were at the center of the problem, they were independent investment banks -- Lehman, Bear Stearns -- independent insurance companies -- AIG -- whose activities weren't affected at all by the Glass-Steagall repeal.  

If you think about the countries that have been most successful in maintaining stability -- and probably the country whose financial regulatory system is actually looking very good right now, it's Canada.  Canada has had a much more integrated financial system in which all of these various activities have been combined for quite some -- for quite some time, going back to the late 1980s.  

If you look at what -- the solution that authorities here chose, it was actually a solution in which really the only transactions that have taken place since Gramm-Leach-Bliley passed that really were importantly implicated by Gramm-Leach-Bliley were the transactions taken to respond to this crisis -- the conversion of the major investment banks into banks.  

So the lesson that I would draw is much less one of combining banking and investment banking, where I suspect it's going to be very, very hard -- be very, very had to put the genie back into the bottle, and where I don't think if you look at any -- look at the institutions that primarily got in trouble, they were ones that had been affected by those restrictions.  

I think where one would, with hindsght, have done things differently is much more strengthening of regulation of institutions that were going to be very large.  We maintained the illusion that -- the illusion of market discipline with respect to institutions that in fact could not be subject to market discipline, and that's why I've put so much emphasis on the need for a systemic risk regulator in the context of the system.  

I do think there's room for a debate about failure.  You know, we have in our system limits on the fraction of total deposits that a bank can have, and -- because there was a concern about excessive scale.  I think the question of what would constitute excessive scale (in/and ?) interconnection will have to play a role in this regulatory debate, but at least my reading of the evidence wouldn't assign substantial responsibility to those particular regulatory changes.  

HILLS:  You mention what needs to be done to the institutions.  Some have complained about the government facilities, like the FDIC and Treasury, in their level of disclosure, for example. Some say that the selling of failed banks to private-equity funds have far less disclosure than a similar sale by a private company would have.  And I wonder what your thoughts are, because the allegation, as I understand it, is that the lack of information makes it very tough for investors to assess the fairness of the deals -- and if you agree or disagree.  And then, what would you recommend?  

SUMMERS:  You know, the Treasury doesn't actually own and sell banks.  It's really the FDIC.  I understand Sheila Bair is coming here this afternoon, so I'm going to leave that question to her because I don't know enough about their disclosure regimen to have an intelligent opinion.  In general, one would expect that for anybody selling something, you're usually likely to get a higher price if you reduce uncertainty.  

So one would tend to think that more disclosure would be in everybody's interest.    

But the precise nature of that controversy isn't something I've studied.  So I'm going to do what I would not have done 10 years ago and say, I don't know.  (Laughter.)  Leave it at that.    

HILLS:  Let me -- I'll ask you one more question that's dear to my heart.  And that is, the White House announced that trade would have to wait until after the legislation on health care, on environment and the climate.  And Chairman Baucus responded that he was surprised.    

And some have suggested that the debate over trade, which is a tough one in this administration, in this climate, could be converted into a debate over how to create jobs.  And that since the openness of our market and our exports actually cushioned the downturn, for the first three quarters of last year if we were to have the Colombia Free Trade Agreement go through, that would let our exporters sell without the restrictions that we face in Colombia.  And 97 percent of our exports area small-and-medium-size businesses, who are the backbone of job creation.    

Since you are the president's chief economic adviser, what do you say about a jobs bill on trade?  (Laughter.)    

SUMMERS:  I'm trying to figure out where you stand on the issue.  (Laughter.)    

HILLS:  I told you it was dear to my heart.    

SUMMERS:  Look, I don't -- I think the president has been pretty -- been pretty clear on his position.  He wants to see a more integrated global economy.  He thinks it's overwhelmingly in the interest of the United States.    

He knows that in most of the trade agreement, probably all the trade agreements, that the United States has signed, because we've had open markets for a long time, whatever -- they're not just good economic policy.  They're actually good mercantilist policy, because the other countries are reducing their trade barriers, by a lot more than we're reducing our trade barriers.    

And so I think the question is not whether it's a good idea, to create more open markets, but how you do it.  And do you do it in a  way that will support continued momentum, by assuring that the focus on commercial interests doesn't come at the expense of a focus on other interests; the kind of thing -- minimizing the kinds of problems that I was talking about, with respect to races to the bottom.    

Do we want to use the leverage associated with the privilege of being one of a limited number of countries that has a trade agreement with the United States to assure basic kinds of labor protections, to assure that countries are constructive with respect to tax enforcement?  And in what framework do we want to do that?    

That's -- those are important issues, and I think the president's judgment, weighing all of the priorities, is that we will make more progress on trade over several years if we do so in the context of a framework that will enable there to be a broad coalition in its support, and that that's going to take some time.  

And so I suspect that -- I think we probably agree that the right way to judge an administration on trade policy is -- just like you don't judge -- you don't judge somebody in a mile race by where things are after the first lap, I wouldn't judge where we are and the progress we'll make on trade at the end of the first six months or at the end of the first year.  I would look after four years.  

And I think the strategy that's being pursued will lead to substantial progress on trade, including what, to me, is most important, and where I think the economic stakes are actually, by far, largest, which is the multilateral system and the Doha round.  

HILLS:  Thank you for that.  And a question right there, Ambassador.  

QUESTIONER:  How can we assure --   

HILLS:  Name?  

QUESTIONER:  Richard Gardner, Columbia University.  How can we assure that, after this crisis passes, we don't return once again to an unsustainable pattern of in -- of international imbalances between the U.S., China and other surplus countries?  And I ask that in part because of the huge fiscal deficits that are projected by both OMB and CBO in the next decade in this country.  

SUMMERS:  I don't think there's any question that we're going to have to -- and I think it's -- and it's on both sides, Dick.  Part of it goes to the magnitude of our budget deficits, and that's why, if you listen carefully to the health-care debate, it's actually a very different health-care debate than we had in the '90s.    

It's different in that I think we're going to succeed this time, but it's also different in that it's much more focused on the set of questions around cost, and much more focused on limiting the growth in federal spending on health care, because that's really the single most important driver of the budget deficit.  

I've been for a long time, as many of you know, a deficit hawk. My advice to the president, confronting the situation he confronted after the election, was that if he didn't stop the downward spiral, there was no chance that the deficit was going to be other than completely catastrophic.  And so for the near term, the priority had to be on strengthening aggregate demand.  

As I noted in my remarks, that appears to have been a reasonable judgment, and the policies appear to be working.  But as the president has recognized all along, for the medium term we're going to have to obviously assure that the ratio of our debt to our income is on a sustainable, and ultimately on a declining path.  

But if you look at imbalances, it takes two to have imbalances. And so propositions become cliches for a reason usually, which is they have a certain amount of truth.  And the truth that other rapidly- growing parts of the world will need to take seriously a commitment to having their growth be more domestically demand-led is a truism.  And there's all kinds of questions about what the best ways are to encourage that, but I don't think there's any magic here.  We're going to need to save more, and others are going to need to have more focus on domestic demand as a source of growth.  

HILLS:  Yes.  Yes.  

QUESTIONER:  Bob Macey (sp), retired investment banker.  With the benefit of hindsight, do you think that pulling the plug on Lehman was a good plan?  And to what degree -- a lot has been interpreted as to how important that was to the continued sharp slide in our economy, and how much of an impact would you judge it at?  

SUMMERS:  You know, when you are talking about a forest fire and its causes, it's a complicated -- it's a complicated question. It's often difficult to find out what the cause is.  Even if you can find a particular cigarette, if it was a very dry forest, that forest fire might well have happened anyway.  

The authorities have indicated that they faced a variety of legal constraints at the time.  

So I'm not going to try to second-guess -- I'm not going to try to get involved in evaluating the decisions that were made at that time. What I think can safely be said is that the situation went from very serious before Lehman to grave after the events at -- after the events at Lehman.  

And certainly, whether you would, in retrospect, after studying all the context, conclude that the authorities could or could not have done something different -- and people can -- people can debate -- can and have and do debate that -- I don't think there's anyone who could look at the choices the authorities faced that weekend and feel that we have the right legal set of tools for addressing a failing financial institution that's not a bank.  And that's why I attached such importance in my prepared remarks to the set of issues around resolution authority.  

HILLS:  Martina (sic) Whitman.  

QUESTIONER:  Marina Whitman of the -- oh.  (Takes mic.)  I need that. My voice has completely vanished.  Larry, this is the second time I've asked the same question in this two-and-a-half-day meeting.  I'll be curious to see if the answers differ.    

As far as I can tell from reading the press, the president has two goals with respect to General Motors.  One is that it should become a viable, profitable company, and the other is that it should build small cars, more fuel-efficient vehicles, in the United States.    

In my mind, these are in direct contradiction to one another, unless a significant carbon tax were imposed, which -- I don't see any signs of it happening.  And I'm curious to know -- I suspect you don't agree with what I just said -- (chuckles) -- but your views on those two goals?  You said something which tended to go against the notion that he had an environmental goal there, but certainly the reports I've read suggest that that's part of his hopes.  

SUMMERS:  The president's been really very clear.    

It's -- there are a variety of regulations -- on miles per gallon, fuel economy -- all of it administered by the department, administered by the EPA, administered by the Department of Transportation, administered by the states separately.    

There was a compromise that was reached, among those regulations, that was announced five or six weeks ago.  Those rules will apply to General Motors.  Those rules will apply to Ford.  Those rules will apply to Toyota.  Those rules will apply to everyone in -- to all those producing automobiles in the United States.    

With the exception of those rules, which are general rules, the president's belief is that what General Motors should do is become a profitable car company.  And he does not see it as his role, nor does he see it as the role of those of us who work for him, to make a judgment as to what types of cars are best to produce, to become a profitable car company.    

So the approach is, I think, the responsible, go-with-the-grain- of-the-market-system approach, of regulate generally based on your principles and then encourage companies to maximize their returns, consistent with those rules.    

Now, you know, we could have a debate.  People could have a debate as to whether the rules that were set, for the CAFE standards, were exactly the right ones.  And there would be people in the environmental community who would say they should be stricter.  And there would be people in Detroit who would say they should be less strict.    

But the president is very explicitly not setting a strategy, for General Motors, about what type of cars they're supposed to produce, except insofar as it's a consequence of the general regulation.    

HILLS:  Yes, please.  Yes.    

QUESTIONER:  One has the impression that PPIP is sort of going from the front burner to --   

HILLS:  Would you state your name, please?    

QUESTIONER:  Oh, sorry.  (Inaudible.)    

PPIP has moved from the front of the burner to the back burner. I'm wondering what you think about these famous toxic assets and what's going to happen to them.  They still seem to be there.    

SUMMERS:  The question was -- the question was a reference to the -- to the PPIP, the public-private investment partnerships, and more generally to the toxic assets that are on -- that are on banks' balance sheets.    

You know, I think that relative to the moment when those programs were conceived, you've seen very substantial changes in market conditions that have enabled banks to both present much more transparently their financial situations and be objectively much better capitalized than most people would have thought was -- most people would have thought was likely at the time those programs were made -- at the time those programs were made available.  

So those programs are moving forward.  Some of them are up and running; others are not up and running.  I think you are right to say they've probably done less business than one might have expected two or three months ago, but in important respects, that's a consequence of the fact that private-sector leverage has been more available to investors than one might have expected two or three months ago; and banks, because they've been able to raise capital more easily than might have been expected, have had less need to avail themselves of those programs and de-risk than one might have expected two or three months ago.  

So in many ways, the failure to take advantage of -- the failure for there to be more of those -- more use of those programs, I think, is a reflection of good news over the last two or three months rather than of bad news.  

HILLS:  On the aisle, back -- you, yes.  On the left-hand side.  

QUESTIONER:  Astrid Tuminez from the Lee Kuan Yew School of Public Policy in Singapore.  If I might just shift the conversation a little bit to outside the United States, what is the centerpiece or the centerpieces of the Obama administration's economic policy towards Asia?  Is it guided at all by any desire to restore what really is the severely damaged American credibility in terms of leadership in building a robust global free-market economy?  

SUMMERS:  I'm sorry, I didn't entirely accept the premise of the question.  

In many ways, I touched on it when I referred to the president's commitment to the Doha Round.  The president -- I would argue that the G-20 meeting in London was probably as successful a global economic summit as we've had in the last generation.  In terms of the commitment to expansionary policies, it was reached on a global basis, in terms of the commitment to strengthening the IMF's capacity, nearly a tripling of its lending power to respond to the needs of emerging markets at a moment when consonance was very much an issue in emerging markets; and in terms of a recognition of the need for a change in voting power in the IMF and in other international institutions to reflect current and prospective roles in the global -- roles in the global economy.  

So I think that G-20 summit as an initial step and the subsequent steps on trade, the initiation of the dialogue between our administration and the Chinese associated with Secretary Geithner's trip to China two weeks -- two weeks ago, all stand for a very clear recognition of where the greatest dynamism and growth in the global economy is and a very strong desire on the part of the United States to be engaged with that.  

HILLS:  The gentleman on the aisle right there.  Left.  

QUESTIONER:  Amr Assad (ph), Bank of America/Merrill Lynch.  

The current administration proposal would respect the changing the rules governing taxation for multinationals for foreign income, how would that make our companies more competitive?  

SUMMERS:  Well, one way it would make it more competitive globally is by enabling us to bring down the budget deficit, which has been a central cause of -- the increase in which has been a central cause in our trade deficit.  

Look, there are two plausible neutrality principles when you think about international taxation.  One neutrality principle is that a firm -- an American firm thinking about doing business in a third country should compete on a level playing field with a foreign company thinking about doing business in that same third country.  That's one neutrality principle.  

A second neutrality principle is that an American firm locating production should be neutral between locating production in the United States and locating production in a third -- in a foreign country.  

And those two neutrality principles lead to different rules.  The rules that are in place now give total weight to the first neutrality principle.  The proposed reforms you're still working through represent to move about a third of the way from the first neutrality principle towards the second neutrality principle.  

We think both neutrality principles have their claim.  And, more generally, you know, we are very much open to input on this.  

If you look at the figures on profits of U.S. corporations earned abroad, there are places where you might think the greatest profits would be earned -- the places with the biggest economies, like China and Japan and Germany -- and there are other places -- I learned painfully that I shouldn't mention any names -- but there are other countries who -- stand out less for the size of their economies than for the lowness of their tax rates.  And if you look at where U.S. corporate profits show up, they show up very heavily in the latter set of jurisdictions.  

And so the notion that there should be some reforms at a time when we face massive deficits that address this issue seems to me to be a very reasonable one, and this is something that should be debated very much within the context of the overall corporate tax reform issues.  

HILLS:  Larry, you've been -- we simply have run out of time. We could keep him here all day, but I think that we've run the gamut across economic issues.  And he has been candid and direct, as his reputation has him be.  

And we thank you very, very much for being with us.  (Applause.) Great job.  Thank you.

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