Time to leave US financial crisis to the foxes

Business Times - 27 Feb 2009

Time to leave US financial crisis to the foxes

PUNDITS in Washington are obsessing over the intellectual odyssey of economist Lawrence Summers who has been transformed from an avid free marketer of the 1990s, when he served in the Clinton administration, into a supporter of massive government intervention in the current financial crisis as President Barack Obama's top economic advisor.

'(British economist John Maynard) Keynes famously said of someone who accused him of inconsistency: 'When circumstances change, I change my opinion',' Mr Summers recounted recently in an interview with Newsweek magazine to explain why he had been a proponent of deregulating the financial markets during the height of the age of financial globalisation and why now in the era of 'de-globalisation' he has been promoting a more activist role for Washington in regulating Wall Street.

It's not that Mr Summers was experiencing an epiphany, the sudden realisation of the essence of economic theory. As he recalled in the interview with Michael Hirsh and Evan Thomas of Newsweek, it was during the start of the financial crisis that he began to see that the government's normal mechanism for stabilising the economy through monetary policy was not working and that only swift government intervention could help get the economy out of deep recession. Moreover, Mr Summers insists that while he was never a 'wild-eyed free marketer' during the 1990s, he is not proposing now a vast programme of socialising the American economy. His message is that smart and effective economists, like all good policymakers, need to refrain from clinging dogmatically to Big Ideas and instead should exhibit intellectual flexibility and adjust to changing circumstances.

But intellectuals who tend to be appalled by the suggestion that they should consider divorcing their lovely Big Ideas accuse Mr Summers of being an 'opportunist'. He is seen as a betrayer of liberal economic philosophy by dogmatic free marketers while social-democratic intellectuals are furious that Mr Summers, and by extension President Obama, are not making a turn to the left by nationalising large swathes of the American economy.

In a way, applying a typology introduced by the late British philosopher Isaiah Berlin, Mr Summers and Mr Obama demonstrate in their response to the economic crisis that they are 'foxes' and not 'hedgehogs'. As Mr Berlin argued in a famous essay, hedgehogs are intellectuals who 'know one big thing', one Big Idea, that they apply when they deal with every policy issue.

So when we face an economic recession or an economic boom, the free-marketeer hedgehog deduces from his or her Big Idea that once again we need to lower taxes - and dismisses any challenge to his approach. The social-democrat hedgehog's response under these scenarios would express an unyielding sense of confidence in the need to continue expanding government control of the economy - yesterday, today, and tomorrow.

Foxes, on the other hand, 'know many things', suggested Mr Berlin. They examine the many facts before them, and try to draw the outline of their policy analyses and proposals based on the reality on the ground and not based on some grand theory that may sound very profound but doesn't provide an explanation or produce a workable solution to a particular challenge.

Hence, the inductive process of thinking that foxes apply could lead them to conclude that under the global economic conditions of the 1990s, Washington should have taken some steps to liberalise and open the economy, while the response to the current financial crisis requires more but limited government intervention. In general, the public and the elites, including the media, tend to be attracted to the assertive hedgehogs and their Big Ideas that make for good copy and sound bites. And a Big Idea makes it easier for the leader to employ a battle cry to mobilise the people to 'war' against this or that problem.

The foxes sound a bit hesitant and irresolute and they do a lot of verbal zigzags, using a lot of 'on one hand' and 'on the other hand' argument. And that doesn't sound so great on television or in presidential addresses.

Indeed, Mr Obama in his recent address to Congress could have employed, for example, a populist rhetoric and demanded that the greedy bankers be punished and their institutions be nationalised by the government.

Instead, his address reflected the 'foxy' approach promoted by Mr Summers and his other advisers. It's an approach that doesn't guarantee a successful outcome; the Obama administration may have to take many more policy zigzags in the future. But after several years in which the hedgehogs were in charge - cutting taxes at home, and promoting democracy abroad - Americans seem willing to give a chance to the foxes to pursue their method of trial and error that could prove to be more successful.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


Anonymous said…
Obama's advisor Summers fires derivatives whistleblower

Harvard alum Iris Mack, MBA/PhD communicated with Larry Summers (former Harvard President and current Obama economic advisor) to express her concerns about how her Harvard Management Company (HMC) boss Jeff Larson used derivatives to manage an HMC portfolio. Larson eventually left HMC to start Sowood hedge fund with hundreds of millions of dollars of Harvard alums' donations. Sowood was one of the first hedge funds to blow up during the subprime mortgage derivatives crisis.

Dr. Mack communicated with Summers' office regarding such derviatives trades. Perhaps, she could have saved Harvard alums hundreds of millions of dollars if Summers had bothered to continue to hear her out before forcing her resignation. There is a wealth of information describing this derivatives whistleblowing case: correspondence between Dr. Mack and Summer's office (emails, faxes, snail mail, phone records, etc.); legal documents; reports from FBI and DOJ interviews, etc.

Given all this, you have to wonder whether Summers was either too
(a) corrupt and wanted to coverup up something(s) at HMC.
(b) arrogant to think that Dr. Mack had anything of value to tell him about mathematical finance and derivatives. Please recall Summers' comments about women and math. Also, please note that Dr. Mack has a doctorate in Applied Mathematics from Harvard and a Sloan Fellows MBA from London Business School.
(c) incompetent to understand what Dr. Mack was trying to warn him about regarding derivatives trades in HMC portfolios.

Did Summers try to silence Dr. Mack the way he, Rubin and Greenspan tried to silence Attorney Brooksley Born of the CFTC?

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