At the FT Robin Harding dug up some recent comments on economic policy by Larry Summers:
Lawrence Summers made dismissive remarks about the effectiveness of quantitative easing at a conference in April, raising the possibility of a big shift in US monetary policy if he becomes chairman of the Federal Reserve.
“QE in my view is less efficacious for the real economy than most people suppose,” said Mr Summers according to an official summary of his remarks at a conference organised in Santa Monica by Drobny Global, obtained by the Financial Times.
“If we have slow growth, we are not going to keep thinking that 5.5 per cent unemployment is normal,” said Mr Summers. “We are going to decide rightly or wrongly that the potential of the economy is less and therefore we are going to decide that we are closer to that potential and that is going to operate in favour of suggesting that we should normalise interest rates.”
And he sides with Krugman on the importance of fiscal stimulus:
“More of what will determine things going forward will have to do with fiscal policy and that there is less efficacy from quantitative easing than is supposed,” he said in his Santa Monica remarks.
Mr Summers said that while QE does little good it also does little harm. “If QE won’t have a large effect on demand, it will not have a large effect on inflation either,” he said.
The market monetarist view is that QE does little good because it was designed for exactly that. And in this case doing “ little good” is tantamount to doing great harm! Much better to design what Christy Romer calls a “regime shift”.
No wonder the potential is of a Summers Chairmanship has been “spooking bond markets”
And a great punch-line:
Yet at some point, you have to wonder if Mr. Obama really wants to go the Summers route again. Mr. Summers wasn’t exactly a visionary, and he didn’t show remarkably sound judgment.
Or it could just be a matter of Mr. Summers being at the wrong place at the wrong time. Bad pennies have a knack for that.
Of course, Mr. Obama does have a choice. He could try his luck elsewhere.