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“The problem is in the developed world. In the U.S., quantitative easing is ending due to tremendous criticism. The hurdle for launching QE3 will be very high. Europe is a special situation. The ECB [European Central Bank] is trying to reduce its balance sheet for the third time since the financial crisis of 2009. The first time they tried it triggered the Greek crisis. The second time it triggered the Irish crisis. The third time there could be problems in Italy.”

                                          Felix Zulauf (Quoted from Barron’s Roundtable)

Commentary & Analysis

Summers Back with his “How to screw up an economy” playbook

You may know already, but if you don’t: I don’t like Larry Summers. To me he is the poster child for the smarmy Northeastern liberal who thinks he is the Master of the Universe (there are so many of these clowns out there it’s hard to count them all). Larry continues to get great jobs even though most of the time his economic analysis and policies prove dreadfully wrong. But if you get in the smarmy league of the elite, you never seem to have to say you are sorry no matter how much damage you do to others. From an economic policy perspective, Larry takes the cake … in my book.

After his most dismal showing as economic czar for President Obama, Larry has the gall to once again offer policy advice via the Financial Times this morning. This, my friends, is what you call Chutzpah!

Before I share some key criticisms of Larry’s latest drivel, I wanted to share something written by Bloomberg columnist Caroline Baum years ago, while Larry was acting as Treasury Secretary (might have been Assistant under Mr. Rubin) …

I read with glee Caroline Baum’s skewing of Mr. Summers, who she referred to as “the Diet Coke swilling Treasury Secretary.”

Caroline recounted a story of Larry doing the usual finance ministers hob knobbing, in some glorious locale on the globe. You know the kind, the kind where all the literati get together, have their staff draft a meaningless summary statement of all that was achieved at the gathering, but not letting any of that get in the way of wine tasting, cheese and croissant eating or sightseeing tours with family and friends on the taxpayer dole … but I digress …

Baum recounted a time when Larry “Mater of the Universe” Summers was working the room, but without knowledge that a large shrimp, pronounced “prawn” by the attendees of such events, had fallen from his plate into the cuff of his trousers. Seems fitting; a shrimp working the room …

Anyway, for anyone that wants to understand why we are in the fix we are in, I suggest you grab hold of today’s FT and read the Keynesian tinkering solutions espoused by the great Larry Summers. There is much there, and of course not all of it is wrong because even Larry can stumble upon a nut now and then. But here is the key point, I think:

“The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by borrowing and lending and spending.”

It is just that simple. Larry assumes it is just more of the same that will solve the problem…more leverage, more frivolous consumption. Forget about savings in order to develop a solid private pool of capital. It is all about the government saving us from ourselves.

Larry of course never mentions the overhang of massive malinvestment caused by massive leverage caused by borrowing and lending to create wealth out of thin air as opposed to wealth by productive means that needs to be worked off before real growth can take hold. Instead he says this:

“After bubbles burst there is no pent-up desire to invest. Instead there is a glut of capital caused by over-investment during the period of confidence—vacant homes, malls without tenants and factories without customers.”

This is not a “glut” of capital, it is wasted capital through malinvestment triggered by artificially cheap credit that screwed the entrepreneurial process—the normal signals from the market pricing system. It was plain and simple “demand” that he loves so much, conjured up by leverage.

So what is Larry’s solution to avoid a lost decade? You guessed it: Do more of the same. So, boys and girls, instead of just a lost ½ decade Larry wants to shoot for the big leagues.

Right from the “How to screw up an economy” playbook written by John Maynard Keynes, Larry continues to utter the phrase “stimulate demand.”

Japan took its cue from the Keynesian “How to screw up an economy” playbook, and instead of a lost decade, they are going on their lost THIRD decade. Yet, clowns like Summers continue to be taken seriously. It would be to laugh if it weren’t so sad that people actually believe this nonsense.

The last real economic statesman for the American people, when it came to the economy, may have been former Fed Chairman Paul Volcker.

Mr. Volcker understood the best way to fuel future real growth was to let the pricing system work away the dead wood and start anew. Of course it helped that the Reagan administration cut the size of the Federal Registry (list of government regulation) by about 50%, I think. In other words, this team let the invisible hand of the market take precedence over the visible boot of government. Volcker’s tough love and faith in the market, instead of government policy of “stimulating demand,” is what launched the US economy into a multi-decade boom.

Larry, you are no Paul Volcker. You couldn’t carry his jock strap. So do us all and the US economy a favor—go away!