What do you do when after years of insisting that bigger stimulus and more government intervention for more time are the exact recipe for economic success, only to discover that your cherished theories have come up short? Cue the esteemed former Treasury Secretary (and possibly future Fed Chair) Mr. Lawrence Summers. This is the same Mr. Summers who contends that the disappointing rate of economic growth for the last number of years is a problem of secular stagnation and not a problem of poor policy and burdensome regulation. Seems a little convenient coming from one of President Obama’s former chief economic advisers, but we’ll give him the benefit of the doubt.
Mr. Summers is out with a new policy prescription to deal with the “problem” of secular stagnation. As if it weren’t enough that the world’s central banks are already in charge of setting the most important price in the world—the price of money. Mr. Summers suggest taking things further, much further. He wants the world’s central banks to start buying stocks.
This is a beaut if I’ve ever seen one. You have one of the world’s most prominent mainstream economists basically suggesting that government should decide the cost of capital in a capitalist system. Does such a system not cease to be capitalist when the government starts setting the cost of capital?
Bloomberg has more of the gory details:
Summers, who also served as a top economic adviser to President Barack Obama, reiterated his concerns about “secular stagnation,” where trend economic growth rates have been reduced and neutral interest rates are lower than historic norms. To the extent that low neutral rates are in part the consequence of investors preferring fixed-income assets and steering clear of riskier options, policy makers can combat that by buying risk assets, he said.
Thankfully in the U.S., the Fed is barred from investing in anything but government bonds, but Congress could of course change that. Foreign central banks have much more leeway in this department. Unfortunately, this is a policy proposal investors are going to have to watch.
2016 Homer Jones Memorial Lecture, Lawrence H. Summers, “Secular Stagnation and Monetary Policy”
Jeremy Jones, CFA
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