Wednesday 06 Oct 2021 | 17:37 | SYDNEY
Wednesday 06 Oct 2021 | 17:37 | SYDNEY

Economic tough love at home and abroad


Stephen Grenville

27 November 2007 09:47

Consistency may be the hobgoblin of small minds, but it certainly doesn’t constrain great ones. Larry Summers is former US Treasury Secretary, former Harvard President, one of the smartest economists of his generation, and was a member of Time Magazine’s 'committee to save the world' during the Asian crisis of 1997-8. He argues in the Financial Times that Washington should respond to the current sub-prime financial turmoil by easing both monetary and fiscal policy to keep the US economy growing, bailing out the financial sector in the process and encouraging semi-government housing loan agencies to keep the credit flowing.

That may well be sensible policy, but why was the prescription for the Asian crisis so dramatically different? Then, the answer was to tighten both fiscal and monetary policy, and to liquidate Asian banks and companies hit by the huge exchange rate falls. The result, for Indonesia, was a 13 percent fall in GDP, which leaves their income, today, around one third lower than if the crisis had been prevented. When it’s someone else’s economy, policy recommendations can be based on high principle: the 'moral hazard' argument that risk-takers should accept the consequences of their actions and reliance on the 'magic of the market' to sort it all out optimally. When the problem is at home, reality mugs you.