Larry Summers’ FT column on building a U.S. financial recovery is must reading. It is lucid, crisply argued and practically-minded in its attempt to come up with a plan to get U.S. policy ahead of the curve with respect to the unfolding multiple crises in the U.S. economy.
Today, the end of the current financial crisis looks further away than it did in August 2007. Policy is not yet ahead of the curve. I used to remark in the context of the emerging market crises of the 1990s that I would date the moment of recovery from the first time an official pronouncement proved to be too pessimistic. By this standard, recovery is not at hand.
The best prospects for managing a very difficult situation involve a comprehensive effort to support the real economy through temporary fiscal stimulus and the financial system through a programme of measures directed at capital rather than liquidity problems. These steps offer no assurance of success but reactive drift raises the risks of costly failure.
Read the whole thing.