Former Treasury Secretary Lawrence Summers Discusses Lessons from the Financial Crisis

By Matthew O’Rourke

Regulators should be thoughtful about their relationships with major financial institutions, Lawrence Summers told a gathering of senior officials from major central banks and regulatory agencies at the Yale School of Management on July 31.

“I don’t know all of the answers, but I think all of us should engage in a bit of reflecting on these questions of clubbiness: Should it be commonplace for leading financial officials and leading private-sector figures to gather in a pleasant environment, drink wine together, and celebrate our collective effort to maintain financial stability altogether on behalf of the system?” Summers said.

The former secretary of the treasury and president emeritus of Harvard University, Summers spoke during the Yale Program on Financial Stability’s Financial Crisis Forum. He was introduced by Timothy Geithner, former secretary of the treasury and chairman of the advisory board of the Program on Financial Stability.

Regulators need to find a middle ground in dealing with the industry, Summers said. “It’s also true that you can cut yourself off altogether, but if you do and not do anything that is considered clubby, you probably won’t know much of what is going on, and then you’ll probably have a hard time of doing a good job. It’s a very difficult set of balances.”

Discussing the response to the 2008 financial crisis, Summers referenced Geithner’s recent book, Stress Test: Reflections on Financial Crises, noting that Geithner made a perceptive observation about the tradeoffs inherent in the efforts to contain the crisis.

“The basic thought was that we won the battle for financial stability and lost the hearts and minds of people. Tim argued powerfully, and I think correctly, for the proposition that you could promote confidence [in the financial system] or you could promote vengeance, but it was going to be pretty hard to promote confidence by promoting vengeance.”

The two-day forum looked back on the 2008 financial crisis, convening experts, regulators, and central bankers to discuss lessons learned from the event, including a case study on the Troubled Asset Relief Program (TARP). Summers spoke about confidence in the financial system, stress tests, what he considered to be the dubiousness of debt-reduction strategies, and the political fallout from financial stabilization.

“If you look at the populist tone of our politics, a lot that has come from that is not so great,” he said. “Maybe it’s right that no one went to jail [after the financial crisis] because in fact no one committed a crime and being stupid is not a crime. You can’t prove otherwise in any particular case, but should no board member of any major financial institution have been publicly humiliated? I wonder. I think it’s actually kind of hard to defend… I do think there is a big problem of legitimacy that needs to be carefully considered.”