He always had a talent for the bottom line. On the mortgage agencies he writes:
What went wrong? The illusion that the companies were doing virtuous
work made it impossible to build a political case for serious
regulation. When there were social failures the companies always blamed
their need to perform for the shareholders. When there were business
failures it was always the result of their social obligations.
Government budget discipline was not appropriate because it was always
emphasized that they were "private companies.” But market discipline
was nearly nonexistent given the general perception — now validated —
that their debt was government backed. Little wonder with gains
privatized and losses socialized that the enterprises have gambled
their way into financial catastrophe.
I wonder how general the lesson here might be. My fear is fairly
general. Inherent in the multiple objectives urged for creative
capitalists is a loss of accountability with respect to performance.
The sense that the mission is virtuous is always a great club for
beating down skeptics. When institutions have special responsibilities
it is necessary that they be supported in competition to the detriment
of market efficiency.
It is hard in this world to do well. It is hard to do good. When I
hear a claim that an institution is going to do both, I reach for my
wallet. You should too.
Here is more. Larry Summers was my professor for Macro II and every lecture was a joy. "Lecture" isn’t even the right word, it was more like turning on a faucet.