Summers and Geithner Rewind

The American Enterprise Institute’s journal The American has an insightful article examining current policy decisions by Lawrence Summers and Timothy Geithner in the context of the Mexican and Asian Financial Crisis. Much of current policy in the Obama Administration can be traced directly to their experiences and decisions during that period according to Vincent Rinehart, a resident scholar at AEI:

“Why did officials strong-arm banks to agree to an inversion of debt-holder rights in the Chrysler bankruptcy? It worked for Robert Rubin in December 1997, when he talked bankers into rolling over Korean debt.

“Why do officials think bankers can be bullied into more generous mortgage forgiveness? The Indonesian government was induced to disband its monopoly on cloves as a condition for IMF loans in 1998.

“Why do U.S. regulators talk up market confidence with stress tests that deliberately omit the recognition of losses associated with bad mortgage decisions? Banks got a similar free pass, at least for a time, when debt values melted away in the 1990s.

“Is there anything new in cramming risky lending into off-balance-sheet entities, such as the Federal Reserve? The Exchange Stabilization Fund was used as part of the bailout of Mexico, despite the limitations on its use that its name would seem to imply. Later in the decade, the IMF and the World Bank proved pliant lenders, far in excess of precedent, when encouraged by their chief shareholder, the United States.

“The list of similarities lengthens each week as we live through the application of lessons learned by current officials when they were young. The risk to our nation is that they may have drawn the wrong lessons.”