Because Stanley Fischer’s first speech yesterday as Vice Chair of the Federal Reserve focused on financial sector reform, all the news reports and commentary focused on his views on financial sector reform – especially his carefully nuanced discussion of the strengths and weaknesses of individual proposals for further regulatory changes and other means of crisis prevention. As for me, far more interesting were points he made indirectly on how such reform may or may not affect U.S. economic growth and thus the nation’s prospects for regaining real economic health.
No subject in economics is remotely as important, given finance’s rapidly expanding share of in the economy in recent decades and its crucial role in triggering the near-global financial meltdown of 2008. And let’s not forget finance’s continuing and surely undeserved influence on the national economic debate due to journalists’ set-in-concrete instincts of relying on its anointed experts for analysis and commentary, and finance’s lavish bankrolling of politicians and leading think tanks.
Surprisingly, former Treasury Secretary and top Obama economic advisor Larry Summers has produced the most cogent take on the finance-economy nexis that’s received mainstream media airing. This pillar of the Wall Street-dominated national economic establishment believes that the nation has long been mired in secular stagnation, a predicament in which its engines of sustainable growth have so weakened that official bubble-blowing has become its only real hope for decent growth of any kind, healthy or not.
Fischer didn’t explicitly address this issue. But by expressing general satisfaction with the pace of reform so far, he arguably sided with the proposition that Washington so far is generally succeeding in tamng, and thus strengthening, the finance sector without unduly undermining growth in the real economy. In addition, he tacitly accepted the assumption that American finance’s present basic structure is still needed to ensure that capital in the private sector-dominated U.S. economy is allocated efficiently and wisely.
Growth, however, has been woeful during this recovery by historic standards despite massive fiscal and monetary stimulus. Fischer clearly doesn’t swallow Wall Street’s self-serving claim that the regulatory pendulum has already swung too far in the opposite direction, and that the regime is now overly tight. At the same time, it can’t be a total coincidence that, with lenders of various types no longer able to indulge in their worst previous excesses – especially in housing – growth is barely limping along.
One obvious, though still neglected, answer is that Summers is right about secular stagnation, and that the economy lacks adequate engines of real, healthy growth to replace the fake-growth shenanigans on which it had depended. This conclusion, in turn, strongly suggests that American finance has become much too disconnected from the mission of funding the creation of everyday goods and services that produce healthy growth – as opposed to concocting ever more exotic speculative products – and that the reform this sector needs goes far beyond the agenda analyzed by Fischer and dominating the U.S. financial policy debate.