WASHINGTON (Reuters) - Chief White House economic adviser Lawrence Summers on Friday vigorously defended the administration’s aid for banks and carmakers as necessary, temporary measures rather than lasting market intrusions.
“Our objective is not to supplant or replace markets,” Summers told the Council on Foreign Relations in New York. “Rather, our objective is to save them from their own excesses and improve our market-based system going forward.”
Summers directs the National Economic Council from his West Wing office, briefs President Barack Obama daily on the economy and plays a central role in framing the administration’s response to the financial sector meltdown.
His speech, monitored in Washington via audio feed, was clearly intended to take on criticisms that the Obama administration was taking on too much of an ownership role in industry rather than relying on free-market forces that have driven the American capitalist system.
“The actions we take are those of necessity, not choice,” he insisted, adding that President Barack Obama had no desire to “manage banks, insurance companies or car manufacturers.”
He said the government will sell its shares -- including about 60 percent of a reorganized General Motors Corp -- as soon as it reasonably can. “We do not want to be owners, we want to be stewards of structural soundness.”
Summers said critics claim the administration was engaging in “backdoor socialism” and flatly denied it. “Where our focus has been as we have intervened when necessary is on the intervention being temporary, based on market principles and minimally intrusive,” he said.
Summers offered a philosophical analysis of the financial system’s woes, noting that history shows that every two or three years some dire situation arises like the Latin American debt crisis, the 1987 stock market crash or the Asian financial troubles of the late 1990s.
In the current crisis, a reliance on excessive financial leverage and inadequate regulation was largely to blame and that needs to be addressed through regulatory reform that is at the center of the administration’s agenda, Summers said.
The administration is expected to unveil proposals for wide-ranging overhaul of the regulatory system on Wednesday.
Summers said a central element of any reform will be to ensure financial firms have and maintain adequate levels of capital so that they are less vulnerable to over-reliance on debt and borrowing in future.
Summers was Treasury chief for 1-1/2 years from July 1999 until January 2001. He nodded to current Treasury Secretary Timothy Geithner, who served under him in the Clinton administration, during his remarks in a possible reference to what may be coming in next week’s regulatory proposals.
“As Secretary Geithner once said when he was asked what’s most important to financial stability, the three most important things are capital, capital, and capital. Looking forward we intend to address capital adequacy as a central element of systemic reform,” Summers said.
But he warned that the nation’s financial system is not going to be “fail safe” until it is able to handle a failure.
That means some type of resolution authority must be in place to deal with failing firms rather than continue the current system in which some firms are deemed too-big-to-fail so that the government is forced to step in to help them.
Summers said there were some signs the economic system was stabilizing, including the fact that some major banks that got government help have been able to raise capital on their own and to repay the government.
But he added that the key to recovery will be to rebuild confidence that the nation’s financial system in future will be less prone to stumbling because of excessive leverage that contributes to asset “bubbles” developing.
Additional reporting by Mark Felsenthal and Patrick Rucker, Editing by Andrea Ricci