Laurence Summers: Part of is probably is surely better prudential regulation of individual institutions. As one looks at stories of what has happened, in some cases, the choices of individual institutions made are sort of stunningness, almost stunning in there insensitivity to risk and one wonder’s whether that shouldn’t or couldn’t have been monitored and watched more closely.
But I think the deeper imperative, and the imperative that has less fully run through our thinking about financial regulation is what I would call regulation for systemic stability that recognizes that what we ultimately care about in this is not the shareholders and the employees of one particular financial institution. But what we ultimately care about is what’s going to happen to the big real economy, the stuff that’s captured in my high unemployment rate and in Bob’s trillions of dollars of losses. And thinking about systemic stability. Here are some examples of the things you think about if you’re focused on that, what kind of clearing house are we going to have so that problems in one institution don’t become problems throughout the system? We’ve learned something important.
Male: A clearing has, an old clearing house example, might be something like…
Laurence Summers: The Stock Exchange, Broker as example.
Male: The Stock Exchange is a house example.
Laurence Summers: But if you’ll look at I mean, the Stock Market would’ve worked to us well, it would’ve worked less well over time if you trade in stock with one other person then you just have to rely on, that one person will be in credit worthy and delivering the stock, clearing houses is one example.
Second example which involves a variety and sort of legal and technical issues is making the system safe for failure. Lehman Brothers wasn’t the biggest financial institution in the country, it wasn’t -- one of the five biggest financial institutions in the country and yet, its failure has been followed by cataclysmic consequences.
Can’t we find a way to enable an institution to fail and the various interconnections be contained in such a way that that failure doesn’t have the kind of systemic consequences that you’ve seen. That’s important for the system, it’s also important for the institutions to be part of finding that. Because if we can’t find such things and we have a system that’s completely unable to handle failure, that’s going to be a system where we’re going to have to take risk down at an enormous extent and that will in turn have a set of consequences for the dynamism of our economy.
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