Summers Spins Upside |to Health Care Reform

     WASHINGTON (CN) – In the wake of strong pushes by the White House and the Federal Reserve for multi-pronged financial reform, Lawrence Summers, director for the president’s National Economic Council, said Friday that health-care reform is a fundamental aspect of rebuilding a strong financial market and reducing America’s enormous debt to China.

     Even a slight reduction in health-care costs could have a “profound impact” on the future financial picture, Summers said, speaking from the McDonough School of Business at the University of Georgetown. And on the back of a better market could ride a reduction in debt. “Addressing health care is of absolutely critical importance,” he added.
     He also explained the massive expenditures supported by President Barack Obama in dealing with the recession, and the regulatory reforms proposed now.
     “I believe very strongly that we did the right thing,” he said, by substantially raising government spending and debt, claiming the market would Otherwise have experienced a much larger collapse and the nation would have “ultimately much more debt.” “We could not rely on the market’s capacity to act,” he said, referring to the “invisible hand” that balances supply and demand. The market had entered several vicious cycles which compound themselves.
     One example of such a cycle would be a drop in the financial health of an institution, spurring a pullout of investment, and resulting in a further drop and a greater rush to withdraw investment.
     Republicans, however, continue to disagree that the mass spending was necessary, and have pointed to the high unemployment rate, currently at 9.7 percent nationally, to demonstrate Obama’s inadequacy in responding to the economic crisis.
     Regardless of the controversy, the government continues to take strides in responding to the crisis, largely targeting the perceived inadequacies of financial sector regulation.
      The Federal Reserve is expected to implement sweeping new rules in coming weeks that will regulate bank salaries and bonuses, and discourage payment structures that promote excessive risk taking. In the mean time, the Obama administration and many in the international community are pushing for restrictions on executive pay, who’s pay structure many blame in part for the economic downturn.
     “It would be irresponsible for us not to learn the lessons of what took place,” Summers said, noting that financial institutions should not be able to choose among competing regulators, as they did before, because they naturally select the one that regulates least, and said important financial institutions must have adequate capital. He said he would have trouble envisioning as working any regulatory changes that do not involve raising capital levels.
     Summers added that regulation must be approached from a system-wide perspective, instead of looking at each institution separately. No one would imagine setting speed limits without considering multi-car accidents, he said. Insufficient capital is widely blamed in part for the economic downturn. American International Group, for example, insured investments but lacked the capital to support its commitments.
     When investments began to go sour, investors turned to AIG to insure their losses, but the company could not supply many of the needed funds, contributing to a global financial collapse.
     “Taken together,” Summers said, “these principles constitute a bold break with the status quo.”

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