An article from the Financial Times by Dr. Lawrence Summers

The central irony of the financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.

Most policy failures in the US stem from a failure to appreciate this truism and therefore to take steps that would have been productive pre-crisis but are counterproductive now with the economy severely constrained by lack of confidence and demand.

Thus even as the gap between the economy’s production and its capacity increases, fiscal policy turns contractionary, financial regulation focuses on discouraging risk-taking and monetary policy is constrained by concerns about excess liquidity. Most significantly, US housing policies, especially with regard to Fannie Mae and Freddie Mac, institutions whose purpose is to mitigate cyclicality, have become a case of disastrous procyclical policy.

Read the REST OF IT HERE…