More advocacy by Obama's top economist for sneaky market rigging

12:20p ET Saturday, March 27, 2010

Dear Friend of GATA and Gold:

Alfredo Ley, founder of Ley Investor B.V., an investment management and research firm in the Netherlands, yesterday published a fascinating review of a 1989 academic paper written by the great rationalizer of surreptitious government intervention in the gold market, former Harvard professor and former U.S. Treasury Secretary Lawrence H. Summers, now director of President Obama's National Economic Council.

Summers was co-author of the academic study "Gibson's Paradox and the Gold Standard," published in 1988, which suggested that governments could gain control of interest rates by gaining control of the price of gold:

http://www.gata.org/files/gibson.pdf

Summers' academic paper published the following year, "Planning for the Next Financial Crisis," was published by the National Bureau of Economic Research, and Ley reproduces it at his Internet site here:

http://www.ley-investor.com/PDF/891017%20NBER%20Feldstein%20Ch%203.pdf

Ley's review of that paper, headlined "From the Horse's Mouth: Lawrence Summers on Market Manipulation in Times of Crisis," construes the paper as an argument for government to respond to financial crises by propping up asset prices and rigging currency exchange rates, presumably also largely surreptitiously. Ley writes:

"The paper makes the case that in an open economy with floating exchange rates, there is an inherent conflict of interest between the loose monetary policy needed to alleviate a liquidity crisis and thus save financial institutions, and the international dimension that results in currency collapse due to foreigners' loss of confidence in U.S. dollar assets and financial institutions. On the other hand, the high interest rates needed to prevent a currency crisis would lead to a credit and liquidity contraction and endanger the viability of financial institutions.

"As a solution to this conflict, Summers' proposes a second policy instrument to deal with the international dimension of the crisis 'so that a measure of stability can be maintained in both the foreign exchange market and the banking system.'

"The paper does not go into the design detail of this policy instrument, which it refers to as foreign monetary policy; however, it is clear in that its objective is to focus on managing foreign exchange rates so as to isolate the currency dimension of the crisis from the domestic objective of liquidity provision. In his own words, 'Perhaps this is an argument for fixing exchange rates or at least institutionalizing the principle of cooperation to insure that they do not move too rapidly.'

"I argue that it is in the context of this policy proposal that the size and number of currency swap lines established by the Fed with several foreign central banks during the 2007-09 period need to be examined."

Ley hopes to write more about Summers' work, and we sure hope that he does. You can find his review of Summers' 1989 paper here:

http://www.ley-investor.com/index.php?content=pages&page=100326

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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