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Summers reaches into the past for economic cure for the future

The President's chief economic adviser was in Philadelphia describing the recent crisis as a time when government needed to take "strong action" to fix economic and market instability.

I've listened to many speeches about "lessons learned" from the financial crisis.

I've read all sorts of theories about the causes, on blogs and in magazines, newspapers and books.

And I've heard from plenty of readers, who want to know what the solution is. What will prevent it from ever happening again?

For months, Congress and the Obama administration have been fashioning their prescription of fees, regulations and taxes to change how the U.S. financial system operates. With a deadline of July 4, the financial regulatory reform bill is in the final throes of arm-twisting. And every day brings a new hint of what may be in or out of the final version.

So I was quite ready to put the minutiae of the political poker game behind and hear about the future in a lecture titled "America's Economic Landscape in a Post-Recession World" at the National Constitution Center last week.

That the speaker was Lawrence Summers, President Obama's chief economic adviser, gave me pause to wonder how someone so close to the kitchen could coolly offer up a view on the way forward.

But the future is what David Eisner, president and chief executive officer of the National Constitution Center, promised in his introduction to Summers, who'd been invited to give the eighth annual John M. Templeton Jr. lecture on economic liberties and the Constitution.

What Summers, who is also director of the National Economic Council, wound up talking about sounded more like a blast from the past than the shape of things to come.

He told a story about reading over his twin daughters' textbook for an advanced-placement American history course. As an economist, he was bothered that events that seemed so important to him, such as the stock market crash of 1987 and the high inflation of the 1970s, were barely mentioned in the book. But there were pages devoted to the Great Depression.

Still, it illuminated for him the difference between an important event and a historically significant one. His objective in helping formulate economic policy for the Obama administration is to make sure that "this economic crisis is not studied by students of history 25 years from now, or 50 years from now," he said.

We all should hope that's the case. But given that Summers' lecture equated the massive federal response employed over the last two years to prop up the economy to the massive federal response to the Great Depression, that's unlikely.

Summers' view of history is that there are moments when the American people think the greatest threat and risk comes from government, and other times when the biggest threat comes from the inability of government to muster the will to act.

"My judgment is that we are in a period of the second kind," he said.

Eighteen months ago, plenty feared that some of the largest U.S. financial institutions would fail as the credit markets seized up, Summers said. We may have concerns about the financial sector, but no one fears the biggest banks will collapse now.

"It is because a government took strong action," Summers said.

However, as I listened to him talk about the "right approach to regulation," it was clear that when it comes to financial reform, shrinking the largest banks to eliminate the "too-big-to-fail" problem is not an action that Summers thinks makes sense.

George Priest, a Yale law professor, gave a response to Summers' lecture that also delved into the Depression era and the many policy mistakes the federal government made in the name of repairing the social chaos.

While he acknowledged the current "feeling" in the nation that "the political establishment should do something" to reform the financial system, he warned that the current efforts are "likely to prove counterproductive" and "impede economic liberties."

From reading his daughters' textbook, Summers surely knows that some of the legislation that Congress passes and the President signs into law will have unintended consequences in the future.

But on this night, Summers sought to portray policymaking as a careful, thoughtful process. The financial-reform proposals are not "anti-business," he said.

To Summers, they are what's needed to build more stability in the financial system.

(A transcript of Summers' lecture, Priest's rebuttal, and the short audience question-and-answer session are expected to be posted on the National Constitution Center's website this week.)

Annual meetings

Wednesday: Brandywine Realty Trust, Checkpoint Systems, Met-Pro;

Thursday: Auxilium Pharmaceuticals, Fibrocell Science, InterDigital, Pennsylvania Real Estate Investment Trust, Ulticom, Universal Health Realty Income Trust;

Friday: Hill International, United America Indemnity.