Lawrence Summers

On his way to Davos, Lawrence Summers gave a talk at the London School of Economics. He argues that the Global Financial Crisis was partly cause by a glut of savings round the world. This argument is common, but Summers adds an interesting twist. He says that it has a technological cause.

In the days, when IBM and AT&T were the largest companies in the world, they were always borrowing. Google and Apple have taken over as the dominant companies. They both have massive cash surpluses. Apple is trying to give spare cash back to its owners.

A start-up used to cost millions. Now only $½ million can fund a start-up.

Summers claims that the cost of capital has changed in a way that affects the interest rate.

He suggests there is now a lack of demand for loans. He claims that governments should take up the slack. He suggests that this is a good time to invest in state infrastructure, such as schools and airports.

I think that this points to the problem. The state controls significant capital-intensive parts of the economy, but it always short of capital, because it only has cash flows. The state is not capable of making economic decisions. It only makes political ones. If the infrastructure was owned by private groups, they might be taking advantage of low interest rates to improve their capital.