Larry Summers's hedge fund days

If his advice is that good, I'd like to buy some of it.

"But it does demonstrate Wall Street's potential for corrupting political discourse."
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Given Wall Street's recent record of wrecking the global financial markets, it's potential for corrupting political discourse seems a second order phenomenon. The question is: What are we going to do about it?

I think it reasonably calls into question Summer's objectivity. And it brings currency to the debate recently conducted between Simon Johnson and David Brooks whether the current financial system can, in fact, be saved in its present form.

The Simon Johnston article, "The Quiet Coup." can be found here. He basically argues that the government has been co-opted, or corrupted, by the kind of money Wall Street is throwing around.

http://www.theatlantic.com/doc/print/200905/imf-advice

The rebuttal, by David Brooks, argues we just need to recapitalize the banks, because Wall Street just had a moment of stupidity.

"The greed narrative leads to the conclusion that government should aggressively restructure the financial sector. The stupidity narrative is suspicious of that sort of radicalism. We'd just be trading the hubris of Wall Street for the hubris of Washington . The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize what's left of functioning markets. "

http://www.nytimes.com/2009/04/03/opinion/03brooks.html

However, Felix Salmon seems to indicate that Wall Street knew EXACTLY what risks it was taking on the math of securitization:
"The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.
In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop."
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

Why would smart people act stupidly? Because the incentives clearly indicated that they could best meet their personal goal –which was making money –by doing so.

This sort of thing is exactly why the “Prisoner's Dilemma” was originally postulated in game theory.

“In the classic form of this game, cooperating is strictly dominated by defecting, so that the only possible equilibrium for the game is for all players to defect. No matter what the other player does, one player will always gain a greater payoff by playing defect. Since in any situation playing defect is more beneficial than cooperating, all rational players will play defect, all things being equal. “
http://en.wikipedia.org/wiki/Prisoner's_dilemma

The logical interpretation of this is that, unless the incentives are changed, recapitalization by itself won't work. We'll be in the same mess again before too long.