Pushed to do more--especially more non-standard poicies--to boost the economy by Larry Summers, and pushed to do less by Ken Rogoff in order to avoid enabling future moral hazard:
One year ago: LARRY SUMMERS was focused on the real economy:
"I believe the balance of risks suggest a compelling case for a significant fiscal stimulus program that increases the deficit in the short run” but not over the medium to longer term, he said. The program may be most beneficial if it includes new measures for food stamps, unemployment insurance and other policies aimed at supporting low-income families, said Summers. He also argued in favor of new infrastructure investment as well as changes in Medicaid reimbursement rules and new funding to help low-income residents pay their heating bills.
Recall that at that point, he was not a member of a presidential administration. The probability of American default was rising (ah, but soon would begin the flight to safety—Treasuries). And then there was this:
Kenneth Rogoff airs his concerns about the state of central bank balance sheets, particularly the Federal Reserve, Bank of England, and European Central Bank, namely, they seem to be dangerously overexposed to potential financial losses. Rather than continue to put new bank assets on their balance sheets, he suggests they need to let institutions fail and/or facilitate consolidation. I get his point, but if central banks are dangerously overexposed to the financial sector, then surely the need to prevent big losses is heightened rather than reduced, correct? That is, had central banks embraced a tough love approach from the beginning, they might not have faced any risk (though their inaction would have been painful for the rest of the financial world), but now they've basically gone all in, and have to keep doing what they're doing. I'm not sure they can afford to fold.
That's right, on September 8 Kenneth Rogoff wrote that "weak banks must be allowed to fail". This is another reason to doubt Treasury Secretary Hank Paulson's story that nothing could be done about Lehman. The administration was facing a lot of pressure to address moral hazard concerns, and I think some policymakers felt it was time to draw the line. But it was a line they could not afford to hold.