WASHINGTON — Lawrence Summers, President Barack Obama's closest economic adviser, broke a long public silence on Friday, asserting that today's economic problems stem from an unsustainable financial model, and he defended heavy deficit spending as a necessary evil to restore the economy to health.
Summers, a former Treasury secretary in the Clinton administration, now heads the policymaking National Economic Council inside the White House. He said the current recession was sparked not by the normal business cycle but by excesses such as inflated asset prices and insufficient regulation that had built up over years and finally collapsed.
"On a global basis, $50 trillion in wealth has been erased over the last 18 months. This includes $7 trillion in the U.S. stock market and $6 trillion in housing wealth," Summers said, adding that greed has given way to fear.
"This is the paradox at the heart of the financial crisis," he continued, noting that it "was this transition from an excess of greed to an excess of fear that President (Franklin) Roosevelt had in mind when he famously observed that the only thing we had to fear was fear itself. It is this transition that has happened in the United States today."
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Summers also said that after plummeting during the holiday season, consumer spending appears to have stabilized, which he said was "modestly encouraging."
Here's more of what Summers had to say, edited into a question-and-answer format.
Q: Why is Obama moving on healthcare, energy, education and other areas. Shouldn't the focus be on fixing the economy?
A: I can't imagine that it would be rational not to provide assistance to students, not to work on making higher education affordable, not to increase financial confidence in the country by doing the work of getting health-care costs under control, not at a time when there are millions of people unemployed; to be thinking about a sector like energy and the environment, where new jobs can be created. It would seem to me that it would be a manifest abdication of responsibility not, as we thought about recovery, to be thinking about making that recovery as sound and as strong as possible.
Q: Why hasn't Treasury Secretary Timothy Geithner spelled out his plan to get so-called toxic assets off of bank balance sheets so they can lend again?
A: I think that Secretary Geithner has handled this in a difficult and courageous way. The easy thing to do would be . . . to lay out a nine-point plan with illusion of specificity and the sense of certainty about what the future would bring. It's so easy that we saw half a dozen of them from the previous administration; it's just that they were different each month. The right approach, the approach that Secretary Geithner has taken, is an approach that lays out a framework, that, unlike so much of the commentary, actually recognizes the enormous complexities of the problem and the balances that need to be stuck.
Q: What kind of balances need to be struck?
A: The need to address on the one hand the capital markets and on the other hand the banks, and not to do what so many do . . . and fail to recognize the profound interlinkages. The whole question about the toxic assets in the banks has to do with the health of the capital markets and in what way those assets can be sold.
Q: Chinese Prime Minister Wen Jiabao worried on Friday that America may not make good on the $1 trillion in debt it owes China. Does America's stimulus spending risk a debt default?
A: In the short run, the need is to get the economy going again and to get the private financial system working again and to reactivate those markets. And . . . it's not something that will happen automatically simply through patience. You have to be prepared to prime the pump, and if you allow the process of decay, decline and deleveraging to continue, it's much more costly to do it later. The ultimate burdens are . . . much greater and the loss of confidence and ability to attract foreign capital is that much more profound.
Q: Still, our debt is exploding. Won't this have long-term consequences?
A: Look, I think we need to do what's necessary to get us out of the crisis that we inherited. My speech was intended to persuade you of one thing if you didn't agree with anything else — that this was not a set of automatic processes that will automatically fix themselves if you didn't act. If deflation sets in, if the (gross domestic product) collapses further . . . the magnitude of the federal borrowing, as large as it is today, will be dwarfed; will be far larger. So I believe the approach the president is taking is the ultimately fiscal responsible approach, because of the risk it avoids and it contains.
Q: So it's not a problem?
A: One of the real dangers that is inherent in a moment like this is that there are certainly plenty of examples in history that the crisis spending, or crisis increases in deficits, will continue after the crisis. And that would be very risky.
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