Summers: White House Stimulus Action May Have Stabilized Consumer Spending

UPDATED 12:09 p.m., below, with Q-and-A:

Larry Summers, President Obama's top economic adviser, just concluded remarks to the Brookings Institution and said the president's stimulus plan may be working.

"It is surely too early to gauge the broader economic impact of the president’s program," Summers says. "But it is modestly encouraging that since it began to take shape, consumer spending in the U.S., which was collapsing during the holiday season, appears, according to a number of indicators, to have stabilized."

Summers added: "Already, [the stimulus plan's] impact is being felt by cops and teachers who would have been laid off but whose jobs have been saved—it may retain14,000 teachers in New York alone. It will, for most American workers, be felt in the coming weeks as withholding schedules are adjusted, in continuing unemployment insurance benefits and health benefits for hundreds-of-thousands of workers who already would have done without, and in contracting already underway with respect to tens-of-billions of dollars of infrastructure projects across the country."

Q-and-A UPDATE:

-- Asked about the massive amount of federal debt being incurred by the stimulus plan and budget, Summers said: "If my speech was intended to persuade you of one thing, it's that [the crisis] is not a set of economic processes that would simply and automatically fix themselves if you didn't act."

He continued: "I track the markets very closely and my reading is that the central variable is whether we are successful in establishing confidence that the economy will recover and growth will be restored and we will have a sustainable expansion. If we put that at risk in the name of some generalized concern about austerity, we would be doing the wrong thing by the economy and ironically, even doing the wrong thing by the markets."

Further, he said: "If deflation sets in, if GDP collapses further, if the consequences of that [impact] even the insured parts of the financial system; if that happens, the magnitude of the federal borrowing -- as large as it is today -- will be dwarfed; it will be far, far larger."

He concluded: "So I believe that the approach that the president is taking is the ultimately fiscally responsible approach because of the risks that it avoids and it contains. Federal debt is being incurred in ways through its macro-economic and structural effects contributes to the process of economic recovery."

-- Summers said that Treasury Secretary Tim Geithner is handling the crisis "in a difficult and courageous way." He added: "The easy thing to to do would be to lay out a nine-point plan [that has] the illusion of specificity and sense of certainty about what the future would bring. We saw that a half-dozen times from the previous administration....The right approach that Secretary Geithner has taken is based on deeds and not words."

In his prepared remarks, Summers inveighed against economic bubbles.

"Bubble driven economic growth is problematic because of disruption and dislocation – affecting those who took part in the bubble’s excesses and those who did not," Summers's remarks read. "And, it is not entirely healthy even while it lasts."

The key to limiting the boom-and-bust cycles of bubbles, Summers is saying, is smart regulation. He proposes:

-- Regulatory agencies should never be placed in competition for the privilege of regulating particular financial institutions.



-- Globally, the United States must lead a leveling-up of regulatory standards, not as has happened all too often in the recent past, trying to win a race to the bottom.



-- No substantially interconnected institution or market on which the system depends should be free from rigorous public scrutiny.



-- Required levels of capital and liquidity must be set with a view toward protecting the system, even in very difficult times.



-- And there must be far more vigorous and serious efforts to discourage improper risk taking through transparency and accountability for errors.

The remainder of Summers's speech is being spent promoting Obama's economic recovery plans.

Summers gave a grim accounting of the past 18 months:

-- On a global basis, $50 trillion dollars in global wealth has been erased. This includes $7 trillion dollars in U.S. stock market wealth which has vanished, and $6 trillion dollars in housing wealth that has been destroyed.

-- Inevitably, this has led to declining demand, with GDP and employment now shrinking at among the most rapid rates since the second World War.

-- 4.4 million jobs have already been lost and the unemployment rate now exceeds 8 percent.

-- Frank Ahrens

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