“The fire brigade is still in the station. Someone, somewhere, should suggest something,” Summers said. “I am very disappointed with the response.”
Larry Summers has President Biden’s ear – but not always his support
Just two years after the pandemic recession, the global economy faces an ever-evolving array of threats. Higher interest rates needed to fight decades of inflation are causing investors to reconsider their holdings, leading to volatile trading. The war between Russia and Ukraine has pushed up grain and fuel prices. And relations between the United States and China, the world’s two largest economies, seem to be deteriorating every day.
“This is the most complex, disparate, and cross-cutting set of challenges I can recall in the 40 years that I’ve been involved with this kind of thing,” Summers told the Institute of International Finance, an industry group.
Summers, who rightly warned earlier last year that inflation was becoming an ongoing problem in the United States, said policymakers must act on multiple fronts to counter an “ominous” prospect: ensuring that financial markets work smoothly; increasing credit and easing the debt burden for poor countries; and accelerating the transition to a low-carbon economy.
Summers said the United States should provide the World Bank with an additional $5 billion over six years, which could eventually support up to $100 billion in new loans.
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The prominent economist, who recently spent an hour chatting with President Biden in the Oval Office, is no ordinary critic. As a senior Treasury official in the Clinton administration, he helped shape the US response to financial crises in Mexico and Asia. During the latter episode, Time magazine memorably hailed him, his boss, Treasury Secretary Robert Rubin, and Federal Reserve Chairman Alan Greenspan as “the committee to save the world.”
Central bankers and finance ministers from around the world gathered in Washington this week for the annual meetings of the IMF and World Bank. Summers denigrated much of the ensuing discussion as “vague, airy fairy stuff.”
“This meeting will not be remembered for anything except that it’s a missed opportunity,” Summers said.
His comments came as international bodies issued a series of increasingly pessimistic economic forecasts amid the growing threat of a global recession. The World Bank this week lowered its annual growth estimate for 2023 to 1.9 percent from a previous forecast of 3 percent.
Summers contrasted the pro-spending response to Ukraine’s defense needs with what he called inadequate global action on the economic front.
“This is an extraordinary and urgent moment in economics and finance, as well as security,” Summers said.
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With CPI inflation topping 9 percent this year, the Federal Reserve has raised interest rates at its fastest pace since the early 1980s. That has boosted the value of the US dollar, causing significant problems for dozens of other countries.
Central banks in emerging markets have had to raise interest rates to keep their currencies from depreciating against the dollar. Higher borrowing costs risk painful recessions. And many of these countries are facing higher bills to repay borrowed dollars or for global commodities like oil that are valued in dollars.
“It has all sorts of side effects for the rest of the world,” Summers said.
One example is the recent turmoil in the UK bond market following the UK government’s proposal to borrow money to fund a tax cut for high income earners. As UK government bond yields soared, the Bank of England had to step in to avert a market slump. Finance Minister Kwasi Kwarteng resigned on Friday amid the ongoing crisis.
The consequences could be even greater in developing countries. Prioritizing the fight against inflation in the United States and other advanced economies — even as poorer countries feel the pinch — risks a broader fracture, Summers said.
“The developing countries will eliminate us. They might turn on China, they might not,” he said. “But either way, it’s hard to believe that we’re going to create the world we want to create.”