Summers Sees Risks of More Financial Instability, Slower Growth

Former U.S. Treasury Secretary Lawrence Summers said he sees a risk of increased financial instability worldwide, accompanied by slower U.S. and global growth.

“This is a moment of more than usual financial fragility, including in China,” Summers, a professor at Harvard University, said in an interview Monday. “There are many uncertain interconnections” in the markets, he said.

In a Twitter message earlier Monday, Summers compared recent developments with the 1997-98 Asian financial crisis and the 2007-08 subprime credit meltdown, saying, “We could be in the early stage of a very serious situation.”

Expanding on that comment in the interview, Summers noted that the dangers from both those previous crises were “greatly underestimated” at first.

World stock markets cratered on Monday, with the Standard & Poor’s 500 Index plunging 3.9 percent. The rout pushed the S&P 500’s two-day loss to 7 percent, the most since the height of the 2007-08 financial crisis, amid the worsening global selloff that saw Chinese shares sink the most since 2007 and stocks in Germany fall into a bear market.

Summers argued that it would be a mistake for the Federal Reserve to increase interest rates at its meeting next month, given what’s going on. The central bank has held its target for the federal funds rate at zero to 0.25 percent since December 2008 as it strove to resuscitate the economy from its worst recession since the Great Depression.

“The balance of risks is towards more financial instability, slower growth, disinflation and deflation,” Summers said. “That’s not a time to be raising rates.”

Spending Plans

He said consumers and companies probably will put off some spending decisions given what’s been happening in the financial markets.

Summers also voiced skepticism about arguments by some Fed officials that the central bank should boost rates because the U.S. is approaching full employment.

“The only reason why full employment is a problem is if it leads to inflation, and I have yet to see any evidence of that happening,” he said.

The jobless rate has fallen to 5.3 percent from a high of 10 percent in 2009. Most Fed officials reckon that a 5 percent to 5.2 percent rate is equivalent to full employment, according to projections released after their meeting in July.

Atlanta Fed President Dennis Lockhart said Monday he continues to expect the Fed to increase rates this year, while cautioning that a stronger dollar, a weaker Chinese yuan and falling oil prices complicate the outlook.

“I expect the normalization of monetary policy —- that is, interest rates —- to begin sometime this year,” Lockhart said in Berkeley, California, without citing a particular month.