core sector communique

Summers Says Fourth Quarter US GDP Report Shows Obama Economic Policies Working

• US President Obama’s top economic adviser cites the fourth quarter GDP growth rate – estimated at 5.7% – as evidence that Obama’s policies have pulled the US economy back from the brink of a second Great Depression, but says more needs to be done to fight unemployment
• Summers also defends proposed “Volcker rule”, which would prevent banks that have access to government deposit insurance and the Federal Reserve’s discount window from owning hedge funds or engaging in strictly proprietary trading activities
• Summers criticizes financial industry for lobbying against bank fees that would reimburse US Treasury for cost of TARP bailout, but denies administration wants to “pick a fight” with Wall Street
• Status of US dollar as global reserve currency will be determined by the markets and foreign Central Banks, Summers says. But, he predicts the dollar will play “central role for many years to come”
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Davos-Klosters Switzerland, 29 January 2010 − In a wide-ranging interview with US TV talk show host Charlie Rose, Larry Summers, Director of the US National Economic Council, vigorously defended the Obama administration’s economic policies and regulatory proposals.

Summers argued that the latest US GDP report, which shows the economy expanded at a 5.7% rate in the fourth quarter, demonstrates that the massive fiscal and monetary stimulus measures proposed or endorsed by the administration have “pulled the [US] economy back from the brink of a depression, and created a basis for economic growth.” However, Summers also stressed that additional measures – such as President Obama’s proposed payroll tax credit – are needed to bring down the double-digit US unemployment rate and boost middle-class incomes.

The GDP report “certainly doesn’t suggest we are in any position to pop champagne corks,” Summers said. “It’s going to take a lot more effort in the months, quarters and years ahead.” Summers conceded that much of the fourth quarter growth in the US (nearly 60%, according to Commerce Department results) was due to inventory restocking rather than a substantial pickup in private demand, which remains weak. He said President Obama will press the US Congress to enact the job creation measures he outlined in his State of the Union address earlier this week.

The interview included an extensive discussion of the administration’s proposed reforms in financial regulation, which Summers said would increase capital standards, create a new system for handling the failure of non-bank lenders, and limit the ability of commercial banks (which benefit from federal deposit insurance and access to the Fed’s discount window) to own hedge funds and certain other alternative investment vehicles, or engaging in purely speculative proprietary trading.

The latter proposal, commonly known as the “Volcker rule” after its chief advocate, former Fed Chairman Paul Volcker, was added only recently to the administration’s legislative wish list. Summers denied that this reflected any internal conflict within the administration over the proposal. “As any reform process moves along, details are always filled in, and that’s what’s happening here,” he said.

Summers rebutted suggestions that the administration is seeking a confrontation with Wall Street as a way to shore up its popular support, but criticized the financial industry for opposing proposed bank fees that would reimburse the US Treasury for the cost of the Troubled Asset Relief Program (TARP) – the US$ 700 billion package of loan guarantees and bank capital injections approved by Congress in 2008.

Although the financial industry argues that higher fees would curb lending, Summers noted that the proposed fees would equal only a small fraction of what the banks are paying out in executive bonuses this year. “I don’t understand how you can logically maintain that paying out large bonuses has zero effect on lending … and then maintain that a [relatively small] financial fee would somehow deprive the economy of a trillion dollars in lending.”

Asked to comment on French President Sarkozy’s recent call for an alternative global reserve currency, Summers said any change in the US dollar’s role would be brought about by market forces – including decisions made by foreign governments and Central Banks with sizable foreign exchange holdings. “I believe the dollar is going to have a very central role in the international financial system for a very long time to come,” he said.