March 13, 2009 -- Larry Summers, the top economic adviser to President Obama, said today that even though the country's recent excessive optimism may have helped trigger the current recession, the resulting lack of confidence is now hurting its chances of recovery.
"It is this transition from an excess of greed to an excess of fear that President Roosevelt had in mind when he famously observed that the only thing we had to fear was fear itself," he said.
The director of the National Economic Council emphasized that now the country must find a way to first overcome its fears if it is to overcome the current downturn. In a speech at the Brookings Institution in Washington, Summers attempted to address this issue today by delivering a wide-ranging defense of the administration's actions thus far.
"We are embarked on what I believe is the boldest economic program to promote recovery and expansion in two generations," he said. "No one can know just when and how its positive effects will be fully felt… but I am confident that in its resolution, lies enormous opportunity for both Americans and the United States of America."
As an exclamation point to his optimistic outlook, Summers said, "There is one enduring lesson in the history of financial crises: They all end."
"With the strong and sound policies the president has put forward," Summers said, "and the passage of time, we will restore economic growth, regain financial stability and find opportunity in this moment of crisis to assure that our future prosperity rests on a sound and sustainable foundation."
Even though he acknowledged that earlier this week the Dow Jones industrial average, adjusted for inflation, sank to the same level it was at in 1966 -- "the sale of the century", he called it -- Summers pointed to a number of economic indicators that he sees as signs that the administration's efforts may already be having a positive effect, including stabilized consumer spending and reduced credit costs.
"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."
"There are some indications that the expectations of future actions have been a positive in reducing credit costs in a number of key areas," he said.
Pep Talk for Investors
Urging investors to jump back into the market, Summers said that "those who have sound, long-term strategies, who have investments that they want to make, who see productive opportunity, are going to find this a very good moment to make those investments."
And Summers urged the corporate world to also think long term.
"My advice to business leaders would be not to foreshorten the horizon at a moment like this and also to remember this central paradox of financial crisis, that while the problem was caused by excessive complacency and excessive optimism, what we need today is more optimism and more confidence."
During today's lengthy Q&A session at Brookings, Summers defended Treasury Secretary Tim Geithner, who faced criticism in recent weeks as he unveiled the department's new plans.
I think that Secretary Geithner has handled this in a difficult and courageous way," he said. "The easy thing to do would be... to lay out a nine-point plan with the illusion of specificity and the sense of certainty about what the future would bring."
"We saw half a dozen of them from the previous administration. It's just that they were different each month. The approach that Secretary Geithner has taken, is an approach that is based on deeds and not words."
In the last 18 months, Summers noted, $50 trillion in global wealth has been lost. Earlier today, the government announced that the nation's trade deficit had dropped to $36 billion in January, a six-year low. To reverse this global recession, Summers echoed Geithner's calls for major countries to engage in and sustain stimulus efforts, just hours before the G-20 meeting of finance ministers kicks off tonight in England.
"There are probably some for whom it would be imprudent, but for a very substantial majority of the world economy there is room for temporary fiscal expansion," he said.
Summers touted the administration's $787 billion stimulus package, citing 14,000 teaching jobs that may be saved in New York alone.
"We've done more in weeks than is often done in the face of financial crisis in years," he said, quoting Geithner.
"Our single most important priority is bringing about economic recovery and ensuring that the next economic expansion, unlike its recent predecessors, is fundamentally sound and not driven by financial excess," Summers said.
One way that the administration will crack down on excess is regulatory reform measures, as outlined Tuesday by Federal Reserve Board chief Ben Bernanke and Wednesday by Geithner ahead of this weekend's U.K. summit.
"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," Summers said today. "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 towards 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."