Obama adviser Larry Summers, former Treasury Secretary under Clinton, says the Western economies should increase spending dramatically, right now, in order to save the world’s economies.
Summers echoes a call from U.K. Prime Minister Gordon Brown last week, who foresees an “economic hurricane” if world governments do not act.
The Group of 20 developed economies are slated to meet next month to discuss just that, and a second stimulus bill is rumored to be in the works from the Obama team even as Republican politicians cry foul and demand that major banks and car companies be allowed to fail.
“The right macroeconomic focus for the G20 is on global demand and the world needs more global demand,” Summers told the Financial Times in an interview.
In economics term, “demand” in this context means public borrowing and spending in order to keep the economy chugging along as private business falters into the deepest recession since World War II.
The Obama administration has already approved several hundreds of billions in new spending while the Federal Reserve literally floods the economy with new money from Treasury. Such a strategy carries the risk of creating an inflation wildfire in short order, but Summers says the only way forward now is to spend in huge amounts.
“This notion that the economy is self-stabilizing is usually right, but it is wrong a few times a century. And this is one of those times ... there’s a need for extraordinary public action at those times.”
Sen. Richard Shelby (R-Ala.), among other top Republicans, however, is calling on the United States to avoid the path that Japan took after its economy imploded on a real estate bubble during the 1990s.
Japan has seen its recession extend well past a decade despite a monstrous public-spending binge that focused on increasing money supply and public works projects.
Instead, Shelby and others wants the markets to declare winners and losers more quickly, even if it means the failure of a major bank. After the Bear Stearns and Lehman Brothers debacles, no major bank has been let to fail, although an increasing tide of small banks teeter on closure.
"Close them down, get them out of business. If they're dead, they ought to be buried," Shelby told ABC's "This Week" program.
The FDIC this week asked Congress to approve a half-trillion dollar credit line from Treasury to cover more bank closures ahead. Normally, the FDIC charges banks a premium to cover the cost of closing failed banks.
"We bury the small banks. We've got to bury some big ones and send a strong message to the market," Shelby said.
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