Former Clinton Treasury Secretary Larry Summers is warning the Federal Reserve to check its attitude at the door before it fights the next recession.
He thinks the central bank's complacency about its current toolbox is unwarranted - and possibly dangerous to the economy and investors.
“I was disappointed in what came out of The Federal Reserve's annual conference in Jackson Hole, Wyo., for three reasons,” Summers, who served in two Democratic administrations, wrote in his blog for the Washington Post.
“First, the near term policy signals were on the tightening side which I think will end up hurting both the Fed’s credibility and the economy. Second, the longer term discussion revealed what I regard as dangerous complacency about the efficacy of the existing tool box. Third, there was failure to seriously consider major changes in the current monetary policy framework,” wrote Summers, a former economic adviser to President Barack Obama.
“I think the Fed’s complacency about its current toolbox is unwarranted. If I am wrong in either exaggerating the risks of recession or understating the efficacy of policy, the costs of taking out insurance against a recession that cannot be met with monetary policy are relatively low. If my fears are justified, the costs of complacency could be very high. The right policy in the near term should be tilting as hard as possible against recession. For the longer term, the Fed will have to reconsider its broad policy approach,” wrote Summers, now a Harvard professor.
“I believe that countering the next recession is the major monetary policy challenge before the Fed. I have argued repeatedly that (1) it is more than 50 percent likely that we will have a recession in the next three years (2) countering recessions requires four to five percentage points of monetary easing (3) we are very unlikely to have anything like that much room for easing when the next recession comes,” he wrote.
The next recession is also sure to hurt investors in countless ways.
To be sure, investors who are buying stocks because they think bonds are too expensive are setting themselves up for potentially disastrous losses, says Albert Edwards, global strategist at Société Générale.
The “TINA” argument, or “there is no alternative” to stocks, ignores long-term market trends that show bear markets don’t end until the economy has been through at least four recessions, he says. Because the U.S. has only had two recessions since the prior market peak in 2000, stocks are vulnerable to the next economic contraction.
“The equity secular valuation bear market takes many economic cycles to unfold and ends when equities are dirt cheap,” Edwards says in a Sept. 7 note obtained by Newsmax Finance.
The last time U.S. stocks bottomed out, the global economy was in the midst of the deepest decline since the Great Depression. The S&P 500 fell about 60 percent from its October 2007 record high to a level of 666 in March 2009.
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