Tags: Summers | interest | rates | FederalReserve

Lawrence Summers: Rock Bottom Interest Rates Create Problems of Their Own

By    |   Monday, 07 April 2014 11:14 AM

The global economy faces serious impediments, and central bank easing programs are no panacea for eliminating those impediments, says former White House economic adviser Lawrence Summers.

Indeed, the easing can cause harm, he writes in the Financial Times.

"The medium-term prospects for the global economy have not been so problematic for a long time," says Summers, now a Harvard professor.

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"In the face of inadequate demand, the world’s primary strategy is easy money."

Central banks are keeping short-term interest rates very low throughout the developed world, he notes.

"This is all better than the tight money that in the 1930s made the depression the Great Depression. But it has problems as a growth strategy."

First, it's not clear that cutting interest rates from already low levels sparks much spending, Summers argues. "Any spending they do induce tends to represent a pulling forward rather than an augmentation of demand," he writes.

"We do know they strongly encourage economic actors to take on debt; that they place pressure on return-seeking investors to take increased risk; that they inflate asset values and reward financial activity."

In addition, the ultimate impact of easing on markets is unknown, Summers maintains.

Moreover, while businesses and households spend on "unworthwhile" investments because the capital costs are low due to monetary policies, many elements of investment are held back by misguided public policies, he argues.

Martin Feldstein, Summers' colleague at Harvard, has criticized Fed policy for some time. Feldstein believes the Fed isn't voicing enough concern about inflation.

"The Fed's leaders should be telling the public and financial markets what they think about the risk that future inflation could rise substantially above the Fed's 2 percent target — and what the Fed would do to prevent such inflation or reverse it if that occurs," he writes in The Wall Street Journal.

Consumer prices rose 1.1 percent in the year through February.

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The global economy faces serious impediments, and central bank easing programs are no panacea for eliminating those impediments, says former White House economic adviser Lawrence Summers.
Summers,interest,rates,FederalReserve
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2014-14-07
Monday, 07 April 2014 11:14 AM
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