- The Washington Times - Friday, March 13, 2009

President Obama’s top economic guru Friday sought to shore up confidence in the administration’s economic recovery plan and to encourage investors and business out of a defensive posture, arguing that the current downturn in the stock market and asset prices represents “the sale of the century.”

Greed that created the economic crisis has given way to fear, and “fear begets fear,” said Lawrence H. Summers, chairman of Mr. Obama’s National Economic Council, in a major speech at a the Brookings Institution that laid out the administration’s approach to the economy in detail.

“While greed is no virtue, entrepreneurship and the search for opportunity is what we need today,” Mr. Summers said. “There are a very large number of things that are on sale today … My advice to business leaders would be not to foreshorten the horizon on a moment like this.”

Though he said that “it is surely too early” to judge the impact of the White House plan, Mr. Summers said that a rise in consumer spending last month is “modestly encouraging.”

“There is one … lesson in the history of financial crises: they all end,” he said.

One of Mr. Summers’ main points was that Mr. Obama’s plan to reform healthcare and energy as part of his economic recovery plan, which has attracted growing criticism, is the very thing that will make the plan work in the long run.

“It is tempting to suppose that as some argue, the focus of economic policy at a moment like this should be solely on achieving economic recovery. We believe that that would be setting our sights too low. It would be, in a real sense, irresponsible, because we have just been reminded of the dangers of policies that produce short-term bubble driven growth, instead of durable and sustainable growth,” he said.

The Obama plan, Mr. Summers said, will move the U.S. economy away from “bubble-driven growth” that he said has produced an average of one financial crisis every 2.5 years over the last two decades.

Mr. Obama on Thursday also voiced these themes, telling a group of business leaders that he wants to move the economy away from “endless cycles of bubble and bust” and toward “a foundation that lasts.”

“We can’t continue to base our economy on reckless speculation and spending beyond our means, on bad credit and inflated home prices and over-leveraged banks,” Mr. Obama said. “This crisis teaches us that such activity is not the creation of lasting wealth, it’s the illusion of prosperity, and it hurts us all in the end.”

Mr. Summers said that the system of the past decade has benefited a small group at the expense of the many. He said that “confidence will be enhanced if this system is replaced with a new one that is “more sustainable and fair in the distribution of its benefits than its predecessor.”

It was not clear whether Mr. Summers meant confidence on Wall Street or Main Street, or both.

Mr. Summers’ comments hinted at a broad, overarching plan to move the U.S. economy’s growth engine away from over reliance on “financial sector growth,” or in other words, Wall Street and its complicated, interrelated universe of derivative products and use of leverage to create wealth out of thin air.

“If growth in the coming years is not to be driven by asset price inflation-induced consumption, other engines of growth must be identified,” Mr. Summers said.

Financial sector profits made up 40 percent of corporate profits in 2006, Mr. Summers said. He said this trend was a major factor in average middle class incomes falling by $2,000 in real dollars between 2000 and 2007, even as the economy took off.

Mr. Summers said that the White House plan for long-term buildup of the economy means reforming the financial regulatory structure, enhancing exports, and reforming healthcare, energy and education.

He defended Treasury Secretary Timothy F. Geithner’s approach so far to the financial sector and the problem of continued deleveraging, where trillions in bad assets continue to be offloaded by institutions, eroding their net value and threatening the entire economic system.

Mr. Geithner has not given specifics on how the government will intervene in the financial sector so far because the full extent of the problem is not yet known, Mr. Summers said, calling this a “difficult and courageous” approach.

“It would be tempting to rush to action to meet a chorus of questions … but I don’t see how anyone could observe what happened in calendar year 2007 and 2008 and judge or design or implement policies that bore on the major financial institutions without feeling the need to stress test them and evaluate their current situation,” Mr. Summers said.

Mr. Summers said “the wisdom in Secretary Geithner’s approach will be much clearer” in time.

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