- The Washington Times - Saturday, March 14, 2009

Current stock prices may represent “the sale of the century,” President Obama’s top economic adviser said Friday as markets shook off a warning shot from China to complete their best week since the new U.S. administration took office.

The Dow Jones Industrial Average rose almost 54 points Friday, ending the week at 7,223.98, a rise of nearly 600 points from Monday’s opening-bell figure. It represented the first sustained stock rally since Mr. Obama’s Jan. 20 inauguration, giving him a respite from questions about whether Wall Street is reacting badly to his economic agenda.

Still, Lawrence H. Summers, chairman of the White House National Economic Council, said most investors remain seized by excessive fear about the market and he encouraged them to see opportunities for profit in a stock market still 50 percent below its high of 14,000 points in July 2007.

“That the market would be at essentially the same real level as it was in 1966 … will be regarded by some as suggesting the presence of the sale of the century,” Mr. Summers said in a major speech at the Brookings Institution.

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

However, in Beijing, a top Chinese official voiced anxiety about the growing level of U.S. debt and what effect that might have on the safety of U.S. bonds and treasuries, in which China is heavily invested.

“We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. Frankly speaking, I do have some worries,” said Chinese Prime Minister Wen Jiabao, the second-ranking Chinese government official behind President Hu Jintao.

Beijing holds more than $1 trillion in U.S. debt, and Mr. Wen was only the latest to express hope that the U.S. economy corrects so that America remains capable of honoring its commitments.

White House press secretary Robert Gibbs talked up the value of U.S. securities from the podium of the Brady Press Briefing Room.

“There’s no safer investment in the world than in the United States,” he said.

But several economists said that despite the White House’s optimism, significant uncertainty remains about the future, and that is why capital is not flowing like it should.

“Significant work remains undone about crafting financial rescue and restructuring regulation. As long as investors are not sure about the financial landscape going forward, they will be reluctant to commit,” said Vincent Reinhart, a former senior official at the Federal Reserve who is now at the conservative American Enterprise Institute.

Mr. Obama and Mr. Summers also had a secondary message Friday about their efforts to stabilize the economy. They said the Obama plan to reform health care and energy is not, as some have said, trying to do too much.

“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 past two decades.

Mr. Obama on Thursday also voiced these themes, telling 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 the system of the past decade has benefited a small group at the expense of the many, adding “confidence will be enhanced” if there is a new system 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.”

“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 noted 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.

Lawrence J. White, an economics professor at New York University, said this shift was inevitable.

“Regardless of who had been elected in November, there was going to be a decreased reliance on the financial services sector going forward,” he said.

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

He defended Treasury Secretary Timothy F. Geithner’s approach so far to the financial sector. Mr. Geithner has not given specifics on how the government will intervene in the financial sector so far because the full extent of the weakness in many institution’s balance sheets is not yet known, Mr. Summers said.

He said Mr. Geithner’s approach was “difficult and courageous.”

“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.

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

Mr. Geithner headed Friday for Britain to meet with finance ministers from Group of 20 nations in advance of a summit early next month where the world’s major economies will discuss solutions to the global recession.

Mr. Obama spoke Friday morning by telephone with Saudi King Abdullah and Indonesian President Susilo Bambang Yudhoyono, both of whom will be at the summit. Saudi Arabia, in particular, is one nation the Obama administration hopes will cooperate with its call to increase the International Monetary Fund’s reserve fund from $50 billion to $500 billion.

The purpose of expanding the IMF’s fund would be to give it the resources to deal with economic collapse in Eastern Europe or elsewhere. A byproduct of a large influx of money from Riyadh and Beijing, another country being called on by Washington, would also likely be a larger role for these emerging economies in the IMF.

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