Former treasury secretary Larry Summers warned that world leaders are failing to do enough to prevent a possible global crisis, as rising interest rates and fallout from the war in Ukraine and the coronavirus pandemic rattle advanced and developing countries alike.
“The fire department is still in the station. Somebody should be proposing something somewhere,” Summers said. “I’m very disappointed in the response.”
Just two years after the pandemic recession, the global economy confronts an evolving set of threats. Higher interest rates needed to battle decades-high inflation are causing investors to rethink their holdings, leading to volatile trading. War between Russia and Ukraine has sent prices soaring for grain and fuel. And relations between the United States and China, the world’s two largest economies, seem to worsen each day.
“This is the most complex, disparate and cross cutting set of challenges that I can remember in the 40 years I’ve been paying attention to such things,” Summers said to the Institute of International Finance, an industry group.
Summers, who correctly warned early last year that inflation would become a persistent headache in the United States, said policymakers need to act on several fronts to address an “ominous” outlook: making sure financial markets operate smoothly; increasing lending and easing debt burdens for poor countries; and accelerating the transition to a low-carbon economy.
Summers said the United States should provide an additional $5 billion in funding for the World Bank over six years, which ultimately could support up to $100 billion in new lending.
The prominent economist — who spent an hour recently conversing with President Biden in the Oval Office — is no ordinary critic. As a top Treasury Department official in the Clinton administration, he helped craft the U.S. response to financial crises in Mexico and Asia. During the latter episode, Time magazine memorably lionized him, his boss, Treasury Secretary Robert Rubin, and Federal Reserve Chair Alan Greenspan as “The Committee to Save The World.”
Central bankers and finance ministers from around the world gathered in Washington this week for the annual IMF and World Bank meetings. Summers disparaged much of the resulting discussion as “vague, airy fairy stuff.”
“This meeting is not going to be remembered for anything except being a missed opportunity,” Summers said.
His remarks came as the international bodies issued a series of increasingly downbeat economic forecasts amid growing dangers of a global recession. The World Bank this week lowered its annual growth estimate for 2023 to 1.9 percent, down from a previous 3 percent forecast.
Summers contrasted the free-spending response to Ukraine’s defense needs with what he said was insufficient global action on the economic front.
“This is a moment that is extraordinary and urgent in the economic and financial sphere in the same way that it is in the security sphere,” Summers said.
As consumer price inflation topped 9 percent this year, the Federal Reserve has raised interest rates faster than at any time since the early 1980s. That has pushed up the value of the U.S. dollar, which is causing significant problems for dozens of other countries.
Central banks in emerging market economies have had to raise interest rates to prevent their currencies from sinking against the dollar. Higher borrowing costs risk painful recessions. And many of those countries face higher bills to repay borrowed dollars or for global commodities like oil, which are priced in dollars.
“That’s got all kinds of collateral consequences for the rest of the world,” Summers said.
One example is the recent bond market turmoil in the United Kingdom following the British government’s proposal to borrow money to fund a tax cut for high-income individuals. As yields soared on U.K. government bonds, the Bank of England was forced to step in to avert a market collapse. On Friday, Kwasi Kwarteng, the chancellor of the exchequer, resigned amid the ongoing crisis.
The consequences could be even greater in the developing world. Prioritizing the fight against inflation in the United States and other advanced economies — even as poorer countries feel the pinch — risks a broader rupture, Summers said.
“The developing world is going to tune us out. Maybe they’ll tune China in, maybe they won’t,” he said. “But either way it’s hard to believe that we’re going to be creating the world we want to create.”