Summers Warns Deflation Is 'Real Risk' for Economy (Update1)
Feb. 4 (Bloomberg) -- White House economics director Lawrence Summers urged swift passage of a stimulus bill and pledged further taxpayer funds for major banks, warning that the economy is in danger of sustained declines in consumer prices.
"Deflation is a real risk facing the economy," Summers, the director of the National Economic Council, said today on a conference call with reporters. "We do not have time to wait" to approve the fiscal-stimulus package the Obama administration is pushing in Congress, he said.
A prolonged slide in prices would worsen the recession by making debts harder to pay off and banks even less likely to make new loans. Summers's remarks come as the administration seeks congressional approval of the stimulus by the end of next week.
"This bill is imperative for our economic security," Summers said. "I've got great confidence that in our country we do the right thing. So I expect a bill to be signed into law."
House lawmakers approved a measure last week, and the Senate is deliberating on the bill this week. Treasury Secretary Timothy Geithner held meetings today with Senate Democrats and House leaders.
Capital Injections
The stimulus package alone won't be enough, said Summers, a former Harvard University professor and Treasury secretary in the Clinton administration. Policy makers are readying an overhaul of the Treasury's financial-bailout program, which may come early next week, and a strategy to stem record mortgage foreclosures.
The focus of the financial recovery plan "will be on maintaining the overall flow of credit" in the economy, Summers said. It will include "government support for the credit markets" and "capital infusions into major financial institutions."
Summers said the stimulus package is aimed at helping fill a $2 trillion gap between the economy's potential growth and its actual performance in 2009 and 2010.
President Barack Obama today called on Congress to quickly complete the legislation, saying that a failure to act "will turn crisis into a catastrophe and guarantee a longer recession."
The economy shrank at a 3.8 percent annual rate in the fourth quarter of 2008, the most since 1982, and analysts anticipate a deeper contraction in the first three months of this year. The unemployment rate likely climbed to 7.5 percent in January, compared with a 4.9 percent rate a year before, according to the median estimate in a Bloomberg News survey ahead of a Labor Department report due Feb. 6.
To contact the reporter on this story: Nicholas Johnston in Washington at njohnston3@bloomberg.net; Rich Miller in Washington at rmiller28@bloomberg.net
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