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Summers sees increased risk of market crash, praises BOE

(Bloomberg) — Former finance minister Lawrence Summers says heightened volatility has increased the risk of a “collapse” in market functioning — although that hasn’t happened outside the UK, with global monetary policy The top priority for the framers remains to curb inflation.

“I certainly wouldn’t be surprised if we see other financial stability issues emerging that require a response from policymakers,” Summers said in an interview on Bloomberg Television on Wednesday. “The Phnom Penh market is not functioning and functioning properly,” he said, which is why the Bank of England intervened. “Other markets are working right now.”

Summers spoke hours after the Bank of England pledged to buy unlimited long-term UK government bonds. The aim is to avoid a looming collapse in the Phnom Penh market, which has been battered since Friday over concerns over Prime Minister Liz Truss’ plans for fiscal tax cuts.

The Bank of England’s action is the ‘right thing’ to do,” said Summers, a Harvard professor and paid contributor to Bloomberg Television. “It does not address any fundamental inconsistencies in UK policy. , nor does it address concerns between the need for disinflation and the ongoing massive fiscal expansion.

The former U.S. Treasury secretary had criticized Friday for dismissing the administration’s fiscal plan — aimed at boosting productivity and economic growth by lowering a historically high tax burden — as “naive” and “Wishful thinking.”

“It remains to be seen” Summers said Wednesday whether the world’s broader central banks need to shift their focus to worrying about financial stability rather than inflation.

“If central banks don’t continue their efforts to stem and contain inflation, they could delay bigger risks as leverage increases. More attention will be paid to what this might mean in emerging markets with significant foreign exchange for currency-denominated debt, or currency liabilities and asset mismatches in financial institutions.

The bigger issue for the U.S. is “the consequences of a rapid rise in interest rates,” Summers said. “You can never be sure what the consequences will be.”

While steps have been taken since the credit crisis to strengthen banks, such as stricter capital rules, “I do worry about the shadow banking system. and situations outside the banking system can be significant risks,” he said.

©2022 Bloomberg LP



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