US recession risk highest since 9/11: ex-Treasury secretary

AFP
Monday Aug 27, 2007

WASHINGTON: Former US Treasury secretary Larry Summers said Sunday it was too early to declare the financial markets crisis over and said chances had risen sharply of an economic downturn in the United States.

Despite interventions by the US Federal Reserve last week which appeared to reverse heavy selling pressure over the collapsing US housing debt market, Summers said the risk of recession was its highest since the immediate aftermath of the September 11, 2001 attacks.

"We certainly saw some repair and some return to normality this week, but I think it would be far premature to judge this crisis over for at least two reasons," Summers told ABC television.

"First, we can't yet know that there aren't more shoes to drop in the financial area," he said, referring to the massive loss of confidence in securitised housing loans as US real estate prices sag.

(Article continues below)

"Second, we haven't yet had the time to observe what all this is going to mean for the real economy and for the actual process of job creation in our economy.

"I do not think we yet have ... a basis of making a prediction that there will be a recession, but I would say that the risks of recession are now greater than they've been any time since the period in the aftermath of 9/11."

Summers, who headed the US Treasury from 1999 to 2001 and then was president of Harvard University until a year ago, criticised the administration for not using government-backed mortgage lenders to help homeowners facing default on their loans.

He said policy should not be targeted at protecting investors or corporate lenders in the risky "sub-prime" sector, which targets borrowers with patchy credit records.

"You know, the substantial majority of the firms that were in the sub-prime mortgage business have already gone out of business. Many of the firms that remain have seen their stock prices fall by half or more," said Summers, now with the New York investment bank DE Shaw & Co.

"But the focus shouldn't be on those firms. The focus should be on the homeowner. The focus should be on the guy who bought a mortgage," he said.