Ex-Treasury chief Summers warns on recession risks

 @ibtimes
on August 27 2007 4:25 PM

Former Treasury Secretary Lawrence Summers said on Sunday the risks of a recession are greater now than at anytime since the September 11 attacks due to real estate and mortgage market troubles.

I do not think we yet would have a basis for making a prediction that there will be a recession, Summers said.

But I would say that the risks of recession are now greater than they've been anytime since the period in the aftermath of 9/11, he said on ABC's This Week.

Summers headed the Treasury Department from 1999 to 2001. He resigned last year as president of Harvard University. In October, he joined a Wall Street hedge fund group.

For years, he said, the economy was bolstered by consumer spending, fueled by easy credit in a real estate boom.

With the boom over, he said, those processes -- the rising housing market, the greater credit taken out of homes -- are going to go into reverse, to at least some degree. So I think the risks of a downturn have surely risen.

He questioned efforts to restrain housing finance giants Fannie Mae and Freddie Mac from doing more to stabilize the housing and mortgage debt markets.

Of all moments to be trying to constrain their activities, this can't be the right moment for that, he said.

Surely we should be encouraging them to provide capital in the subprime space ... simply making available the kind of liquidity that enables these markets to function.

Fannie and Freddie, the largest U.S. home loan funding groups, are chartered by Congress. Lawmakers are pushing to raise caps on home loans the two groups can hold.

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat and presidential candidate, last week asked the Bush administration to lift the portfolio caps.

But Dodd said Treasury Secretary Henry Paulson expressed a reluctance to take such a step. Paulson said earlier he was talking with Fannie and Freddie about policy options, including possible legislation.

The Bush administration has said the investment portfolios of Fannie and Freddie, which both suffered accounting scandals in recent years, are bloated and should be controlled.

Earlier this month President George W. Bush said, First things first when it comes to those institutions ... Congress needs to get them reformed, get them streamlined. Get them focused and then I will consider other options.

The Federal Reserve this month cut the discount rate at which banks can borrow directly from the central bank by 0.5 percentage point to 5.75 percent. The Fed also injected about $100 billion of extra liquidity into the banking system.

Summers said: It would be far premature to judge this crisis over. ... There's been repair, but we'll have to see what happens.

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