Larry Summers: Fed's 'Low Interest Rates Could Become Source of Instability'

Friday, 16 May 2014 11:17 AM

By Dan Weil

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Harvard economist Larry Summers, a former top adviser to President Barack Obama, is concerned that the Federal Reserve's easing program could hurt the economy.

"Low interest rates could become a source of instability down the road," Summers said at the SALT investment conference Thursday, Fortune reported.

The Fed's federal funds rate target has stood at a record low of zero to 0.25 percent since December 2008.

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Low interest rates could cause bubbles in asset markets, Summers noted. Thus he advocates increased government spending for areas like infrastructure rather than massive monetary stimulus.

In addition to its low interest-rate policy, the Fed is still buying $45 billion of Treasurys and mortgage-backed securities a month.

The central bank's accommodative policy is probably worsening income inequality by supporting wealthy stockholders more than others, he explained. "A policy that works by pumping up asset prices is not going to be egalitarian."

Summers doesn't think a financial crisis is likely when interest rates finally rise. "The major financial institutions are much better capitalized than in the past," he stated. "Will they always be? It's a good thing to question."

But James Rickards, managing director at Tangent Capital Partners, sees the dollar headed for crisis. Central banks are petrified of deflation, the author of "The Death of Money: The Coming Collapse of the International Monetary System" told Bloomberg TV.

So how do central banks prevent deflation? "They print money," Rickards said. "If you print enough money, you will collapse confidence in the dollar. The ultimate backing of the dollar is confidence."

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