Summers Sees Heightened Risk of Market Breakdowns, Lauds BOE

(Bloomberg) — Former Treasury Secretary Lawrence Summers said that heightened volatility has raised the danger of “breakdowns” in market functioning — although that’s not yet been seen beyond the UK, and the priority for global monetary policymakers remains containing inflation.

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“I certainly wouldn’t be surprised if we see other financial-stability issues arise that demand responses” from policymakers, Summers said in an interview on Bloomberg Television Wednesday. “The gilt market was not working and functioning properly,” which was why the Bank of England has intervened, he said. “Other markets right now are functioning.”

Summers spoke hours after the BOE pledged unlimited purchases of long-dated UK government bonds. The aim was to stave off an imminent crash in the gilt market, which had been walloped since Friday by concerns about Prime Minister Liz Truss’s fiscal program of tax cuts.

The BOE’s action was “the right thing to do,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. “It does not resolve any of the fundamental contradictions in British policy or address the attention between the anti-inflation imperative and the massive fiscal expansion being engaged in.”

The former US Treasury chief had criticized the Truss government’s fiscal plan — designed to boost productivity and economic growth by reducing an historically high tax burden — as “naive” and “wishful thinking” on Friday.

It “remains to be seen” whether central banks more broadly around the world will need to pivot toward worrying about financial-stability issues rather than inflation, Summers said Wednesday.

“If central banks don’t carry through on their efforts to stop and contain inflation, they may risk deferring even greater risks as leverage builds up,” he said.

As for the strengthening dollar, Summers played down risks it poses to the US economy, saying, “I would be much more concerned about what it might mean in emerging markets with significant foreign currency denominated debt, or in financial institutions” with a mismatch in currency liabilities and assets.

The bigger issue for the US is “the consequences of rapidly rising interest rates,” Summers said. “You can never be certain about what the consequences of that will be.”

While steps have been taken since the credit crisis to strengthen banks, such as setting tighter capital rules, “I do have concerns about the shadow-banking system and situations outside of the banking system where there could be significant risks,” he said.

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