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Former Treasury Secretary Says US Risks Economic Downturn

A former U.S. treasury secretary says last week's surge in America's financial markets does not necessarily signify an end to the recent upheaval stemming from tight credit conditions and high default rates on risky home mortgages. VOA's Michael Bowman reports, Larry Summers, who headed the Treasury during the final years of the Clinton administration, says the risk of America sliding into recession has increased.

Until last week, August was not kind to U.S. financial markets or their counterparts in Europe and Asia, with many major indexes plummeting by 10 percent or more. But in New York, the Dow Jones Industrial Average has recouped some of the losses, finishing up 2.3 percent last week, its best weekly performance in fourth months. The technology-heavy NASDAQ performed even better, rising nearly three percent.

The surge in the markets came after the Federal Reserve cut short-term interest rates, the latest move by the central bank to try to alleviate tight credit.

But were financial markets casting a vote of confidence in the future, or were investors merely bargain-hunting, rushing to buy stocks that are cheaper than they were a month ago? Former Treasury Secretary Larry Summers spoke on ABC's This Week television program.

"We certainly saw some repair and some return to normality this [past] week," said Larry Summers. "But I think it would be far premature to judge this crisis over for at least two reasons. First, we cannot yet know that there are not more shoes to drop [problems to emerge] in the financial area. Second, we have not yet had the time to observe what all of this is going to mean for the real economy and for the actual process of job creation in our economy."

Summers says U.S. economic growth has been fueled to a large degree by American consumers who, until recently, benefited from a rising housing market that allowed them to use their home equity to make major purchases. He says falling housing prices and a rash of defaults on some home mortgages will inevitably slow consumer spending, making economic growth harder to sustain.

"I think the risks of a downturn have surely risen," he said. "I do not think we have a basis for making a prediction that there will be a recession. But I would say that the risks of recession are now greater than they have been anytime since the period in the aftermath of 9/11 [2001]. So [U.S. economic] policy will have to be vigilant."

Bush administration officials have declined to comment on the day-to-day swings of financial markets, but they maintain that overall U.S. economic health and the global economy in general remain strong.