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Government Stimulus Needed to End Negative Economic Cycles says Larry Summers


The Director of President Barack Obama's National Economic Council, Lawrence Summers, says the United States cannot fix the financial system without addressing the fundamental problems in the economy. Summers told a group of bankers in Washington on Wednesday that bold action is needed to stem further economic decline.

In a speech to the American Bankers Association, Lawrence Summers noted that in the current economic downturn, problems tend to multiply and magnify. He noted, for example, that as housing prices fall, foreclosures rise, forcing housing prices to decline even further.

"These vicious cycles are the central threat and why a strong policy response is so essential," said Summers.

Summers, one of President Obama's top economic advisers, said the administration's strategy to reverse these cycles starts with economic stimulus.

"The first key step was engaging the economy because, let us be frank, we cannot have a completely healthy financial system in a profoundly unhealthy economy," he said.

According to Summers, the president's economic stimulus plan signed in February, fosters sustainable expansion by funding initiatives such as education and energy efficiency.

He said the administration is also addressing problems in the financial sector and that greater regulation is key to this effort. Summers also noted that the Treasury Department plans to partner with private investors to purchase bad mortgage-related assets that are at the center of the financial crisis.

But Republican Senator Jon Kyl of Arizona, speaking earlier to the bankers association, cautioned about the Obama administration's intervention in the banking industry.

"It's obvious that the federal government will not necessarily be a passive partner," said Jon Kyl. "The government will be looking over your shoulder and second-guessing every decision you make. Obviously, there is a price to pay for additional government assistance."

World leaders are meeting in London to discuss a coordinated solution to the global economic crisis at the G-20 summit of developed and emerging economies.

Lawrence Summers said one of the most important topics at the G-20 will be how to prevent protectionism - the imposition of trade barriers to protect domestic industries. He said the Obama administration will do everything it can to avoid economic nationalism.

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