Larry Summers Says Central Bankers Confront a ‘Black Hole’ for Policy
Summers said it is “dangerous” for central bankers to suggest they have control over assuring sufficient demand.
(Bloomberg) --
Harvard University economist Lawrence Summers warned central bankers that they are staring at “black hole monetary economics” where small changes in interest rates and even more aggressive strategies do little to solve demand shortfalls.
“Interest rates stuck at zero with no real prospect of escape -- is now the confident market expectation in Europe and Japan, with essentially zero or negative yields over a generation,” Summers wrote on in a series of tweets as central bankers head toward the Kansas City Fed’s annual policy retreat in Jackson Hole, Wyoming. “The United States is only one recession away from joining them.”
Explaining his views over a series of 28 tweets, Summers said a forthcoming paper he has co-authored with Harvard researcher Anna Stansbury argues low interest rates do little to stimulate demand and may make the problem worse.
“Interest rate cuts, even if feasible, may be at best only weakly effective at stimulating aggregate demand and at worst counterproductive,” Summers wrote, explaining that they could produce financial bubbles, induce higher savings, and sustain zombie firms with low debt service payments that are like students “who do not have to take tests.”
Summers said it is “dangerous” for central bankers to suggest they have control over assuring sufficient demand. He said he hopes the issue will be discussed at the Kansas City Fed’s Jackson Hole symposium, “but we are not holding our breath.”
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net
To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Jeff Kearns
©2019 Bloomberg L.P.