'US markets face highest risk of recession since 9/11'

WASHINGTON: The risk of US markets falling into a recession mode is higher than ever before since the aftermath of September 11, 2001 attacks, former US Treasury secretary Larry Summers has said.

It is "premature" to say the crisis is over despite some recovery by the stock markets and the Federal Reserve last week availing more cash into credit markets, the Treasury Secretary of previous Clinton administration said on Sunday.

"We certainly saw some repair and return to normality this week. But I think it would be far premature to judge this crisis over for at least two reasons," he said.

"First, we can't yet know there aren't more shoes to drop in the financial area. There had been all kinds of securities that people had judged to be very safe that turned out to be anything but. There's a large pipeline of loans that needs to be funded," he said referring to the collapsing US housing debt market.

"Second, we haven't yet had time to observe what all is going to mean for the real economy and for the actual process of job creation in our economy.

"The consumer has been propelled by a rising housing market and by greater availability of housing credit. Those processes -- the rising housing market, the greater credit taken out of their homes -- are going to reverse to at least some degree," he said.
"I do not think we yet have ... a basis of making a prediction that there will be a recession, but I would say that the risks of recession are now greater than they've been any time since the period in the aftermath of 9/11," said Summers, now with the New York investment firm DE Shaw & Co.

The former top Treasury official declined to lay out the prescriptions for the Federal Reserve as far as credit markets are concerned but said the focus ought not to be on protecting investors.

"... old Treasury secretary habits die hard, so I'm not going to prescribe for the Fed, but I'll say this: The focus on economic policy should not be on protecting investors one way or another," former President of Harvard University said.

"The focus should be on real economy, on the people who are working, on the people who are in these houses, and there are a number of areas that need to be looked. What's needed is more credit and more liquidity and more support for the housing market," he said.

"... the substantial majority of the firms that were in the subprime mortgage business have already gone out of business. Many of the firms that remain have seen their stock prices fall by half or more," he warned.

"Surely we should be encouraging them to be able to provide more capital. Not giving anybody money, not bailing anybody out, but simply making available the kind of liquidity that enables these markets to function in ordinary ways," he added.

"Those are steps that we can take, and I don't think those create a risk that we're going to have some further crisis 10 years from now. I think we need to worry about the problems we have right now," Summers said.