(The Hill) Former Treasury Secretary Larry Summers compared the Federal Reserve’s efforts to bolster the economy to the wars in Vietnam and Afghanistan, arguing all three epitomized the dangers of sticking to inept strategies.
“The American experience in Vietnam and Afghanistan teaches an important lesson. Making policy incrementally — focusing on adjusting the current policy path to avoid near-term pain, rather than stepping back and assessing whether the current state of affairs makes sense — can lead to terrible outcomes,” Summers wrote in a Washington Post column published hours after 12 U.S. service members and at least 60 Afghan civilians died in an attack on the airport in Kabul, Afghanistan.
Summers, a top economic adviser to former Presidents Clinton and Obama, argued that the Fed’s refusal to back away from its monthly purchases of Treasury and mortgage bonds was similarly dangerous given the current state of inflation and the economy.
The Fed has purchased at least $120 billion in Treasury bonds and mortgage-backed securities each month since March 2020 to help keep credit flowing through the economy. The bank is facing growing pressure to pare back those purchases after inflation reached a 5.4 percent annualized rate in July.
Several Fed officials have also argued that the U.S. economy is strong enough to keep chugging after recovering almost 17 million of the 21 million jobs lost to the onset of the pandemic. But others, including Fed Chairman Jerome Powell, have expressed concerns that pulling back too abruptly could leave the U.S. vulnerable to another pandemic-driven slowdown.
Powell is expected to say in a highly anticipated Friday speech that the economy is still on track to improve enough for the Fed to begin tapering bond purchases relatively soon. But Fed watchers say Powell is unlikely to pin down a hard date with uncertainty about the impact of the delta variant looming over the labor market.
Summers, however, argued that the U.S. is “near peak delta,” and even if it weren’t, Fed bond purchases would do nothing to prevent the inevitable drop in consumer activity. He also said the Fed was only maintaining its presence in the bond market because it was afraid of the consequences of withdrawing, evoking the U.S. withdrawals from Saigon and Kabul.
“The Fed is running quantitative easing at current levels not because anyone has analyzed that as appropriate given current conditions. Rather, there is a felt need to maintain credibility given previous commitments and a reluctance to accept the immediate pain and dislocation associated with changing course, coupled with faith in the ability to manage the situation down the road,” Summers said.
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“This kind of incrementalist thinking did not end well in Vietnam or Afghanistan. Of course, it is also true, as Afghanistan demonstrates, that precipitate change of a problematic course can be very costly.”
Summers has been a frequent critic of both President Biden and the Fed’s handling of the economy, particularly their support for steady stimulus through the spring and summer of 2021, while generally praising the president’s infrastructure push. Biden met with Summers last month amid mounting criticism of his spending plans, worrying progressive Democrats who’ve urged the president to go big and bold.
Liberal Democrats also blame Summers for curbing Obama’s stimulus ambitions following the 2007-08 recession and kneecapping the subsequent recovery. While Obama had considered appointing him to succeed former Fed Chairman Ben Bernanke in 2013, the president changed course after opposition from liberal senators and nominated former Fed Chair Janet Yellen, who now serves as Biden’s Treasury secretary.
