US Economic 'Free-Fall' to End in Months: Summers

The U.S. economy will end its "free-fall" within a few months as government stimulus and rescue efforts take hold and inventory cycles return to normal, White House economic adviser Lawrence Summers said Thursday.

AP Lawrence Summers

But Summers, speaking to the Economic Club of Washington, said it was still unclear how quickly and strongly the economy would turn around.

"I think the sense of a ball falling off the table -- which is what the economy has felt like since the middle of last fall -- I think we can be reasonably confident that that's going to end within the next few months and you will no longer have that sense of free-fall," Summers said.

However, he said the U.S. unemployment rate may still rise because unemployment typically lags an economic rebound and needs a growth rate of 2.5 percent to remain stable.

"Even if we got a return to positive growth, an economy that was growing at 1 percent would be an economy with rising unemployment.

I don't think we can hold out the prospect we'll stabilize at the current level," he said.

Partway into his talk, two protesters rushed onto the stage and unfurled a pink banner behind Summers emblazoned with the words "We want our $$$$ back!" Summers sat silent until security ushered them out of the hotel ballroom.

Summers said policy-makers needed to be wary of risks for both inflation and deflation, adding that near term-deflation risks were part of the reason for the Obama administration's strong fiscal stimulus efforts and programs to support credit markets.

Meanwhile, Thomas Hoenig, President of the Kansas City Federal Reserve, said Thursday that the U.S. economy is "under significant stress" and will not recover until the financial system is stabilized and credit flows improve.

Hoenig called for a plan to deal with failure at the largest financial firms—those often branded as "too big to fail" because of their systemic nature — that is framed around what is best for the overall economy, not just for one group.

"The restoration of normal financial activity depends on how we deal with the problems of our largest financial institutions," Hoenig told a Tulsa Metro Chamber of Commerce meeting in Tulsa, Oklahoma.

For even those massive firms, "failure does have to be an option in an economic system such as ours," he said, adding that as part of the resolution process, management at failed firms should be replaced.

"We simply cannot add more capital without a change in the firm's ownership and management and expect different outcomes in the future," he said.

Hoenig said a financial institution has "failed" when the value of its assets is less than the value of its liabilities, or if it suffers a massive loss in liquidity to the point where liquidity is insufficient to meet current payment obligations.

"It does not matter what size the firm is. Although a bank might still be open and operating, if it is insolvent by these definitions, it has failed."

Copyright 2009 Reuters. Click for restrictions.