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Summers: Avoid the 'Cliff' to Set Off 'Virtuous Circle'

Friday, 26 Oct 2012 | 12:26 PM ET
Colin Anderson | Photographer's Choice | Getty Images

Economist Larry Summers expressed optimism about the economy's long-term prospects, telling CNBC that the first step in setting off a "virtuous circle" was to avoid the "fiscal cliff."

But that's a big if, he warned Friday on "Squawk Box."

With the economy growing but still vulnerable, Summers said, "if we didn't do something about the fiscal cliff … you're looking at an overwhelming likelihood of serious recession and you're looking at a real threat to national security."

Summers, who was Treasury secretary in the Clinton administration, said politicians need to prevent massive short-term damage to the economy and to put forward a longer-term framework to deal with the budget once the economy improves. (Read More: Why CEOs Are on the 'Fiscal Cliff' Warpath.)

How to Rise Above the Fiscal Cliff
"If we don't do something about the fiscal cliff...we're looking at an overwhelming likelihood of serious recession, and we're looking at a real threat to national security," said Lawrence Summers, Harvard University professor, on what needs to be done to avoid falling off the fiscal cliff.

"If you don't have that, it will be very hard to put back confidence," he said.

Summers added, "If you have more growth, that means you have better revenues, better budgets, that means you have lower interest rates, that means you have more investment, more growth. That's the kind of virtuous circle that we need to set off."

While the "fiscal cliff" is a major short-term problem, Summers is optimistic about the longer-term outlook for the economy.

'Silver Lining' in Soft Earnings: Summers
Lawrence Summers, Harvard University professor, says the reason a lot of the recent earnings are depressed is due to companies making long-term investments in the future of their companies.

"We've got opportunities for a housing turnaround," he said. "We've got huge opportunities in the energy sector that everybody talks about." (Read More: Rough Results from Apple, Amazon May Shake Market.)

There's also a silver lining in the third-quarter earnings numbers. "If you listen to what the companies said, a lot of the reason the earnings were depressed was that they were making a lot of long-term investments in the future," Summers said.

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