Fareed speaks with former U.S. Treasury Secretary Larry Summers about U.S. economic policy and developing economies. Watch the full interview on GPS this Sunday at 10 a.m. and 1 p.m. ET on CNN.
If you look at what happened a couple of weeks ago, when there were some indications that the Fed might start reversing its course – you know, either raise interest rates or end what is called the quantitative easing policy. What happened was the stock markets here swooned. Markets around the world crashed and countries like Turkey found themselves in very big trouble, very fast growing countries. Does that suggest that the world is not ready for a return to what would frankly be very normal interest rates?
They are now so abnormally low, that many people believe they have to come up to some kind of historical norm and when that happens, we will see another financial crisis, because assets and markets around the world have got inflated and they're going to get punctured again.
I think there’s no question that in a number of countries, a period when it's been very easy to attract capital because capital could only earn a zero return on U.S. Treasury bills, has bred a kind of complacency and a kind of over borrowing. And the sense that it was going to get a little more challenging in the competition for capital has raised a set of fears and brought a set of problems to light. That’s really the story of the so-called fragile five countries – Turkey and India, South Africa and Indonesia, and Russia, each of which, in their own way, probably has become more complacent than would have been ideal during this period of quite extraordinary financial conditions.
But I think the Federal Reserve is going to have to do all the things that it judges to be appropriate in the context of U.S. economic expansion. And developing countries will need to find ways of standing on their own two feet without the spur of the extra investment that comes from extraordinarily low interest rates.
I think it's also important to remember that the emerging markets have a huge stake in successful and strong U.S. economic growth. And to some extent, we're getting this tightening of monetary conditions because there's a sense that growth in the U.S. may be accelerating. And that growth in the U.S., if it does accelerate, will bring substantial benefits to them as exporters, which will help to offset any adverse effects of higher interest rates.
So I think it would be a grave mistake for the U.S. Fed, the central bank, to tighten policy absent clear evidence of growth at higher rates than we've seen for the last few years being established.
But at the same time, when the time comes, there really isn't going to be an alternative to a normalization of policy and that normalization of policy will be, and that growth, will bring benefits as well as risks, to the emerging markets.