Larry Summers not sure about QE3, but debt ceiling has him worried

Economist Larry Summers said it would be financially catastrophic for lawmakers to fail in their quest to raise the nation’s debt ceiling by the Treasury’s Aug. 2 deadline. Summers, who served as President Obama’s White House National Economic Council director for two years, told CNBC Monday the debt ceiling is not a bargaining chip, and delays in raising it are just not fathomable. His cautionary words mirror those of Treasury Secretary Timothy Geithner, who has consistently warned lawmakers about the risks of not bumping the ceiling above its current $14.29 trillion debt limit. “I can’t conceive — whatever their other political failings are — political figures in Washington would allow the debt ceiling to default,” Summers said in a CNBC interview Monday. “A debt ceiling is not a good lever to use to get what you want. I find it very surprising that people in positions of authority are prepared to use the credit worthiness of a country,” he said. At the same time, Summers is less certain about what will happen when the Fed’s controversial Treasury debt-buying program ends in late June. The program — known as QE2 — allowed the Fed to gobble up $600 billion in Treasury debt as a means to stimulate the economy. Since its inception last November, the program has been the subject of heated debate. Those against the program worry inflationary risks will result from the Fed’s expansionary monetary policies, while others claim QE2 and even QE3 are needed to stimulate the anemic economy. During HousingWire’s recent REthink Symposium economist Paul Krugman advocated for a QE3 that is larger than QE2. On the issue of whether the Fed will be forced to engage in another round of Treasury debt buying to stimulate the recovery, Summers was vague, saying only that “we are not going to comment on the Federal Reserve.” Summers, formerly Harvard University‘s president and now an economic professor at the school, said there has been an ongoing debate about what is a more serious risk to the nation’s financial prosperity:  inflation caused by too much stimulus or a situation where you declare a recovery too soon and create a long period of economic stagnation. “The latter is the greater of the two risks,” Summers added. Write to: Kerri Panchuk.