SUMMERS' BIG ECONOMIC SPEECH.

Council of Economic Advisors National Economic Council Chair Larry Summers delivered a speech (after the jump) today at the Brookings Institution that continued the defense and explanation of the administration's economic plan. Summers has been a major architect of all the administration's economic proposals. While it doesn't seem at first reading to break any major news, the speech does offer a very holistic picture of the administration's principles and approach, making it a good primer for understanding the current economic questions. Like, what is being done to address the troubled major banks?

The stress tests now underway will enable a realistic assessment of the position of each different institution and appropriate responses in each case to assure their ability to meet their commitments and lend on a substantial scale. And as the President said in his joint address to Congress, “When we learn that a major bank has serious problems, we will hold accountable those responsible, force the necessary adjustments, provide the support to clean up their balance sheets, and assure the continuity of a strong, viable institution that can serve our people and our economy.”

That answer, I think, will disappoint almost everyone with it's lack of detail, but at least doesn't rule out the various receivership plans people are discussing. Interesting, there was no mention of the public-private partnership that would supposedly be creating a market for the various toxic assets.

Another question worth asking -- what will drive the beginning of the recovery?

About 14 million new car sales are necessary for replacement and to accommodate rising population growth. Yet car sales are now running at an annual rate of about 9 million. New household formation requires something like 1.7 million new housing units a year and housing starts are now running about 400,000 a year. Once the inventory is worked off, investment will increase. Historical experience suggests that rapid inventory decline such as we have observed in recent months is followed by increased production to rebuild inventories.

This passage is tempered by Summers' later observation that policies need to be in place to reduce carbon emissions and prevent future bubbles. But the question of where long-term growth will come from continues to nag as it becomes clear, at least in the short-term, that our economic drive will be two industries that have been neither reliable nor sustainable in recent memory.

-- Tim Fernholz

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