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Larry Summers: Debt Got Us Into This Mess and Debt Will Get Us Out

Aaron Task
Editor in Chief
Daily Ticker

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At The Economist's Buttonwood Gathering in lower Manhattan this week, the prevailing mood was in opposition to the euphoria in the financial markets.

The odds of a 'double-dip' recession have declined in recent weeks thanks to Europe's latest bailout and another round of better-than-expected economic data, but "the risk is still there and I don't think there's a foundation for growth that will significantly bring down unemployment," Larry Summers tells me in the accompanying clip. "Unless we're able to get more demand going, we're not going to generate the incomes necessary to have growth to allow us to move forward."

In order to stimulate demand, the former Treasury Secretary and President Obama's chief economic advisor says the keys are infrastructure spending, tax cuts for middle-income families and relief for struggling homeowners via refinancing and/or mortgage modification.

On these issues, Summers says the President is "very much on the right track" with his recent proposals.

In addition, and somewhat controversially, Summers also believes in the beneficial power of (wait for it) debt.

Debt Is Good?

"The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending," Summers writes in a recent op-ed in The Financial Times.

In the accompanying video, I asked Summers whether that's the equivalent of trying to drink yourself sober.

His answer, essentially, is that after a period when credit flowed too freely and people were overly eager about taking risk, the pendulum has now swung too far in the other direction.

"The reason firms aren't hiring is they don't have demand; the only way they'll get demand is to have more spending; the only way people will spend more is if they have access to credit," he says. "We have to work through the old debts to enable people to take on new debts."

Check the accompanying video for more and to hear Summers' (brief) thoughts on the Occupy Wall Street movement.

Earlier: Steven Rattner Feels the Pain on Both Sides of Occupy Wall Street

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com