January 29, 2010 / 7:07 PM / 8 years ago

Strong U.S. Q4 growth no reason to pop champagne: Summers

DAVOS, Switzerland (Reuters) - An acceleration in U.S. economic growth at the end of last year is good news but no reason to break out the champagne given high unemployment, a top White House economic advisor said on Friday.

The U.S. economy grew at a faster-than-expected 5.7 percent pace in the fourth quarter, the quickest in more than six years, as businesses made less-aggressive cuts to inventories and stepped up spending.

The robust performance closed out a year in which the economy contracted 2.4 percent, the biggest decline since 1946.

“It confirms what we have recognized. It created a basis for economic growth. It certainly doesn’t suggest we are in any position to pop champagne corks,” Larry Summers, director of the White House National Economic Council, told the World Economic Forum in Davos.

“We have a profoundly serious problem of unemployment and slow growth in middle income (families). We need to do a lot more. First comes GDP growth, then comes the number of hours people work, then comes the level of employment, then comes the level of unemployment. We have a long way to go.”

He urged financial institutions to stop taking excessive risks and leverage and said regulators must close loopholes and arbitrage opportunities to prevent another crisis.

“At the center of regulation are some clear imperatives. It has to be basic protection for consumers, there’s got to be a system where we recognize we can’t have a fail-safe system. There has to be an end to loopholes and regulatory arbitrages,” he said.

“There have to be rules that constrain the amount of risk that large financial institutions take ... Banks should not be taking advantage of leverage ... simply in order to trade back and forth. Trading is a crucial part of a modern financial system but it doesn’t need to be supported by governments, guarantees provided by governments.”

Banks, which were bailed out by governments, should focus on fulfilling their obligations to their stakeholders -- customers, Summers added.

“They need to think very carefully about their obligations to their customers. The system was brought to the brink of a collapse by reckless lending standards. In that context there’s obligations on the part of those who benefited from governments involvement to carefully consider their obligations.”

Asked about the dollar’s role as a reserve currency, Summers said: “Reserve currencies are chosen by the market. I believe the dollar has a very central role in the international financial system for a long time to come.”

Editing by Mike Peacock

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