Larry Summers: We can’t experiment with default
FORTUNE — Larry Summers, the former chief economics adviser to President Obama and former Treasury secretary in the Clinton administration, told Fortune last night that a default on government financial obligations “is not an experiment we should ever run.”
As Congress continues to debate legislation to avert default that the government says will occur tomorrow, Summers dismissed any notion that failure to pay bondholders on a timely basis, and to meet other financial obligations, was an overstated risk. “The U.S. has benefitted from having the most trusted and liquid securities market in the world,” he said. “Even a small slip-up undermines that.”
Nor should anyone countenance the idea that the Treasury could somehow prioritize its obligations to make sure bondholders got paid first. “There are major computer systems and Y2K issues with any delays in payments.” Moreover, he said, “a default, even if temporary, risks a reassessment by the world of the United States’ capacity for responsible governance. That is potentially a very big deal.”
Fortune reached Summers as he was boarding a flight in South Korea, returning to the U.S. He was in Seoul delivering the keynote address at the World Knowledge Forum. While there, he met with President Park Geun-hye to discuss international financial markets.
Earlier this month, Summers withdrew as a candidate to lead the Federal Reserve. President Obama nominated Fed vice chairman Janet Yellen last week. Summers is currently a professor at Harvard.