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Summers' Storm Warning


By Maria Bartiromo In the same week that Warren Buffett donated $31 billion to the Bill & Melinda Gates Foundation, Oracle (ORCL) announced that CEO Larry Ellison will not give more than $100 million to Harvard. The subtext: He doesn't like the way the ultimate Ivy treated its outspoken and outgoing president, Larry Summers. You'd think that being forced out of Harvard, which Summers will exit on June 30, would send anyone into a funk. But the former Treasury Secretary (under Bill Clinton), who married about a year ago, seems as happy as a schoolboy heading into summer vacation.

How do you see the economy playing out?

The end of this expansion is not in sight, [but] there is a gathering constellation of risk. The major risks include price inflation, asset deflation in the housing market, and the risks associated with our substantial dependence on foreign capital and oil imports from less-than-stable parts of the world. All of this means that negative surprises are more likely over the next year than in the typical year.

Is the economy on the verge of higher inflation, requiring more Fed hikes, or do you anticipate a weakening in the second half that would cool inflationary pressures?

I think the Fed is trying to navigate its way across a very narrow ledge on a fairly high precipice. [Below are] the risks of a slowdown and housing problems on the one hand and inflation on the other. It will take both very [precise] readings of the economy and good luck for us to come through smoothly over the next year and a half.

Given the continued large budget and current-account deficits, what could trigger a sharp drop in foreign financing of the U.S. economy? And how imminent is this?

It's very difficult to judge, not least because so much of the financing is coming from the foreign governments through their central banks, so their decision-making is guided by much more than a currency trader's calculation of profit and loss. What is clear is that we are taking needless risks with the magnitude of our dependence on foreign capital, given that our debts are financing consumption rather than investment.

What would you do to boost revenues?

We need to look at overall fiscal policy, both in terms of the tax cuts, the long-term context of entitlement problems, and the questions of growing inequity in the distribution of income. We can't continue to cut taxes and increase spending in the way we have over the past six years. The combination of more guns, more butter, and more tax cuts is not sustainable.

Hank Paulson as Treasury Secretary: Good choice?

I am proud that another Harvard Business School alum is becoming the Treasury Secretary. Hank is an extraordinarily well respected and experienced financial leader. And I think it is good at a time when the risk of financial instability is probably higher than normal to have someone with his breadth and depth of experience.

Are you worried about the twin deficits?

I am not one who believes in forecasting apocalypse from the deficits, but current fiscal policy is running a needless risk. If you smoke a pack or two a day, it will not necessarily hurt your health, but it's not a risk a prudent person takes...so also with our budget deficits.

Why are people so nervous about the global markets?

I think there is a growing awareness that there are substantial risks.... As the old joke goes, the three most dangerous words on a ski slope are: Follow me dad. And the four most dangerous words in markets are: It's different this time.

What happened at Harvard?

I was a man in a hurry with a strong desire to bring about what I thought were important changes in the university's commitment to science and technology, to using its resources for financial aid, to supporting public service, and especially to increasing the faculty commitments to undergraduate students at a time when a growing fraction of teaching and grading was done by graduate students. All of that, plus no doubt some mistakes I made, created a great deal of turbulence in what has been a rather tradition-bound institution.

Maria Bartiromo is the host of CNBC's Closing Bell


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