by Calculated Risk on 6/29/2008 06:49:00 PM

Lawrence Summers writes in the Financial Times: What we can do in this dangerous moment

It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August.

Summers has four recommendations:

First, the much debated housing bill should be passed immediately by Congress and signed into law.

I haven't commented very much about this housing bill. Many of the critics have labeled it a $300 billion bailout - it's not. The cost will only be a small fraction of that amount, and the bill will probably be inconsequential. For more on the bill, see the CBO's analysis Federal Housing Finance Regulatory Reform Act of 2008 and Vikas Bajaj's article today in the NY Times: As Housing Bill Evolves, Crisis Grows Deeper.

Second, Congress should move promptly to pass further fiscal measures to respond to our economic difficulties. ... There is now also a case for carefully designed support for infrastructure investment ... There are legitimate questions about how rapidly the impact of infrastructure spending will be felt. ...

Yes, it appears the 2nd half recovery has been cancelled and there will be calls for more stimulus packages. Some infrastructure investment - that provides jobs for unemployed construction workers - seems to make sense. Atrios made a similar point this morning.

And from Summers on inflation:

Third, policymakers need to make a clear commitment to addressing the non-monetary factors causing inflation concerns. ... the primary source of inflation concern is increases in the price of oil, food and other commodities. ... Appropriate steps include reform of misguided ethanol subsidies that distort grain markets to minimal environmental benefit, allowing farm land now being conserved to be planted; measures to promote the use of natural gas; and reform of Strategic Petroleum Reserve Policy to encourage swaps at times when the market is indicating short supply. Major importance should be attached to encouraging the reduction or elimination of energy subsidies in the developing world.

There seems to be an overwhelming consensus that corn ethanol is misguided - and yet the program persists.

Fourth, it needs to be recognised that in the months ahead there is the real possibility that significant financial institutions will encounter not just liquidity but solvency problems as the economy deteriorates and further writedowns prove necessary.

Solvency is the real issue, and I'm not sure about the solution.