Summers Warns ‘Too Early’ for All-Clear on US Financial Turmoil
Former Treasury Secretary Lawrence Summers said it’s too soon to be confident that the US has turned a corner on financial troubles that were sparked by the Federal Reserve’s rapid interest-rate hikes.
There’s “well under” a 50% chance of a repeat of the bank runs that brought down Silicon Valley Bank and Signature Bank earlier this month, Summers said. But there could still be some other kind of “accident” that causes a constriction in credit, he said.
The key question is whether financial dynamics unfold in a “non-linear” fashion, “where constriction of credit leads to declining asset prices and leads to non-performance of loans, leads to more credit constriction,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. That question cannot now be answered, he added.
“It’s too early to give any kind of all-clear sign,” Summers said. “We’re going to be much of the way through the summer before I would feel comfortable being confident that it wasn’t going to go non-linear.”
Summers spoke after the latest reading on US inflation, which showed a slowdown in the monthly pace of the core gauge — excluding food and energy costs — to 0.3% from 0.5%. The annual pace of gains ticked down to 4.6% from 4.7%, still more than double the Fed’s long-run 2% projection.
“We are still a substantially unsustainable-inflation country, unless the economy turns down fairly hard in response to the credit issues raised by the banking system,” Summers said.
It’s also “plausible” that the recent banking woes subside without a big impact on credit, leaving in place “serious inflation issues.” In that scenario, “the Fed will have to tighten much more than is priced in.”
A third possibility is that the economy manages to skate in between those two scenarios, with a so-called soft landing — but that seems “very much odds-off,” he said.
The former Treasury chief also expressed concern about the cost of the Federal Deposit Insurance Corp.’s wind-downs of SVB and Signature.
The FDIC’s deposit insurance fund will suffer an estimated $20 billion hit linked to SVB, and a $2.5 billion blow from Signature, according to the agency. After each lender was later sold, the acquiring banks saw their shares rally — suggesting investors concluded that they had got a good deal from the FDIC.
“These were stunningly expensive transactions,” Summers said. “Everybody’s going to say ‘it’s not coming back to taxpayers.’ But banks are taxpayers on behalf of people — their depositors, their customers, the people they lend to — and the $23 billion the FDIC has spent is 100 bucks per adult American. And that’s a fair amount.”