Bloomberg: Summers on the Inflation Fight

Former US Treasury Secretary Lawrence H. Summers breaks down the latest reading on US PCE and shares that it’s “plausible” the recent banking woes may subside without a big impact on credit, leaving in place “serious inflation issues.”
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Transcript

Let’s talk about inflation. We got those core P.C. and other P.C. numbers in this week. We know the Fed pays attention them. They were a little bit better than they had been. Yeah, they were. I don’t think one should make too much of that.

I think 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. And we don’t know yet whether that’s going to happen. So in a sense, the outcomes here are a bit bifurcated. Either the banking crisis will pass

Without incident and without large impact on credit. And in which case we really do have serious inflation issues and the Fed will have to tighten much more than is priced in or we’re going to see some kind of real downturn here.

And I think both are plausible outcomes. And I recognize that there’s a chance we’ll skate through right in between. But I have to say, that seems very much odds off to me. Soft landings are very hard, even in the best environment, solar. I think I heard in your answer, we’re

Gonna have to wait to see what the aftermath of the banking kerfuffle has been here. But give us a sense of what you’re expecting and more important, what you’re looking for. When will we know when there’s a credit crunch? The lesson of financial crises, if you study their history closely, is that

It’s not just all one big downturn. It was six months from bear to Lehman, even the week in which the Lehman events happened. The stock market went up and the Fed did not cut rates. And the Fed statement that week was heavily about inflation.

So I think it’s too early to give any kind of all clear sign. I think eventually we I think we’ve gotten to a point where I would say it’s unlikely that there will be more panic weekends with bank runs.

Not impossible by any means, but I’d say that’s certainly less than well under a 50 percent chance. But whether you’re going to see some other kind of accidents, whether you’re going to see a substantial restriction in credit, that’s not very clear when you have a series of earthquake tremors.

One certainly hearing many anecdotes around constriction of credit. And the question really is, is that going to go non-linear where constriction of credit leads to declining asset prices, leads to non-performance of loans, leads to more credit constriction? And I don’t think we know yet whether it’s going to go non-linear.

And I think 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. Larry, one thing we do know at this point is that the FDIC is on the hook

For a lot of money for guaranteeing all those deposits in the billions of dollars here. What do you make of the financial aspect, this what the FDIC is putting up as opposed to what some of the banks are benefiting from? I’m surprised by how much the FDIC has

Had to spend on these resolutions relative to the things that were being said earlier. They were hoping to sell as VB as a whole entity. And then in order to get somebody to buy it, they had to chip in a set of stuff that was cumulatively worth 20 billion

Dollars. The arithmetic is similar relative to the scale of the bank at Signature Bank. There are a lot of questions about those transactions. I’m still confused about why the holding company debt of SVP is still being valued in a meaningful way,

And I’m will want to see assurance that no executive there is getting deferred compensation. But these were stunningly expensive transactions. Ultimately, everybody’s going to say it’s not coming back to taxpayers, but banks are tax payers on behalf of. People, their depositors, their customers, their people they lend to and

The twenty three billion dollars the FDIC has spent is a hundred bucks per adult American. And that’s a fair amount. So I wonder if we can’t be looking at the procedures that they’re using and finding ways to do better. And it looks like some of these deals

Were pretty attractive given what happened to the shares of some of the acquiring banks. ISE. Yeah. Yeah, that’s right, David. There are two parts of it. There are what seem like huge gains that the banks that were lucky enough to get into this got over 50 percent for the

Acquirer of ISE be close to 40 percent for the acquirer of signature. So there’s that piece of it that they may have overpaid. There’s also just a question of why it was necessary to pay so much, Larry, in a very different subject. We had, for the first time in history, a

Former U.S. president indicted this week. Donald Trump was indicted for certain allegations. We’re not even sure about what they all are yet arising out of a hush payment that he was made. I really wonder about the connection of our justice system with politics. You talked on this program before about

What’s been going over on Israel. What are the risks in Israel having United States, that we politicized our colonel justice system? David, every would even former presidents of the United States is entitled to a presumption of innocence. God knows.

I don’t know the facts of those matters. Well, I think we saw in Israel was that when there was a sense of the intertwining of politics and the basic rule of law and the judicial function that had, in addition to all the other consequences, really quite problematic financial and economic consequences.

And so I hope all the actors in this, both President Trump and those who feel loyalty to him and those involved in carrying out this prosecution will be doing their very best to keep politics out of it, to act in ways that will

Provide reassurance that it is the rule of law that’s being elevated rather than the political side, because ultimately the ability to have a viable market economy rests on there being confidence in the judiciary. And finally, we’re here to try something new here that you suggested sort of a

Quick round lightning round of some issues and people and whether you are long or short on them. Let’s start, first of all, with foreign direct investment in China. We had the premiere of their lead Cheng this week, really make a case for why there should be more foreign investment

In China. Long or short? Short. Deeds, not words, are most important. And I think they’re just enormous uncertainties about everything Chinese and about the Western response. And that’s going to chill investment substantially. Larry, you brought Chad IPT to Wall

Street week and now we have a something like eleven hundred tech people who are writing a letter saying, let’s hold off on this chat for let’s make sure we know we’re doing before we keep moving forward. You long or short today on chat GPA? I’m long.

It’s continued development. One of the important developments in the last several weeks has been the engineering of the technology so that it can be used on much smaller computers. And that means the genie’s out of the bottle. They’re going to be all kinds of people

Doing all kinds of things. And I think this is going to be a story like other technology stories. It may take longer to think, longer to happen than you think it will. But ultimately, it will happen faster and more pervasively than you thought it could.

And finally, we talked about golf, a firm, and I know you’re an avid golfer. We’ve got the Masters coming up next week. We’ve got two favorites right now, according to Betting ISE there, Scotty Scheffler and Rory McIlroy. Are you long or short? Rory McIlroy? I belong Rory.

He’s overdue. And I think this may well be his moment.

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