Former Treasury Secretary Larry Summers waded into a host of issues, including inflation, the economy and the banking crisis, in a recent interview with Bloomberg.
Bifurcated Outcome: One should not make too much out of the recent government data that shows a small let-up in inflation, Summers said. “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,” he said.
The outcomes could be mixed, the former Treasury official said. The banking crisis can pass without incident and without any large impact on credit, making inflation strong and requiring the Federal Reserve to tighten much more than is priced in, he said.
Alternatively, there could be a real downturn, Summers said, adding that soft landings are very hard, even in the best environment.
Spotting Credit Crisis: When asked when it would be clear that there is a credit crunch, Summers said that, historically, there is not just one big downturn during a financial crisis. In the week of Lehman Brothers’ collapse in 2008, the stock market went up and the Fed did not cut rates, he said.
It’s too early to give any kind of “all-clear sign,” but things have reached a point where there will seemingly be fewer panic-filled weekends involving bank runs, the economist added. Though not ruling them out completely, he said there is less than a 50% chance of such occurring.
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Summers said the question now is whether the impact of credit constriction is non-linear — in other words, where constriction leads to declining asset prices and, in turn, leads to non-performing loans and more credit constriction.
“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,” he said.
Summers also took exception to the amount of money the Federal Deposit Insurance Corporation had to spend on bank resolutions, noting that it spent about $20 billion to get a buyer for Silicon Valley Bank. He noted that the deferred compensation to banking executives was stunningly expensive.
On Trump’s Indictment: Summers said former President Donald Trump, those who feel loyal to him, and those involved in carrying out this prosecution should be doing their very best to keep politics out of it. They should be acting in ways that will provide reassurance that it is the rule of law that's being elevated rather than the political side, he said. This is because the ability to have a viable market economy rests on there being confidence in the judiciary, he added.
Read Next: Larry Summers Backs Fed's 25 Bps Rate Hike: 'Carrying Through Was Broadly The Right Thing To Do'
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