Larry Summers Says 'Disappointed' First Republic Bank Crisis Lingered Long: 'Hope … Best Way Forward Will Be Found Within The Next Week'

As rumors of San Francisco-based First Republic Bank FRC going under run thick and fast, former Treasury Secretary Larry Summers weighed in on the latest banking crisis.

Speedy Resolution In Need: "I’m surprised and disappointed that this situation has continued to linger as long as it has, with the bank stock down 95% and various other credit indicators of it in a problematic direction," said Summers in an interview with Bloomberg.

The big banks and the government both have a strong stake in the situation being contained and resolved, the economist said, noting that the big banks have deposits in First Republic in significant quantity. When problems at First Republic initially began to surface in mid-March, the government brokered a deal, paving the way for the bank to receive $30 billion in uninsured deposits from 11 banks that included JPMorgan Chase & Co., Inc. JPM.

First Republic’s stock went into a freefall on Friday amid rumors the Federal Deposit Insurance Corporation (FDIC) would take over the bank and a Wall Street Journal report that said that, following the FDIC takeover, JPMorgan and PNC Financial Services Group Inc. PNC would bid for the beleaguered bank.

"I hope that between the banks, the FDIC, the other public authorities, that the best way forward will be found within the next week or 10 days," Summers said, according to Bloomberg.

See Also: First Republic Bank Faces Limit On Fed Borrowing, Loses More Than 25% Of Market Cap In Session

Stagflation Likely: Among the data released last week, the first quarter employment cost index was most noteworthy as the labor market has been the key to the process of inflation, Summers said.

"It only comes quarterly, because it’s the best of the numbers for measuring wage inflation because it includes benefits and adjusts for changes in the composition of the labor force," the economist said.

"The 4.8% of labor cost inflation just does not go with 2 percent underlying inflation. So I think we’ve got a bit of a stagflationary problem developing where we have a base inflation that’s well above target," Summers said.

The former Treasury official also reiterated his view that inflation wouldn’t return to the target without a meaningful slowdown in the economy.

"If the Fed does what’s necessary to contain inflation, I think a slowdown is likely to come along," Summers said. The odds of that happening in the next 12 months are pretty good, perhaps 70%, he added.

Summers said the Fed should raise rates in May due to emerging credit problems but noted that June is an "open question." "So what I hope we’ll see from the Fed is a move upwards by 25 basis points in May, followed by a commitment to monitoring both the activity and inflation figures on one hand, and the credit flow issues,"  he said.

Read Next: The US Economy On A Tightrope With Continuing Bank Crisis, Company Bankruptcies: More Economic Updates Coming Next Week From Government

Photo: International Monetary Fund via flickr