David Westin, the host of Wall Street Week, standing by right now with the
former secretary of the Treasury, Larry Summers.
David, thank you so much for me. Yes, Larry, thank you so much for
joining us. Larry, of course, is our special
contributor on Wall Street week every week.
And Larry, last Friday, you and I talked some of what was going on banking.
A lot has happened since then, particularly in Washington, the Federal
Reserve and others really stepping up to really guarantee deposits.
What do you make of what is going on and specifically, what do you think that
will mean for the Federal Reserve? Because there's a lot of movement in the
market about what they think the Fed is going to be up to.
David, I think the authorities over the weekend did what they needed to do, it
was clear that if there wasn't assurance put behind deposits, both deposits in
the failed institutions like SBB and deposits in institutions in other
institutions, that you were going to have enormous chaos this week.
And I think by guaranteeing the deposits in the failed institutions and by
providing support to the whole banking system, they have at least taken very
substantial steps to contain what otherwise could have been a panic.
We're going to have to see how this plays out from here.
I'm sure there will be more financial aftershocks.
Markets have radically revised their view of what the Fed's going to do.
They now think rates will be substantially lower at the end of the
year than they are right now. None of us can know.
My own judgment is that it would be a serious mistake for the Federal Reserve
not to remain focused on its objective of containing inflation and bringing it
down to the range of the 2 percent target, and that that's probably going
to require monetary policy to become more restrictive than it is right now.
Now, the hard thing to judge is that when banks are nervous and scared, as
they surely are in the wake of what's happened, they lend less.
And so we've already had some of the monetary tightening that the Fed thought
it was going to have to deliver. So it's going to have to make a judgment
about how much more monetary tightening to deliver that reflects what it's what
is happening in credit markets. I think markets have quite possibly over
stated that adjustment. My guess would still be that it will be
appropriate for the Fed to move by 25 basis points at its meeting next week,
though conditions are always subject to change, and I think that it's
imperative that the Fed remain focused on inflation.
If we don't if the Fed doesn't remain focused on inflation, the ultimate
consequence will be higher interest rates.
And that will mean more of the kind of financial dislocation we saw last week.
There was a time about two weeks ago that you were saying that we should at
least have the open possibility of 50 basis points.
From your point of view, is that sort of off the table, at least in this time of
turmoil? I wouldn't take anything off the table,
right? Right now we're going to get important
numbers on the CPI. We're going to see how financial markets
move and evolve over the next week. Certainly, if a decision had to be made
today, I think with all the surrounding uncertainty, it would not be sensible to
make it a 50 basis point move. But I think that there's no reason why a
decision does have to be made today. And I think as much as it has ever been
the case in my memory, this is a time when the Fed needs to keep its fingers
on the pulse of the economy and make judgments.
Only is only at the moment when they have to be made.
And on the basis of all the available data, Larry, one of the things that we
saw over the weekend is special lending facility effect.
With that way from the Fed, they opened the window for all banks, as I
understand it, with a fairly favorable terms.
Is it consistent to be doing that at the same time you have quantitative
tightening or let me put it the other way around.
Should the Fed be considering coming off the quantitative tightening right now?
No, I think that the two are really separate spheres of policy.
David, the motivation behind the Fed's lending program is not to support the
bond market. The motivation is to provide liquidity
to banks so that their customers will know that their money is safe and good
within them. And I think that's an important
objective and something that in current circumstances probably necessary for the
Fed to do. That's quite separate from the question
of what the overall level of rates is. And I think there the Fed is creating an
enormous amount of liquidity and has a very large balance sheet and some
normalization, I think is appropriate. But I don't think those two policies are
in contradiction with each other. Larry, you've been quite outspoken and
direct about the fact that the Fed took too long to start tightening monetary
policy, let inflation really get somewhat out of control.
At the same time, looking back on it now, is it possible, having gotten
started, they went too far, too fast that in fact, they did in the end break
something? Is that what we're seeing the last few
days? I don't I don't think that's the right
interpretation. What broke Silicon Valley Bank was
highly problematic risk management practices at Silicon Valley Bank.
The fact that they borrowed money very short term and put it in long term
securities, the fact that they relied for funding on highly unstable uninsured
deposits, the fact that all their business activities engaged people who
all had dinner with each other every night, that tightly knit Silicon Valley
community. And so they were prone to being the
victims of groupthink. That's the lesson here.
It's a lesson about banking and how to run a bank in a
healthy sound way, not a lesson about monetary policy.
I know you you've done a fair amount on Silicon Valley.
Do you have any particular relationship with Silicon Valley Bank?
I mean, did you know this was coming? Did you see it coming?
No, I didn't. I.
I was aware of the existence of Silicon Valley
Bank and no doubt companies I had something to do with had something to do
with Silicon Valley Bank. Just because so many companies there
did. But I didn't have a close relationship,
any real relationship with Silicon Valley Bank, and I wasn't studying or
poring over their accounts. I have to say, when this came to light,
I was struck by how clear it was. If you did look at their basic accounts,
but that's not something I had done before.
Finally, you've been in the room, certainly at the Treasury when you ran
the Treasury as secretary. Also when you were chair of the Council
of Economic Advisors in the White House, when certain really crises came up.
Give us a sense of how a decision maker, whether it is Janet Yellen, the Treasury
Department or Jay Powell at the Fed, how they decide not to go too far, because
if they overreact to these situations, they can cause even more concern.
Right. I suspect every leader is is different.
My own experience and the people I worked with, Secretary Bob Rubin and
Secretary Lloyd Bentsen, Chairman Alan Greenspan, Presidents Clinton and Obama.
Their approach
was to. Get someone to state clearly what the
problem was, what the rationale for action was, to attempt to lay out the
various possible actions with their pros and cons and then to try to choose a
direction. And having chosen a direction, we're
going to close SBB and we're going to guarantee its deposits and we're going
to provide liquidity to the rest of the system, then to turn to the tactics of
the strategy that had been selected and try to think them through as carefully
and clearly as possible. So it's a it's an approach of identify
the problem and the objective. Choose a strategy, optimize the tactics,
given the strategy that's been selected.