How is this crisis different than ninety eight?
How is this crisis different than 2008? Well, compared to 2008, right now we
don't have the credit risk yet. We're not in a recession.
And the losses that occurred that seem to be related to Marketplace and other
financial institutions did not realize that we have rising interest rates.
The price of bonds would fall. And last year, U.S.
banks alone have something like six hundred and twenty billion dollars of
unrealized losses on their securities. We have a copy.
I loved about 2 1 2 3 0 0 0. The average loss is about 28 percent
reduced significantly. That was the ratio of the two to one
ratio for some banks, actually. The numbers like that, say Silicon
Valley Bank, of course that number was a hundred percent.
But instead of the regional banks were right, that duty of all says there'll be
50 percent of that credit capital. Not a lot of money.
I want to go back to your Italian economics, your public service to
President Clinton, where you are expert on the regulatory framework.
Switzerland is a devolved federal government with the cantons with great
strengths. What is your knowledge of Swiss
regulators right now? How removed are they from the credit
squeeze crisis? Are they can they be active today to
help their beleaguered bank? Well, they can be actors today, even if
their system is so delegated. However, the problem is that it's raised
by some standards may be too big to fail, but also too big to be saved.
It's not clear that unlike the United States, the federal system has enough
resources to engineer a bailout. And what they need sort of them is more
tightly. But then the question is whether or not
otherwise bad things can happen or bad things are happening this morning.
I'd love your take on this. There might be some people waking up
this morning looking at what's happening with Credit Suisse, perhaps back perhaps
based here in the United States and thinking, what does this mean for me?
Why is this important? Could you explain to those people in
Nora out just how important Credit Suisse might be to the financial system?
Well, he's imposed them because as BP was only about a hundred and fifty
billion dollars of assets like in the case of Credit Suisse West for about at
least 700 billion. So anything will happen to Credit Suisse
will be of systemic effects, sort not just the European financial system, but
also for the global financial system. So if you see these Silicon Valley bank
create a ripple effects in the global financial markets.
Something bad happen in the Credit Suisse would be an order of magnitude
more severe and something more like Lehman moments.
A lot of people are talking about the implications of this on monetary policy.
And Thorsten SOC earlier said when the facts change, his view changes from no
landing to a hard landing. He sees perhaps the end of a rate hiking
cycle as just the market, including 100 basis points of cuts in the next year.
Nouriel, do you agree with this assessment?
Have the facts changed or suddenly rate hikes are out of the picture and you see
that the inflation story will get solved by a crisis elsewhere?
I don't think so. I think that the dilemma for central
bankers got be even worse because the latest economic data for inflation in
the eurozone or the US suggests that inflation is still too high, is falling,
but is not falling as fast as the Fed or ECB wanted to be.
So based on what's the economy doing right now, we need to hike in much for
the Fed should go at least closer to 6 percent.
The ECB should bring the deeper rate book at least 4 percent growth.
Right now, we're facing a situation of financial instability and financial
instability would suggest to stop hiking, maybe meant cutting rates and
maybe resuming quantitative easing. And what the Fed has done is backdoor
quantitative easing. But if you do that, you're at risk of
the island, for example, inflation and inflation expectations.
That tradeoff exists that even before raising rates would have led those
stresses in financial markets like last year, where bond yields went much
higher, credit spreads widen. That's rising, becoming more severe
today. Because now we have systemic financial
problems. But we are also in a situation inflation
is way too high. And the idea that this financial stress
is going to cause inflation drop is not yet in the economic data.
So there is a dilemma for central banks, although a lot of people are saying that
they see credit conditions tightening. We heard earlier from Larry Fink of
BlackRock saying that he sees a slow rolling crisis that's going to move from
the banking system to private credit to private equity.
How does your view kind of tie into this sort of inherent credit tightening that
we see across a whole host of assets? Certain there's going to be it tied them
of financial positions, at least in terms of credit spreads.
Bond yields are falling both on the short and long, and that's an easing of
financial. The leash on that eventually might lead
to an economic slowdown. But the reality is inflation today is
way too high and it's going to remain too high because the forces are leaving
for high inflation, like, for example, very tight labor market are staying with
us. And therefore, that's going to be a
cause of assistant inflation. And the idea that the balance of these
tightening of financial conditions is going to cause a slowdown in the
economy, a weakening of inflation is not yet in the data.
So there is a real contradiction between achieving economic stability and lower
inflation and maintaining financial stability.
What a conflict. What a conflict now.
I've got 45 seconds left. I wanted to give the opportunity to try
and answer this. Banks found out that a risk was where
they thought the safety was. Nouriel W the safety now
when the safety is not in long term treasuries.
I've been writing poetry for over a year.
You know, if the average inflation rate will be safe, 5 percent, 10 year
Treasury eventually has to be 7 percent. So they've got about 20 in house.
Last year you lost 20 percent on your safe bonds, more than you lost on your
S&P because yield went from Wall to Wall Street.
If they go from three and a half to seven over the medium term, there'll be
further bloodbath on 20 trillion dollars of long duration risk assets.
This solution is going to be short term. Treasury keeps gold, precious metals and
other adjust against inflation. That's why you have to go and invest
investors only now starting to realize that that's what you have to do.