We have to look out Silicon Valley Bank. It's been developing toward the end of
the week. A lot happened.
They pretty quickly went into receivership from the FDIC.
What does it tell us more broadly about what's going on in the banking sector or
in the economy? Look is still plenty of fog of war here,
and we're still all trying to sort through it.
There clearly was a big managerial failure.
It sure looks like regulators were not on the case in the way they could have
been. Right now, it looks like this is not a
broad systemic issue that Silicon Valley Bank and perhaps perhaps several other
banks, but not many other banks, and none of the largest banks had
a mismatch between the kinds of deposits they had and the ways in which they had
invested their money in longer term bonds.
And so I don't think this is likely to be a broadly systemic problem, but it
certainly is going to have very substantial consequences for Silicon
Valley, for the economy of the whole venture sector, which has been dynamic
unless the government is able to assure that
this situation is worked through. Right now, the holders of uninsured
deposits have been told that those deposits are frozen and can't be
withdrawn. There are dozens, if not hundreds of
startups that were planning to use that cash to meet their payroll next week.
If that's not able to happen, the consequences will be will be quite
severe for our innovation system. ISIS back that ways will be found to at
least provide significant advances on those deposits to enable the payment of
payrolls. I think the FDIC is going to have to
think very hard about how to be maximally creative in using its
authorities to assure that this doesn't have a set of collateral consequences
for the innovation economy. I don't think this is a time for moral
hazard lectures or for talk about teaching people lessons.
We have enough strains and challenges in the economy without adding the
collateral consequences of a breakdown in an important sector of
the economy. So I hope that they will in the short
run and be aggressive about containing the problem and containing possible
contagion. And then over the medium term, I think
there are important lessons for how we regulate what roles we use for market
values in regulation that need to be learned from this experience.
I think we have tended to have a bit of a romance with the community bank
relative to the larger banks, and we're going to have to figure
out how to maintain banking services for communities while moving to also pay
attention to making sure that we've got as much financial stability as we
possibly can. Whenever we talk about financial
stability, we are reassured that the banking system is so much stronger than
it was before 2008 2009. So many reforms.
Is there some question now whether that's exactly right.
And let me be very specific. What about the stress tests?
Why didn't they kick this out? Look, I think I have written that there
are a lot of concerns about the stress tests.
I. I do not believe the stress tests give
an accurate picture of the resilience of the banking system.
I think they are far too optimistic in thinking about what would happen in a
catastrophic kind of scenario. That said, I think any fair minded
observer has to think that banks are better protected than they were
before the 2008 financial crisis. Though I think we have to recognize that
a large part of the lending in the country and lending to businesses
is now done by institutions that are not banks.
And so there are important issues in the shadow banking system.
So this certainly should come as a reminder that
rational financial regulation is hugely important to the success of the American
economy. Larry also got jobs numbers out on
Friday this week, and they were more robust once again than expected through
11000 new jobs. At the same time, the rate of wage
increase actually came down just a little bit.
What did those tell you about the strictly economy and for that matter,
where we're headed with inflation? I think that most of us
probably have a kind of now more than ever view after these numbers.
If you were a person who is very worried about inflation, you focus on the
strength in the economy and the seemingly ever tighter labor market.
If you're a person who is less concerned about inflation, you probably take heart
from the lower wage inflation number. So I doubt these numbers change too many
minds. I'm going to be watching for the CPI
number next week, but I think more broadly it seems to me that we don't
have a lot of evidence of a basic downwards trend in inflation.
It looks to me more like the inflation story is fluctuation around an
underlying inflation rate of 4 and a half or 5.
And if that's close to right, it suggests that the Fed has considerably
more work to do. Well, that's exactly my question.
What does it mean for monetary policy? What do you think the Fed should take
away from these numbers and what does that mean they should do?
For example, on terminal rate? I suspect that there's a quite good
chance that we're going to need to get to a terminal rate
near six. After all, we have inflation running at
close to 5 percent and we have interest rates at
about 5 percent. And so interest rates and inflation in
the same range doesn't point to a lot of pressure to bring inflation down.
So I'm very much open to changing my mind.
And I think confident pronouncements about these things are a mistake.
If we get a strong CPI number on Tuesday, I think the right thing to do
will quite likely be to increase rates by 50 basis points in March, because if
we're pretty confident that rate increases of that magnitude are
necessary, I don't see much reason not to get on.
Not to get on with it. If the CPI number is more moderate, then
I think it's a or comes in surprisingly low.
Then I think it's a very different kind of judgment that needs to be reached.
In general, I think there is more risk of under reacting to the inflation
concern and then of overreacting. Larry, finally and briefly, if we can,
what about the budget that we saw out of the White House this week as six point
nine trillion dollars, spending an awful lot more on a lot of things.
Are we having a serious discussion about the federal budget?
Either the Democrats or the Republicans side at this point.
And if not, how do we get to one? A lot of good ideas in the budget.
But I think for a variety of reasons, the deficit path is likely to end up
greater than the administration imagines unless there are substantial policy
actions. And I think we're getting back into a
phase as the interest rates rise, where it's going to be very important to think
about the long run behavior of budget deficits in many ways.
The picture is more adverse than it was a decade ago when the Simpson-Bowles
process was launched. So I do think we need to have that as a
bipartisan conversation. I welcome the president's
providing his budgetary blueprint and asking the Republicans to provide their
political blueprint as a basis for conversation and dialogue.
I am glad to see rising focus on containing health care costs, because
that's probably the single most important issue in thinking about the
budget over the longer term. Ryan, though I'd have to say that my
judgment is that the ultimately necessary expenditures on national
security are going to be substantially greater than the president's budget.