WEBVTT - Bloomberg Wall Street Week April 14th, 2023 0:00:00.240 --> 0:00:03.160 Global Wall Street gathers in Washington with a focus on 0:00:03.240 --> 0:00:06.960 higher rates, shaky banks, and whether the world's two largest 0:00:06.960 --> 0:00:10.280 economies can work together. This is Bloomberg Wall Street Week. 0:00:10.360 --> 0:00:13.920 I'm David Weston this week's special contributor. Larry Summers of 0:00:13.960 --> 0:00:16.600 Harvard on whether we're headed for a soft but slow 0:00:16.880 --> 0:00:17.840 landing after. 0:00:17.720 --> 0:00:22.400 All, I don't see inflation as on a secure path 0:00:23.000 --> 0:00:27.200 down to the two percent of target unless the economy 0:00:27.360 --> 0:00:29.120 turns over a bit. 0:00:29.560 --> 0:00:32.239 Glenn Hubbard of Columbia on whether we're headed for a 0:00:32.240 --> 0:00:35.600 credit crunch. And Sonya Gibbs of the IIF on the 0:00:35.640 --> 0:00:37.400 plight of zombie companies. 0:00:37.840 --> 0:00:39.680 Higher rates are going to cause a lot of pain, 0:00:39.800 --> 0:00:51.599 and particularly for these zombie firms. 0:00:54.760 --> 0:00:57.640 Washington hosted the annual meetings of the IMF and World 0:00:57.640 --> 0:01:00.360 Bank again this week, with a focus on threats to 0:01:00.400 --> 0:01:03.920 global growth. Treasury Secretary of Yellen insisted that things didn't 0:01:03.960 --> 0:01:04.920 look all that bad. 0:01:05.280 --> 0:01:08.120 I said that the global economy was in a better 0:01:08.200 --> 0:01:12.360 place than many predicted last fall. That basic picture has 0:01:12.480 --> 0:01:15.440 remained largely unchanged. 0:01:15.160 --> 0:01:18.920 Though IMF Chief Economist Garancha warned that questions about the 0:01:18.959 --> 0:01:21.759 banks could be a drag on the global economy. 0:01:22.000 --> 0:01:24.360 The risk that banks are going to look at the outlook, 0:01:24.360 --> 0:01:26.280 they're going to look at the bottom line, and they 0:01:26.280 --> 0:01:27.920 are going to be a little bit more prudent in 0:01:27.959 --> 0:01:31.360 extending loans going forward, and that could weigh down further 0:01:31.760 --> 0:01:33.040 on economic growth. 0:01:32.920 --> 0:01:36.760 And geopolitics, particularly the tensions between China and the United States, 0:01:36.800 --> 0:01:40.000 the world's two largest economies, could make the difference. As 0:01:40.040 --> 0:01:42.720 acknowledged by Treasury Under Secretary Jay Shambaugh. 0:01:43.040 --> 0:01:44.880 We obviously need to be able to work together. 0:01:44.959 --> 0:01:47.880 And the USCPI numbers came out showing that inflation is 0:01:47.920 --> 0:01:51.120 still with us, but it appears to be moderating. We 0:01:51.200 --> 0:01:53.600 know that prices are still too high for so many 0:01:53.600 --> 0:01:56.720 things across the economy, but certainly we are looking for 0:01:56.800 --> 0:02:01.120 this downward momentum. The market took all of this, put 0:02:01.160 --> 0:02:04.120 it together with somewhat weaker retail sales numbers, and came 0:02:04.160 --> 0:02:06.600 out slightly higher, with the S and P five hundred 0:02:06.600 --> 0:02:09.000 adding eight tens of a percent and the NASDACK up 0:02:09.040 --> 0:02:11.760 almost three tens of percent, while the yield on the 0:02:11.840 --> 0:02:14.440 tenure was up thirteen basis points to end the week 0:02:14.639 --> 0:02:17.960 just over three point five one percent. For their thoughts 0:02:18.040 --> 0:02:19.919 on what we learned this week. We welcome back now 0:02:20.000 --> 0:02:24.079 Christina Hooper Invesco chief investment market strategist, and Sarah Mallick. 0:02:24.200 --> 0:02:26.800 She is chief investment officer at Nouvene, So welcome to 0:02:26.800 --> 0:02:28.320 both of you. Great Davy back with us, Sara, let 0:02:28.320 --> 0:02:30.720 me start with you. What did we learn this week 0:02:30.760 --> 0:02:33.520 and specifically about where the economy is headed? Maybe more importantly, 0:02:33.600 --> 0:02:36.320 what you think, what the Fed thinks? Is there evidence 0:02:36.360 --> 0:02:38.040 in fact and the CPI and on the numbers than 0:02:38.040 --> 0:02:39.640 in fact we're getting our arms around inflation. 0:02:40.840 --> 0:02:43.200 We learned that progress is being made on the war 0:02:43.240 --> 0:02:46.160 against inflation, but economic damage is yet to be seen. 0:02:46.240 --> 0:02:48.400 We had two data points for the bulls and the 0:02:48.400 --> 0:02:52.560 bears this week. For the bulls, CPI and PPI both moderating. 0:02:52.600 --> 0:02:55.360 Great to see sticky areas like Shelter starting to become 0:02:55.400 --> 0:02:58.320 a tailwind. But for the bears, powkish Fed speak and 0:02:58.360 --> 0:03:01.080 also negative retail sales for March. That's four out of 0:03:01.080 --> 0:03:04.120 five months there, and that concerns us that overall we 0:03:04.200 --> 0:03:07.600 still have economic downside ahead of us, perhaps lower earnings 0:03:07.639 --> 0:03:10.040 going forward and market evaluations with the s and P 0:03:10.120 --> 0:03:12.720 OFBO forty one hundred likely has a tough time going 0:03:12.840 --> 0:03:15.040 forty two hundred to forty four hundred. If it gets 0:03:15.080 --> 0:03:16.480 to that level, I think we just stay in a 0:03:16.520 --> 0:03:18.920 trading range and then go back down from there until 0:03:19.080 --> 0:03:21.160 we clear the decks on what we think is likely 0:03:21.200 --> 0:03:22.600 coming up, which is a mild. 0:03:22.280 --> 0:03:24.919 Recession and the FED twenty five basis once in May. 0:03:24.919 --> 0:03:26.239 What do you think, Sarah. 0:03:26.400 --> 0:03:28.200 We think the Fed is one and done. One more 0:03:28.240 --> 0:03:30.040 twenty five basis point rate hike in May. 0:03:30.080 --> 0:03:32.760 But what we haven't seen yet is now thirteen months 0:03:32.800 --> 0:03:34.960 ago was just the first FED rate hike, and we 0:03:35.000 --> 0:03:38.880 have not seen the effects of monetary tightening through the economy. 0:03:38.880 --> 0:03:41.080 We did just see it recently with the banking system. 0:03:41.280 --> 0:03:42.920 I think there's more to come in terms of how 0:03:42.960 --> 0:03:45.480 higher interest rates are going to impact, for example, of 0:03:45.520 --> 0:03:49.040 the consumer. Tighter credit conditions that's going to impact the economy, 0:03:49.400 --> 0:03:51.760 which is why we're expecting that slowdown going forward. 0:03:52.040 --> 0:03:53.400 Christina, one and done. 0:03:53.720 --> 0:03:55.360 No, I don't think the Fed is going to high 0:03:55.400 --> 0:03:57.720 rates again. I think the odds are increasing that they won't, 0:03:57.760 --> 0:04:00.440 and I think that is the right decision. The Fed 0:04:00.520 --> 0:04:03.680 has already done enough, and I do believe that they're 0:04:03.720 --> 0:04:06.840 going to be relatively comfortable with the pace of inflation, 0:04:07.040 --> 0:04:10.840 especially since we've seen progress made in services x housing, 0:04:11.080 --> 0:04:13.880 which is the component of inflation that the FED is 0:04:13.960 --> 0:04:14.800 laser focused on. 0:04:15.160 --> 0:04:17.280 Are they not going to hike rates Christina, because in 0:04:17.279 --> 0:04:20.440 fact we're headed to a recession. They see that they're. 0:04:20.279 --> 0:04:24.880 Not going to hike rates because inflation is coming down 0:04:24.960 --> 0:04:27.800 at an appropriate pace that they're comfortable with. And they're 0:04:27.800 --> 0:04:32.040 not going to hike rates because they know that there 0:04:32.040 --> 0:04:35.080 are lagged effects of monetary policy, so we haven't yet 0:04:35.160 --> 0:04:38.440 seen most of the damage that has been done by 0:04:38.440 --> 0:04:41.640 the aggressive tightening cycle. But no recession, you think, well, 0:04:41.680 --> 0:04:44.760 I think that there is a pathway. It has narrowed, 0:04:44.760 --> 0:04:47.080 but there is a pathway to a semisoft landing. If 0:04:47.120 --> 0:04:48.880 we get a recession. I think it's going to be. 0:04:48.839 --> 0:04:51.000 Mild Sarah, recession, no recession. 0:04:51.839 --> 0:04:53.360 We're in a mild recession camp. 0:04:53.360 --> 0:04:55.080 And the reason that we think that FED has more 0:04:55.120 --> 0:04:57.080 work to do with raising interest rates is because they've 0:04:57.120 --> 0:04:59.760 been clear that their mandate is two percent inflation as 0:04:59.760 --> 0:05:01.640 a t target. I don't think they're going to take 0:05:01.680 --> 0:05:04.039 their foot off the gas until we get closer to 0:05:04.120 --> 0:05:07.000 that number, and we're just not near that yet. The 0:05:07.040 --> 0:05:09.840 other thing we're concerned about is earnings now coming into 0:05:09.880 --> 0:05:12.480 first quarter? It was nice to see that earnings estimates 0:05:12.520 --> 0:05:14.680 actually were cut to a higher mount than usual, so 0:05:14.800 --> 0:05:16.760 Q one earnings may be come out all right. 0:05:16.800 --> 0:05:19.480 In terms of revenue growth, margins will continue to be. 0:05:19.440 --> 0:05:21.880 Compressed for this quarter and going forward, and I think 0:05:21.920 --> 0:05:24.560 that positive revenue growth we see this quarter may have 0:05:24.640 --> 0:05:27.880 difficulty holding up because revenues have been growing because of 0:05:27.920 --> 0:05:31.039 pricing power, and as inflation we continues to moderate, companies 0:05:31.040 --> 0:05:32.080 may lose their pricing power. 0:05:32.120 --> 0:05:33.920 Sarah, What about credit? There's a lot of talk about 0:05:33.960 --> 0:05:37.680 a credit crunch, whatever that means. Certainly there's tightening credit appears. 0:05:38.160 --> 0:05:41.120 Is that more likely to slow on the economy? Sarah? 0:05:41.160 --> 0:05:43.480 I think it is because the consumer and the employment 0:05:43.520 --> 0:05:45.919 market has been what is holding up the economy here, 0:05:46.120 --> 0:05:48.080 and with the mini banking crisis that we saw, we 0:05:48.160 --> 0:05:50.440 expect banks to tighten credit and that will make it 0:05:50.440 --> 0:05:52.040 tougher for the consumer. 0:05:52.080 --> 0:05:54.560 And just thinking about banks more broadly, they're going. 0:05:54.400 --> 0:05:57.719 To probably have issues going forward with tighter regulations, tighter 0:05:57.760 --> 0:06:01.040 capital requirements, and pressures on their net margins. Even though 0:06:01.040 --> 0:06:04.480 we saw today with JP Morgan an unusually positive men 0:06:04.560 --> 0:06:07.360 interest margin income for them, but I think that was 0:06:07.440 --> 0:06:10.240 unusual and will normalize to the downside going forward. 0:06:11.200 --> 0:06:13.520 So I think that a lot of it depends on 0:06:13.560 --> 0:06:16.120 how much credit conditions tighten, and I think there's a 0:06:16.120 --> 0:06:18.680 big difference between what's happening with regional banks and what's 0:06:18.720 --> 0:06:21.720 going to happen with the major national banks. What I 0:06:21.760 --> 0:06:24.440 hear from my contacts at the big banks is that 0:06:24.960 --> 0:06:28.640 we are not tightening credit conditions, but what we are 0:06:28.680 --> 0:06:31.680 doing is adhering more closely to our own lending standard, 0:06:31.800 --> 0:06:35.200 So a very mild tightening of credit conditions, whereas the 0:06:35.200 --> 0:06:38.920 regional banks some have been under pressure and conditions are 0:06:38.920 --> 0:06:40.200 going to tighten significantly. 0:06:40.520 --> 0:06:40.919 So then the. 0:06:40.960 --> 0:06:44.039 Question becomes what is the impact on the economy. I 0:06:44.160 --> 0:06:49.520 think that it's certainly going to be a negative source 0:06:49.520 --> 0:06:51.720 of negative pressure, but at the same time, I also 0:06:51.720 --> 0:06:53.559 believe it could be a positive in that the FED 0:06:53.640 --> 0:06:56.000 seas that some of its work is being done for 0:06:56.040 --> 0:06:59.240 it by those tightening credit conditions, and then of course 0:07:00.040 --> 0:07:01.680 decides not to high rates any further. 0:07:01.839 --> 0:07:05.080 Exactly what about that, Sarah, Are the credit conditions actually 0:07:05.120 --> 0:07:06.880 doing the Fed's job for it? Does it make up 0:07:06.960 --> 0:07:10.040 less likely it will actually have to have one and done? 0:07:10.480 --> 0:07:12.880 I think credit conditions did some of the fed's job 0:07:12.960 --> 0:07:14.880 in March. A couple of weeks before the March FED 0:07:14.960 --> 0:07:17.520 rate high markets were expecting fifty basis points and the 0:07:17.560 --> 0:07:19.880 banking crisis took twenty five basis points off of that, 0:07:20.120 --> 0:07:22.160 and we just got twenty five more and forward. I 0:07:22.160 --> 0:07:24.480 agree with Christina regional banks are more at risk than 0:07:24.560 --> 0:07:27.200 larger banks, but these large deposit flows that we've seen 0:07:27.360 --> 0:07:30.520 come from regionals to large money center banks likely moderates 0:07:30.520 --> 0:07:32.600 from here and we probably even see some attrition from 0:07:32.600 --> 0:07:34.760 that going forward. And then the larger banks also have 0:07:34.840 --> 0:07:37.840 these capital markets businesses that are down significantly, which is 0:07:37.840 --> 0:07:39.880 going to be an issue going forward. Then the larger 0:07:39.880 --> 0:07:43.320 bank category, we'd stick with diversified companies like Morgan Stanley 0:07:43.440 --> 0:07:46.160 because of their strong wealth management business or ing, but 0:07:46.280 --> 0:07:49.120 generally we're not positive on banks overall because of the 0:07:49.160 --> 0:07:51.920 structural issues they're going to have going forward, which started 0:07:51.960 --> 0:07:52.560 over a year. 0:07:52.400 --> 0:07:54.480 Ago, and that is exactly where we're going to turn next, 0:07:54.480 --> 0:07:56.720 where we should be puaring our money given this uncertainty. 0:07:56.840 --> 0:07:59.280 Sarah Melick of Nouvigne and Christina Hooper will be staying 0:07:59.320 --> 0:08:01.800 with us as we get some investment advice from them 0:08:01.880 --> 0:08:04.800 in these uncertain markets. That's next on Wall Street Week, 0:08:05.000 --> 0:08:05.960 and we are on Bloomberg. 0:08:25.480 --> 0:08:28.560 Inflation in America. It's a problem that has come and 0:08:28.680 --> 0:08:33.400 gone every time, but this one. Inflation previously was strictly 0:08:33.440 --> 0:08:37.000 a wartime phenomenon, starting with the period during and after 0:08:37.080 --> 0:08:41.720 the Revolution, and returning virulently, even more virulently than lately 0:08:42.120 --> 0:08:44.800 at the time of the Civil War and World War One. 0:08:45.600 --> 0:08:49.440 What was different was that periods of deflation always followed. Indeed, 0:08:49.480 --> 0:08:53.080 the compound annual rate of US inflation since seventeen ninety 0:08:53.400 --> 0:08:57.079 works out to only one point two percent. What's different 0:08:57.080 --> 0:08:59.800 about inflation in the last forty years is not its height, 0:09:00.200 --> 0:09:00.920 but it's length. 0:09:01.920 --> 0:09:04.160 That was Lewsier Grockett Rockeiser on Wall Street Week back 0:09:04.200 --> 0:09:07.079 in January of nineteen eighty one, another time when inflation 0:09:07.200 --> 0:09:09.520 was proving harder to get under control than markets would 0:09:09.559 --> 0:09:12.200 have liked. The top movie back then that week, at 0:09:12.280 --> 0:09:15.400 least was The Incredible Shrinking Woman starring Lily Tomlin and 0:09:15.440 --> 0:09:18.280 directed by Joel Schumacher. And the number one song Well 0:09:18.320 --> 0:09:21.679 that was starting over by John Lennon. So what is 0:09:21.720 --> 0:09:25.440 our Christina Hooper of Invesco and Sarah Mallick of Nouvene. So, Christina, 0:09:25.480 --> 0:09:28.040 let's start with you. Given that what we're having in inflation, 0:09:28.120 --> 0:09:29.959 trying to get inunder control, what the FED is doing, 0:09:30.160 --> 0:09:32.560 What does that tell investors? What this should they be 0:09:32.640 --> 0:09:33.560 doing right now? 0:09:34.080 --> 0:09:37.679 So, David, what I think is it's telling investors right 0:09:37.720 --> 0:09:39.840 now is that there is an awful lot of uncertainty 0:09:39.840 --> 0:09:42.240 out there. We don't know what the Fed's going to do. 0:09:42.520 --> 0:09:44.760 Sarah and I differed and what we expect, and I 0:09:44.760 --> 0:09:46.959 think that's very very true. Markets don't know what the 0:09:47.000 --> 0:09:49.480 FED is going to do. And in addition, what we 0:09:49.640 --> 0:09:52.679 have is this big unknown about the debt ceiling and 0:09:52.920 --> 0:09:56.880 will it be easily resolved or will it be a 0:09:57.000 --> 0:09:59.200 problem like it was in twenty eleven and could it 0:09:59.240 --> 0:10:02.319 be even worse and what we saw in twenty eleven. So 0:10:02.480 --> 0:10:04.120 this is an environment that I think you want to 0:10:04.160 --> 0:10:10.320 be defensively positioned in tactically though, waiting for a change 0:10:10.559 --> 0:10:12.679 and what is that change going to be? Well, to 0:10:12.840 --> 0:10:16.040 make sure the banking crisis is behind us, and also 0:10:16.160 --> 0:10:19.480 of course making sure the FED hits the pause button 0:10:20.000 --> 0:10:22.880 and we are poised. That to me means we'll be 0:10:22.880 --> 0:10:25.439 poised for a different market environment, one that tends to 0:10:25.520 --> 0:10:26.120 be more risk on. 0:10:26.240 --> 0:10:29.280 Christina. When you say defensively, I think cash money markets 0:10:29.320 --> 0:10:31.160 are we're turning some pretty nice returns And are you 0:10:31.200 --> 0:10:31.800 talking cash? 0:10:32.000 --> 0:10:34.679 I am not talking cash. I'm talking about with inequities 0:10:35.240 --> 0:10:41.559 being more defensively positioned in terms of technology, healthcare, consumer staples, utilities, 0:10:42.120 --> 0:10:47.200 within fixed income, being more cautious, having investment grade credit, 0:10:47.800 --> 0:10:54.360 so within alternatives, overweighting gold, and underweighthing cyclical commodities, So 0:10:54.400 --> 0:10:57.960 that to me is being defensively positioned, but also recognizing 0:10:58.240 --> 0:11:02.040 that this market could market regime could turn soon if 0:11:02.040 --> 0:11:05.199 we get that pause and if we get more clear 0:11:05.240 --> 0:11:07.440 signs that the banking crisis is behind us. 0:11:07.480 --> 0:11:09.880 So, sir, you're a chief investment officer at Neuvene, where 0:11:09.920 --> 0:11:10.679 you're putting your money. 0:11:11.600 --> 0:11:12.840 We're advising our clients. 0:11:12.880 --> 0:11:15.520 Overall, our theme is quality, making sure you own companies 0:11:15.520 --> 0:11:19.280 that are resilient and can survive lower earnings and a recession. 0:11:19.360 --> 0:11:22.760 So starting with equities dividend growers, these companies tend to 0:11:22.800 --> 0:11:26.360 increase their dividend over time, so it gives clients income 0:11:26.600 --> 0:11:28.439 and also they tend to have strong balance sheets and 0:11:28.480 --> 0:11:30.960 strong free cash flow because they're able to grow their divinends. 0:11:31.200 --> 0:11:33.720 You know. Surprisingly, we also like emerging markets. 0:11:33.720 --> 0:11:35.800 That's an area that we don't think of as sort 0:11:35.840 --> 0:11:38.480 of low beta, but with China reopening and the dollar 0:11:38.600 --> 0:11:41.520 likely weakening as the economy slows in the US and 0:11:41.640 --> 0:11:44.000 valuations on their side, we like emerging markets for a 0:11:44.040 --> 0:11:46.200 little more bang for your buck. Then fixed income we're 0:11:46.240 --> 0:11:48.920 looking at high quality, high yield, again the quality theme, 0:11:48.960 --> 0:11:51.520 and also doub rated corporates where you can reach for 0:11:51.600 --> 0:11:53.920 yield and get a little stronger return. And then real 0:11:53.960 --> 0:11:54.840 assets are interesting. 0:11:54.880 --> 0:11:55.000 Well. 0:11:55.000 --> 0:11:57.920 Our biggest, our top pick coming into this year was infrastructure. 0:11:57.960 --> 0:12:01.120 The components of that are waste management and utilities. Given 0:12:01.200 --> 0:12:03.760 during a recession, we take our garbage and we still 0:12:03.760 --> 0:12:05.280 turn of our life, so that tends to be a 0:12:05.280 --> 0:12:07.800 recession resilient sector going forward. 0:12:07.800 --> 0:12:08.599 Those are the areas that we like. 0:12:08.640 --> 0:12:10.480 A process, so certain, just a pressure a little bit. 0:12:10.520 --> 0:12:12.360 Do you have any good examples of what you call 0:12:12.480 --> 0:12:13.480 dividend growers. 0:12:14.760 --> 0:12:17.520 Sure, So it's across the board. It's not broke versus value. 0:12:17.559 --> 0:12:20.320 A company like Lindo, which is an industrial gas company, 0:12:20.320 --> 0:12:23.319 they tend to have strong margin, strong pricing power, high 0:12:23.400 --> 0:12:26.640 quality company, a nice yield. These are the companies that 0:12:26.679 --> 0:12:29.280 we like going Morgan Stanley's another company we just talked 0:12:29.280 --> 0:12:32.360 about that within financials, but that's the company we like 0:12:32.400 --> 0:12:34.440 in a sector where we're not as positive all but 0:12:34.480 --> 0:12:36.520 they have a nice dive and meal. All these companies 0:12:36.520 --> 0:12:38.200 that have a nice yield and also tend to increase 0:12:38.240 --> 0:12:41.120 their dividend going forward are companies that fall into the 0:12:41.120 --> 0:12:42.280 dividend grower category. 0:12:42.559 --> 0:12:44.319 Okay, this has been a terrific discussion. Thank you so 0:12:44.440 --> 0:12:46.559 much for being back with us. That's Sarah Mallick, she's 0:12:46.600 --> 0:12:50.360 CIO of New ven and Christina Hooper of Invesco. As 0:12:50.400 --> 0:12:53.320 we enter banks earning the season, investors are paying close 0:12:53.360 --> 0:12:56.560 attention to evidence of continuing effects of the failure of 0:12:56.600 --> 0:13:00.439 Silicon Valley Bank and government intervention to protect the pots 0:13:00.720 --> 0:13:03.199 to take us through the likely effects. We welcome back now, 0:13:03.280 --> 0:13:06.199 Glenn Hubbard. He's Deanameritis and Professor of Finance and Economics 0:13:06.240 --> 0:13:08.720 at Columbia Business School. Doctor Hubber, of course, served as 0:13:08.800 --> 0:13:11.680 chair of the Council of Economic Advisors under President George W. 0:13:11.760 --> 0:13:12.080 Bush. 0:13:12.120 --> 0:13:14.040 So, Glenn, thank you so much for being back with us. 0:13:14.200 --> 0:13:16.320 So we've paid a lot of attention to what's going 0:13:16.360 --> 0:13:19.480 with banks, particularly regional banks. What's happened here, What are 0:13:19.480 --> 0:13:21.440 the obvious effects and what have made some of the 0:13:21.440 --> 0:13:23.280 more subtle ones we may be missing? 0:13:24.280 --> 0:13:27.719 Well, great question. An obvious effect is you're seeing deposits 0:13:27.800 --> 0:13:31.520 move from smaller and regional banks into money center banks. 0:13:31.920 --> 0:13:34.920 You're seeing a lot of questioning of the financial health 0:13:34.960 --> 0:13:38.040 of many regional banks, and a lot of concerns about 0:13:38.040 --> 0:13:40.800 where the line is drawn into posit and shots. We're 0:13:40.840 --> 0:13:43.559 sort of at the worst spot now where we don't 0:13:43.640 --> 0:13:45.280 know what they expanded a lot. 0:13:45.440 --> 0:13:46.960 Is it going back to where it was? 0:13:47.760 --> 0:13:51.520 But to me there's some less obvious but bigger issues 0:13:51.559 --> 0:13:54.200 having to do with a credit crunch. You know, a 0:13:54.200 --> 0:13:57.040 lot of commercial real estate lending, a lot of commercial 0:13:57.120 --> 0:14:00.920 and industrial loans, certainly the heartland of the country are 0:14:00.960 --> 0:14:04.920 made by small and regional banks, and so even if 0:14:04.960 --> 0:14:09.600 depositors are safe, the credit crunch may provide quite an 0:14:09.640 --> 0:14:12.080 impact on the economy and on the FEDS job. 0:14:12.480 --> 0:14:15.200 What could the possible affects me on the real economy 0:14:15.200 --> 0:14:16.600 if I can call it that. I mean, we all 0:14:16.600 --> 0:14:18.839 care about banks, regional banks, we don't want to wish 0:14:18.920 --> 0:14:21.280 them ill, But could there be broader ramifications for the 0:14:21.280 --> 0:14:22.240 economy overall. 0:14:23.080 --> 0:14:26.280 Well, of course, if banks are tightening lending because they 0:14:26.280 --> 0:14:29.760 really don't see good things to which lend, that's certainly fine. 0:14:30.040 --> 0:14:32.680 But if banks are very worried now about the loss 0:14:32.680 --> 0:14:34.760 of deposits and the one wants to be the next 0:14:34.800 --> 0:14:39.000 Silicon Valley bank or fears of needing more capital, and 0:14:39.040 --> 0:14:42.800 then constrict loans and real estate projects can't happen, Smaller 0:14:42.800 --> 0:14:46.520 mid sized businesses can't get loans. That becomes a quite 0:14:46.600 --> 0:14:50.000 large effect on the economy. From the FEDS perspective, that's 0:14:50.120 --> 0:14:53.960 like thinking there's some extra rate hikes happening in addition 0:14:54.000 --> 0:14:56.720 to the ones that the FED is doing, and so 0:14:57.000 --> 0:15:00.920 the credit crunch may well crimp activity going forward, although 0:15:00.960 --> 0:15:03.120 it will help the FED bring down inflation. 0:15:03.720 --> 0:15:06.480 So let's go back to your question about deposit insurance 0:15:06.480 --> 0:15:07.880 and where we are on that, because we have some 0:15:07.880 --> 0:15:10.320 people like Bob Diamond, for example, formerly Barkley, saying we 0:15:10.360 --> 0:15:13.080 should at least insure up to a million dollars of deposits, 0:15:13.080 --> 0:15:15.840 maybe have unlimited If you were back in your old 0:15:15.920 --> 0:15:18.800 job advising the President United States, what's the right answer 0:15:18.840 --> 0:15:20.960 for the banking system and therefore for the economy overall, 0:15:21.080 --> 0:15:23.040 What would you advise and what do we really need 0:15:23.080 --> 0:15:23.720 from our banks? 0:15:24.600 --> 0:15:27.640 I would say let's start with what can't be right. 0:15:27.920 --> 0:15:32.240 The current law wasn't right. The limit was too small 0:15:32.400 --> 0:15:35.320 to deal with the modern economy, and the Treasury or 0:15:35.360 --> 0:15:38.080 the Fed would try to move the increase it whenever 0:15:38.120 --> 0:15:41.840 we get into trouble. So that's not good. Unlimited, I 0:15:41.880 --> 0:15:44.160 don't think is a very good idea that takes away 0:15:44.280 --> 0:15:47.840 any incentive for depositors, even a very large size to 0:15:47.920 --> 0:15:50.960 monitor the bank. And where to draw the line is 0:15:51.000 --> 0:15:54.640 hard because what you would want in principle is the 0:15:54.680 --> 0:15:59.280 payrolls of small and mid sized businesses, individuals, transactions accounts 0:15:59.280 --> 0:16:02.800 to be okay, those could be large numbers. Here's the concern. 0:16:03.280 --> 0:16:06.800 The higher we take that limit, the more we push 0:16:06.880 --> 0:16:10.080 for more regulation of banks. It's not going to be 0:16:10.120 --> 0:16:13.080 the case the taxpayers ensure all the posits in the 0:16:13.120 --> 0:16:16.480 country without changing what banks do. And going to our 0:16:16.560 --> 0:16:20.800 earlier conversations a moment ago, banks are very important in 0:16:20.920 --> 0:16:23.240 lending in some activities, so I think we need a 0:16:23.280 --> 0:16:27.240 more fundamental conversation about what do we want banks to 0:16:27.280 --> 0:16:30.880 do and how are small and mid sized businesses and 0:16:30.920 --> 0:16:32.240 real estate going to give credit. 0:16:32.920 --> 0:16:35.400 So, Glenn, one of the things that maybe goes unsaid 0:16:35.960 --> 0:16:39.200 largely is sort of a desire to preserve regional and 0:16:39.360 --> 0:16:41.640 specialist banks across the country. We have something like forty 0:16:41.680 --> 0:16:43.680 five hundred I think right now banks across the country. 0:16:44.040 --> 0:16:46.120 Is that too many? Can I ask that blunt question? 0:16:47.280 --> 0:16:50.160 Well, I think we've always had too many banks in 0:16:50.200 --> 0:16:53.440 the United States, certainly relative to any of our peers. 0:16:54.080 --> 0:16:56.600 That said, while I don't know that we have a 0:16:56.600 --> 0:17:01.000 policy objective of preserving particular community or region banks, we 0:17:01.160 --> 0:17:04.440 do want to preserve blending activities theories. So I don't 0:17:04.440 --> 0:17:07.119 think it's the case that if all deposits in the 0:17:07.200 --> 0:17:10.520 United States suddenly moved to the four largest banks, that 0:17:10.600 --> 0:17:13.439 we'd have the same mix of lending. That's what I 0:17:13.520 --> 0:17:16.439 meant by we really need to step back. We thinking 0:17:16.480 --> 0:17:19.040 of the fat or even the Congress as to what 0:17:19.080 --> 0:17:21.920 we want banks to do, but on on an unhealthy 0:17:22.040 --> 0:17:26.119 path now playing with deposit insurance without thinking about the future. 0:17:26.720 --> 0:17:28.399 Glenn, thank you so much. It's always a pleasure to 0:17:28.400 --> 0:17:32.480 have you with us at Glen Hubbard of Columbia Business Schools. 0:17:32.520 --> 0:17:34.320 Coming up, we wrap up the week once again with 0:17:34.359 --> 0:17:38.080 our very special contributor, Larry Summers of Harvard. That's next 0:17:38.119 --> 0:17:48.360 on Wall Street Week on Bloomberg. This is Wall Street Week. 0:17:48.400 --> 0:17:50.439 I'm David Western. We're joined once again by our very 0:17:50.480 --> 0:17:52.480 special contributor here in Wall Street Week. He is Larry 0:17:52.480 --> 0:17:55.200 Summers of Harvard. Larry, great to have you with us again. 0:17:55.520 --> 0:17:57.119 Tell us where you think the economy is right now. 0:17:57.119 --> 0:18:00.199 We got a raft of eco numbers in CPI and 0:18:00.280 --> 0:18:02.680 others this week that some people in term to indicate 0:18:02.720 --> 0:18:05.280 that maybe actually the Fed is having its way, that 0:18:05.320 --> 0:18:07.880 the economy is softening, inflation is coming back down. 0:18:08.240 --> 0:18:12.760 I think it's very hard to read, David, but I 0:18:12.800 --> 0:18:18.680 think I see some growing evidence of stag but some 0:18:18.760 --> 0:18:24.760 real continuing concern about inflation as well, and that's a 0:18:24.840 --> 0:18:31.320 tough combination. On the stag side, it does look like 0:18:32.480 --> 0:18:37.040 defaults are rising, it does look like the flow of 0:18:38.160 --> 0:18:46.080 credit is coming down. Headline retail sales were not strong, 0:18:46.280 --> 0:18:53.000 although the internals are less are less clear, So I 0:18:53.000 --> 0:18:58.160 think you have some grounds for concern about what's happening 0:18:58.280 --> 0:19:05.520 with real activivity on a forward looking basis. And while 0:19:05.600 --> 0:19:10.439 the CPI and the PPI numbers surprised a bit in 0:19:10.480 --> 0:19:15.880 a favorable direction. You saw one year inflation expectations from 0:19:15.880 --> 0:19:21.560 the University of Michigan pop up, and the Atlanta FED 0:19:21.720 --> 0:19:24.800 a wage tracker, which I actually think is a better 0:19:24.920 --> 0:19:28.199 indicator of what's happening in the labor market than the 0:19:28.240 --> 0:19:33.200 monthly average hourly earnings that popped up a bit last 0:19:33.320 --> 0:19:37.760 month as well. So I think we're still looking at 0:19:37.640 --> 0:19:44.520 a very hard to read economy. I don't see inflation 0:19:44.840 --> 0:19:48.840 as on a secure path down to the two percent 0:19:49.760 --> 0:19:56.520 target unless the economy turns turns over a bit. So 0:19:56.760 --> 0:20:00.399 I think the FED has very difficult choices ahead of it. 0:20:00.480 --> 0:20:02.760 So Larie, let me make it even more complex, perhaps, 0:20:02.840 --> 0:20:04.520 And that is where we are with credit right now. 0:20:04.560 --> 0:20:06.520 There's a lot of reports right now that credit standards 0:20:06.520 --> 0:20:09.080 are going up in the wake of those bank if 0:20:09.119 --> 0:20:11.240 I can call them tremors that we had, how do 0:20:11.240 --> 0:20:13.159 you factor that into it? That could that help the 0:20:13.200 --> 0:20:15.360