WEBVTT - Bloomberg Wall Street Week March 24th, 2023 0:00:00.520 --> 0:00:03.720 This is Bloomberg Wall Street Week. We turn our attention 0:00:03.880 --> 0:00:08.320 to the markets this week. USCPI nevers reinforcing concerns about inflation, 0:00:08.440 --> 0:00:11.559 the financial stories that cheap our world, a really different 0:00:11.600 --> 0:00:14.520 reaction to mark its more indications of just how hot 0:00:14.560 --> 0:00:16.959 the US economy really is. Through the eyes of the 0:00:17.000 --> 0:00:21.400 most influential voices Larry Summers, the former Treachery Secretary, Katherine Keening, 0:00:21.560 --> 0:00:24.639 CEO of n y Mon Sam's l Sherman N, founder 0:00:24.640 --> 0:00:27.920 of Equatic Group Investment in Bloomberg Wall Street Week with 0:00:28.160 --> 0:00:32.120 David Weston from Bloomberg Radio, walking and chewing gum at 0:00:32.200 --> 0:00:34.920 the same time, as central banks address the need for 0:00:35.000 --> 0:00:39.479 financial stability without giving up their battle with inflation. Welcome 0:00:39.479 --> 0:00:42.920 to Bloomberg Wall Street Week Time David Weston. This week's 0:00:42.920 --> 0:00:45.600 special contribute to Larry Summers takes us through the FED 0:00:45.680 --> 0:00:47.960 decision and what the banking crisis could mean for the 0:00:48.040 --> 0:00:54.800 real economy. They need to recognize that regulation lost its 0:00:54.880 --> 0:00:59.760 way over the last year or two. A ruined Sundarajan 0:01:00.240 --> 0:01:04.040 NYU sort out the reel from the fanciful and chat GPT. 0:01:04.480 --> 0:01:06.920 The more people who use the system early on, the 0:01:07.000 --> 0:01:10.120 better it becomes and a special Wall Street Week roundtable 0:01:10.160 --> 0:01:13.720 on the banking breakdown, with Larry Summers joining former FED 0:01:13.800 --> 0:01:18.240 Governor Dan Trulo and stephaniely Flanders of Bloomberg Economics. We 0:01:18.400 --> 0:01:23.920 know first that there was a significant supervisory failure somewhere 0:01:24.000 --> 0:01:39.640 along the way. Central banks already had their hands full 0:01:39.720 --> 0:01:42.840 fighting inflation, but then a second front opened up with 0:01:42.920 --> 0:01:46.280 the banking crisis. They quickly spread from Silicon Valley to Zurich, 0:01:46.560 --> 0:01:50.000 where officials began the week announcing that UBS would take 0:01:50.040 --> 0:01:53.760 over credit suis, a move praised by ECB President Christine 0:01:53.840 --> 0:01:58.000 lagard I wilcome the swift action and the decisions taken 0:01:58.080 --> 0:02:02.200 by the Swiss authorities. The actions are instrumental for restoring 0:02:02.520 --> 0:02:07.240 orderly market conditions and ensuring financial stability. But it was 0:02:07.280 --> 0:02:10.400 a shotgun wedding that left holders of so called Coco 0:02:10.600 --> 0:02:14.760 bonds of credit suites out in the coal. Seventeen billion 0:02:14.840 --> 0:02:18.560 dollars of them are now rendered worthless, all of which 0:02:18.600 --> 0:02:20.880 put pressure on the FED to explain how we would 0:02:20.880 --> 0:02:24.880 pursue price stability and financial stability at the same time, 0:02:25.240 --> 0:02:28.440 and Wednesday we got our answer. Inflation remains too high 0:02:28.520 --> 0:02:30.840 and the labor market continues to be very tight. We 0:02:31.000 --> 0:02:33.400 remain committed to bring inflation back down to our two 0:02:33.440 --> 0:02:37.440 percent goal and to keep longer term inflation expectations well anchored. 0:02:37.639 --> 0:02:40.400 We will continue to closely monitor conditions in the banking 0:02:40.440 --> 0:02:42.720 system and are prepared to use all of our tools 0:02:43.160 --> 0:02:46.320 as needed to keep it safe and sound. My colleagues 0:02:46.360 --> 0:02:49.079 and I understand the hardship that high inflation is causing, 0:02:49.639 --> 0:02:52.799 and we remain strongly committed to bringing inflation back down 0:02:52.880 --> 0:02:55.640 to our two percent goal. And while global Wall Street 0:02:55.800 --> 0:02:58.040 was consumed with the stability of the banks and how 0:02:58.080 --> 0:03:00.840 the central banks would respond, the rest of the world 0:03:00.919 --> 0:03:03.560 went on as President G of China paid a visit 0:03:03.639 --> 0:03:06.600 to Moscow for a visit with his good friend Vladimir Putin. 0:03:07.120 --> 0:03:10.480 She is there to present himself as a responsible stakeholder 0:03:10.560 --> 0:03:15.200 and a peacemaker to try to further boaster China's reputation 0:03:15.320 --> 0:03:17.760 on the global stage. Congress some of the CEO of 0:03:17.880 --> 0:03:21.440 TikTok the Capitol Hill for a grilling over his social media. 0:03:21.560 --> 0:03:25.360 Female would also like to talk about national security concerns 0:03:25.440 --> 0:03:29.640 that you have raised that we take very very seriously. 0:03:31.520 --> 0:03:34.480 At the end of this challenging week, equities actually held 0:03:34.560 --> 0:03:37.400 up remarkably well, with the SMP five hundred up one 0:03:37.440 --> 0:03:40.720 point four percent the NAZAC up one and two thirds percent, 0:03:41.120 --> 0:03:43.600 while much of the action was over in bonds, where 0:03:43.600 --> 0:03:45.520 the yield in a ten year started the week just 0:03:45.640 --> 0:03:48.440 over three point four percent spiked up well over three 0:03:48.480 --> 0:03:50.680 point six to end a week back down at three 0:03:50.720 --> 0:03:53.200 point three seven, just a handful of basis points from 0:03:53.240 --> 0:03:55.600 where it all started. Tell us sort all of this out. 0:03:55.680 --> 0:03:58.360 We welcome now Dennis de Busher, his founder and president 0:03:58.400 --> 0:04:01.800 of twenty two V Research, and SONALDA Said, chief investment 0:04:01.840 --> 0:04:05.200 officer for fixed income at Franklin Templeton. So welcome both 0:04:05.240 --> 0:04:06.600 of you. Great to have you here. So now I'm 0:04:06.600 --> 0:04:08.520 gonna start with you, because the action really was largely 0:04:08.600 --> 0:04:11.360 in bonds. You're our fixed income person. Well, how do 0:04:11.440 --> 0:04:14.360 you explain how the bond market reacted to the news 0:04:14.480 --> 0:04:18.800 this week? So, you know, I wish it was an 0:04:18.839 --> 0:04:21.880 equity market equity week, but it is a bond market week. 0:04:21.920 --> 0:04:24.920 Clearly i'd see other type of volatility we're seeing in 0:04:25.600 --> 0:04:30.400 the treasury yield curve. It is very interesting. There is 0:04:30.440 --> 0:04:34.880 a certain amount, in my mind, disonance the bond market 0:04:35.600 --> 0:04:39.200 is asking pleading with the Fed to cut rates. However, 0:04:39.760 --> 0:04:42.440 if I look at what is being priced in by 0:04:42.480 --> 0:04:44.800 the bond market, the number of rate cuts being priced in, 0:04:45.600 --> 0:04:48.600 it just doesn't make sense. It only makes sense if 0:04:48.640 --> 0:04:54.600 you're anticipating a really drastic recession triggered by a massive 0:04:54.680 --> 0:04:59.000 banking crisis. But if that's the case, then the remainder 0:04:59.160 --> 0:05:01.880 of the bondmark it doesn't make much sense. I'm talking 0:05:01.880 --> 0:05:05.680 about credit markets, for example, we haven't seen spreads blowout. 0:05:06.240 --> 0:05:10.520 All the action really seems to be driven off market 0:05:10.600 --> 0:05:15.600 participants being unhappy with the FED not essentially doing what 0:05:16.160 --> 0:05:19.239 we've seen the FED do frankly since the global financial crisis, 0:05:19.560 --> 0:05:23.200 which has used overwhelming posts at the first sign of 0:05:23.360 --> 0:05:28.360 wobbles in any particular piece of the financial sector. So, Dennis, 0:05:28.480 --> 0:05:30.520 is the equity market basically having a big debate with 0:05:30.600 --> 0:05:32.640 the bond market right now because the bond markets are 0:05:32.680 --> 0:05:34.960 saying we're going to have cuts this week this year, 0:05:35.080 --> 0:05:37.560 even though Jay Palla keeps saying we're not going to have, guys, 0:05:37.600 --> 0:05:39.360 but the bond market seems to think it is. If 0:05:39.440 --> 0:05:42.120 really we were, wouldn't that signal something really bad going on? 0:05:42.240 --> 0:05:45.479 And shouldn't that be hurting equities? Right? Now he would 0:05:45.520 --> 0:05:47.840 say theoretically that it should be a pretty big drag 0:05:47.960 --> 0:05:50.800 on equities. I think one of the reasons why equities 0:05:50.839 --> 0:05:54.040 aren't reacting is because a lot of what's happening in 0:05:54.080 --> 0:05:56.640 the bond market could be a hedge against a really 0:05:56.680 --> 0:05:59.120 bad outcome, and at the end of the day, unless 0:05:59.200 --> 0:06:02.200 the near term adomic data is falling off a cliff, 0:06:02.240 --> 0:06:06.120 what it clearly is not doing. Lower rates are not 0:06:06.279 --> 0:06:10.040 going to be terrible for equities until it becomes very 0:06:10.120 --> 0:06:13.920 obvious that you're going to see significant earning degradation. And 0:06:14.040 --> 0:06:18.600 so there's some chance that the banking system gets or 0:06:18.640 --> 0:06:20.719 people have a lot more confidence in the banking system, 0:06:21.160 --> 0:06:24.840 and if that happens, then deposit risk goes away or 0:06:25.200 --> 0:06:28.680 is significantly reduced. You don't have this drastic tightening of 0:06:28.760 --> 0:06:32.120 financial conditions or lending standards. And if that were to happen, 0:06:32.200 --> 0:06:35.160 then the economy can weather it and maybe even with 0:06:35.720 --> 0:06:39.839 a lower rate outlook, and that combination at least stabilizes 0:06:39.920 --> 0:06:42.920 dequities until they have a little bit more information, because again, 0:06:43.120 --> 0:06:45.600 the earnings outlook is not terrible to start the year, 0:06:45.600 --> 0:06:49.440 and that's a really important point. So now the news 0:06:49.640 --> 0:06:51.800 was not just about what the Fed did or what 0:06:51.920 --> 0:06:54.480 j Powe said this week. We also have this overhang 0:06:54.560 --> 0:06:58.080 of some confusion, even some fear in parts of the 0:06:58.160 --> 0:07:00.920 banking industry, was that reflecting the market? Did the bonds 0:07:01.000 --> 0:07:04.159 react to all of that that was going on there 0:07:04.360 --> 0:07:06.960 some extent. But the reality is, you know, if we 0:07:07.480 --> 0:07:10.240 you know, you started off talking about the banking crisis, 0:07:10.800 --> 0:07:13.200 I would almost take issue with the idea that there 0:07:13.360 --> 0:07:17.360 is a crisis as such, because I would really distinguish 0:07:17.480 --> 0:07:20.600 what we are seeing today in banks from what we 0:07:20.680 --> 0:07:24.400 saw when we had a true banking crisis, a financial crisis, 0:07:24.640 --> 0:07:28.440 say two thousand and seven. Eight. We have to recognize 0:07:28.480 --> 0:07:31.560 that what we're looking at our banks, which buy and large, 0:07:31.600 --> 0:07:34.559 are extremely solvent. If you look at banks like SVP, 0:07:34.680 --> 0:07:40.320 for example, problem was the most fundamental mismatch of duration. 0:07:40.960 --> 0:07:47.440 We're not looking at deep, strange, unvaluable securities where you 0:07:47.480 --> 0:07:49.480 can't figure out how much their work. You're looking at 0:07:49.560 --> 0:07:52.640 government treasuries. You're looking at US treasuries. You're looking at 0:07:52.680 --> 0:07:55.640 mortgage bonds, where we know the value of the asset 0:07:55.840 --> 0:07:58.400 by the minute. So I think that's one thing to 0:07:58.560 --> 0:08:03.280 keep in mind every time I hear about the banking 0:08:03.360 --> 0:08:08.160 crisis and how this is spreading and there's something catastrophic waiting. 0:08:09.000 --> 0:08:11.440 I would I actually argue that what we heard from 0:08:11.600 --> 0:08:14.880 j Powell, indeed what we heard from Janet Yellin is 0:08:15.040 --> 0:08:20.760 broadly on point. If they see banks having runs, and 0:08:20.880 --> 0:08:23.320 remember in banking where in the business people are in 0:08:23.400 --> 0:08:26.520 the business and banking of borrowing short and lending long deposits, 0:08:26.560 --> 0:08:30.320 fund loans, it's what banking is. I just think that 0:08:30.880 --> 0:08:34.560 what they are doing, which is trying to separate out 0:08:35.200 --> 0:08:38.000 what to do about the banks from interest rates, up 0:08:38.040 --> 0:08:40.640 to a point, this is a very sensible thing to do. 0:08:42.160 --> 0:08:44.880 So Dennis said, whether the banks are in a crisis 0:08:45.000 --> 0:08:47.280 or not, I guess it matters whether they think they're 0:08:47.320 --> 0:08:49.040 in a crisis. You could go into a crisis because 0:08:49.040 --> 0:08:52.040 it really affects their willingness to lend to some corporations, 0:08:52.080 --> 0:08:55.040 and that could really affect equities. That is what the 0:08:55.120 --> 0:08:57.880 problem is for equities over time. And what we don't 0:08:57.960 --> 0:09:00.720 know is how much of that fighting of lending standards 0:09:00.760 --> 0:09:04.600 will actually show up over time. No one really knows. 0:09:05.559 --> 0:09:07.640 Tightening of lending standards is going to be quote unquote 0:09:07.679 --> 0:09:09.640 off the screen, So you're not going to be able 0:09:09.640 --> 0:09:12.080 to pick it up in the typical type of financial 0:09:12.120 --> 0:09:14.080 conditions in the sees that we are normally look at, 0:09:14.400 --> 0:09:17.360 you know, on a Bloomberg screen. So it's a really 0:09:17.440 --> 0:09:19.839 unknown But you know, we did a search today of 0:09:20.000 --> 0:09:23.640 Google trends FDIC insurance and after a giant spike up, 0:09:23.720 --> 0:09:27.440 it's come down aggressively. So the broader public is probably 0:09:27.600 --> 0:09:30.800 not so focused on this as much anymore. I realize 0:09:30.840 --> 0:09:32.160 we all are on Wall Street, and there's a lot 0:09:32.160 --> 0:09:34.240 of people in California that are. And so if you 0:09:34.360 --> 0:09:38.720 get past that risk, which is the deposit flight risk, yes, 0:09:39.080 --> 0:09:41.480 banks will have tighter lending standards. That might mean that 0:09:41.600 --> 0:09:43.800 the FED doesn't have to tighten as much on a 0:09:43.880 --> 0:09:46.600 go forward basis. In aggregate, you still have the same 0:09:46.640 --> 0:09:50.920 outcome slowing economy, lower inflation, but it doesn't mean a 0:09:51.040 --> 0:09:53.720 recession in the next six months. And if you don't 0:09:53.760 --> 0:09:56.160 have a recession in the next six months, then you 0:09:56.320 --> 0:09:58.199 have the case for eight equities to at least be 0:09:58.320 --> 0:10:01.120 stable and to have a significan get bounced back in 0:10:01.200 --> 0:10:03.760 some of the more cyclical areas of the market. So 0:10:03.880 --> 0:10:06.800 now the side, oh sorry, go ahead, So now please now, 0:10:06.880 --> 0:10:08.800 I was just going to just say to Dennis that 0:10:08.920 --> 0:10:11.800 in fact, that's exactly I've seen so much of talk 0:10:11.840 --> 0:10:15.640 about how j Powell talked about raising rates just two 0:10:15.760 --> 0:10:17.679 days you know that rates needed to go up a 0:10:17.760 --> 0:10:20.920 lot more two days before sv BE broke, and then 0:10:21.000 --> 0:10:23.719 we saw that when we saw the new SEPs the 0:10:23.920 --> 0:10:26.680 top peak rate is still where it was in December. 0:10:26.960 --> 0:10:31.600 So essentially what we're seeing is a substitution of higher 0:10:31.720 --> 0:10:36.640 rates which would have contracted demand for loans more yes, 0:10:36.920 --> 0:10:41.959 with fighter lending standards, as you said, which constrains the 0:10:42.080 --> 0:10:46.520 supply of credit. So overall, I do think it's too 0:10:46.679 --> 0:10:50.240 premature to assume that we're going to see this massive 0:10:50.880 --> 0:10:53.760 meltdown of the economy on the back of what we've 0:10:53.800 --> 0:10:56.200 seen in the past two weeks. So now the side 0:10:56.240 --> 0:10:57.880 and Denis be sure, we'll stay with us because we're 0:10:57.960 --> 0:10:59.480 a turn from what happened this week to what it 0:10:59.559 --> 0:11:02.400 means of medium and long term. That's gonna have next 0:11:02.440 --> 0:11:07.600 on Wall Street Weet on Bloomberg. This is Bloomberg Wall 0:11:07.640 --> 0:11:17.480 Street Week with David Weston from Bloomberg Radio. I think 0:11:17.520 --> 0:11:20.280 we have a lot of individual investors who are on 0:11:20.360 --> 0:11:22.880 the internet buying and selling stocks almost every single day, 0:11:23.000 --> 0:11:25.480 and as a consequence, their behavior is somewhat different than 0:11:25.520 --> 0:11:28.520 the traditional institution, and quite frankly, I think the institutions 0:11:28.559 --> 0:11:31.760 these days are behaving a little bit foolish as well. 0:11:32.679 --> 0:11:35.440 That was Roger mcnabe, a much younger Roger McBey then 0:11:35.520 --> 0:11:38.439 with Integral Capital Partners on Wall Street week back in 0:11:38.559 --> 0:11:41.680 February of nineteen ninety nine, when the number one moving 0:11:41.720 --> 0:11:45.120 the country was Message in a Bottle starring Kevin Coster 0:11:45.200 --> 0:11:47.360 and Robin Ry, and the number one song, well, that 0:11:47.559 --> 0:11:50.840 was Angel of Mine by Monica so Alacie of Franklin 0:11:50.880 --> 0:11:53.680 Templeton and Dennis de Buscher of twenty two V Research 0:11:53.760 --> 0:11:55.520 are still with us. So Dennis, let's go back to 0:11:55.600 --> 0:11:58.560 where you left us. Basically depends at the time horizon. 0:11:58.600 --> 0:12:00.600 We were talking about what happened this week. But when 0:12:00.640 --> 0:12:02.839 you look six months out, twelve months out, if you're 0:12:02.840 --> 0:12:05.839 an equity investor at this point, given all the uncertainty're facing, 0:12:06.000 --> 0:12:09.040 what do you do you plan for lower inflation and 0:12:09.120 --> 0:12:13.440 stocks that benefit from lower inflation? Very simply, we spend 0:12:13.440 --> 0:12:15.280 a lot of time trying to figure out what the 0:12:15.400 --> 0:12:18.800 Fed is trying to accomplish, and this is an open secret. 0:12:19.400 --> 0:12:23.600 They want lower aggregate demand to lower inflation. They're going 0:12:23.679 --> 0:12:25.720 to accomplish that goal one way or the other. Maybe 0:12:25.760 --> 0:12:28.319 the bank's timing of lending standard does it form. If 0:12:28.360 --> 0:12:30.080 that doesn't do it for them, they're going to tighten 0:12:30.120 --> 0:12:33.040 a lot. They're going to type more to make that happen. 0:12:33.440 --> 0:12:35.640 And so the net result of that is companies that 0:12:35.760 --> 0:12:38.599 benefit from lower inflation are going to outfl form. And 0:12:38.679 --> 0:12:40.760 as we see it, the things that will probably do 0:12:40.840 --> 0:12:42.959 the best of that backdrop are your early cyclicals on 0:12:43.040 --> 0:12:47.520 a relative basis, that's tech, communications, and discretionary, So that's 0:12:47.559 --> 0:12:51.120 an area we'd be focused on. Then the main question 0:12:51.360 --> 0:12:54.439 is as the economy slows, is it a recession or not. 0:12:55.280 --> 0:12:59.000 If it's a recession, then more your defensive sectors work. 0:12:59.080 --> 0:13:02.640 That gets you to the stables, utilities, etc. If it's 0:13:02.679 --> 0:13:05.199 a mild recession, I think you want to fade defenses, 0:13:05.520 --> 0:13:07.520 and I think you really need to start thinking about 0:13:07.559 --> 0:13:11.000 the next cycle, which to me is the most interesting conversation. 0:13:11.600 --> 0:13:14.600 Are we in and I know you talk to Larry Summers. 0:13:14.679 --> 0:13:17.800 Are we in a lower savings economy that's going to 0:13:17.880 --> 0:13:22.079 have consistently higher nominal GDP growth, consistently higher inflation and 0:13:22.160 --> 0:13:24.839 pressure affect. That's never really going back to two, but 0:13:24.960 --> 0:13:27.440 letting inflation run a little bit above target and over 0:13:27.600 --> 0:13:31.080 that longer term, right, you know, the defenses are going 0:13:31.160 --> 0:13:33.760 to be extremely unattractive if you're gonna have a two 0:13:33.840 --> 0:13:36.360 year great ramp put to book these levels for a 0:13:36.440 --> 0:13:40.240 persistent period of time. It's just possible in a lower economy. Dennis, 0:13:40.240 --> 0:13:41.800 I want to sneak Sonil in here because I want 0:13:41.800 --> 0:13:43.960 to ask you the same question as a fixed income Unfortunately, 0:13:43.960 --> 0:13:45.559 we have just a short period of time. What do 0:13:45.600 --> 0:13:47.680 you do when you're investing as a fixed income investor? 0:13:48.320 --> 0:13:50.840 So right now is staying up in quality. We've been 0:13:50.960 --> 0:13:53.560 relatively neutral duration because I think we're going to get 0:13:53.559 --> 0:13:56.080 a lot more volatility. I do think ten year rates 0:13:56.120 --> 0:13:59.040 are going to go back up before we actually stopped 0:13:59.080 --> 0:14:02.400 coming down. Because right now market and FED are playing 0:14:02.440 --> 0:14:04.600 a game of chicken. I happen to think the Fed's 0:14:04.600 --> 0:14:08.160 going to win, and so eventually we get higher yields 0:14:08.240 --> 0:14:11.920 and then I think we set ourselves up for a 0:14:12.200 --> 0:14:15.760 pretty good period for fixed income. We're already there as 0:14:15.840 --> 0:14:18.400 we move into slowdown, which allows the FED to cut 0:14:18.600 --> 0:14:20.880 some time next to that is terrific. Thank you, so 0:14:21.040 --> 0:14:24.160 much to both you, as Sonaldasai of Franklin Templeton and 0:14:24.240 --> 0:14:28.360 Dennis the Busher of twenty two V Research. FED chair 0:14:28.480 --> 0:14:31.040 pal this week said he didn't yet know exactly what 0:14:31.240 --> 0:14:33.920 went wrong with Silicon Valley Bank, but the vice chair 0:14:34.000 --> 0:14:37.440 bar was conducting an investigation to find out. We convened 0:14:37.440 --> 0:14:40.520 our own expert roundtable to discuss what we know at 0:14:40.600 --> 0:14:43.480 this point, what we don't know, and what changes it 0:14:43.600 --> 0:14:45.720 should be on the table to make sure we don't 0:14:45.800 --> 0:14:48.520 repeat what we saw over the last two weeks. Here's 0:14:48.520 --> 0:14:53.040 former treasure Secretary Larry Summers, former FED board member Jan Trullo, 0:14:53.320 --> 0:14:57.200 and Stephanie Flanders Bloomberg Executive editor for Economics and Government. 0:14:59.080 --> 0:15:03.680 I trust that the largest banks truly are in the 0:15:03.840 --> 0:15:07.320 much better capital and liquidity position that Jay Powell referred 0:15:07.320 --> 0:15:10.840 to yesterday during the press conference. We know first that 0:15:11.040 --> 0:15:16.400 there was a significant supervisory failure somewhere along the way. 0:15:17.240 --> 0:15:23.240 Was that failure in San Francisco Fed's inability to identify 0:15:23.520 --> 0:15:27.840 problems of growth and maturity mismatches and the like early on? 0:15:28.800 --> 0:15:31.840 Was it the failure of the second San Francisco FED 0:15:31.920 --> 0:15:35.480 team to which did identify some problems to follow up 0:15:35.520 --> 0:15:39.760 in a sufficiently robust way. Was it a supervisory failure 0:15:39.880 --> 0:15:42.760 because of the light touch approach to supervision that the 0:15:42.960 --> 0:15:46.120 Federal Reserve Board had put in place over the last 0:15:46.200 --> 0:15:49.400 four or five years. But I think in the most 0:15:49.560 --> 0:15:55.480 immediate sense, this is clearly a supervisory failure. Other factors 0:15:55.760 --> 0:15:59.840 may be uncovered as the FED Zone investigation proceeds. Larry, 0:16:00.040 --> 0:16:01.960 Let's put you back at the Treasury, or for that matter, 0:16:02.080 --> 0:16:04.560 at the White House. If you were looking at this situation, 0:16:04.720 --> 0:16:07.320 what questions would you be asking to make sure you 0:16:07.560 --> 0:16:10.560 understood the possible ramifications of what we've seen so far 0:16:10.880 --> 0:16:14.440 in a broader financial context. Before I answer that hypothetical, 0:16:14.600 --> 0:16:20.760 let me put a question to my friend Dan. Dan, 0:16:20.960 --> 0:16:25.200 I've heard it said, and I don't know that even 0:16:25.320 --> 0:16:30.840 in twenty twenty two, the FED stress tests that were 0:16:30.880 --> 0:16:36.800 applied to the largest banks did not include an analysis 0:16:36.880 --> 0:16:42.040 of the stress from a major interest rate hike. If 0:16:42.120 --> 0:16:46.040 that's true, that seems kind of bizarre from the point 0:16:46.080 --> 0:16:49.240 of view of the world of early twenty twenty two, 0:16:50.080 --> 0:16:55.880 when it certainly many people, certainly me on David's show, 0:16:56.640 --> 0:17:01.680 were emphasizing that there was likely to need to be 0:17:02.040 --> 0:17:06.320 very substantial increases in interest rates. Can you say something 0:17:06.359 --> 0:17:11.680 and if the stress tests weren't considering increases in interest rates, 0:17:12.320 --> 0:17:16.560 then perhaps the exempting of Silicon Valley Bank from the 0:17:16.720 --> 0:17:22.040 stress tests was not central to understanding the problem. Can 0:17:22.119 --> 0:17:28.840 you say something about interest rate hikes and FED stress tests? Sure? So, 0:17:29.200 --> 0:17:34.159 First off, I think, Larry, I agree with the statement 0:17:34.200 --> 0:17:37.359 you made towards the end of your question, which is, actually, 0:17:37.480 --> 0:17:40.720 if Silicon Valley had been in last year's stress test 0:17:41.200 --> 0:17:44.719 for real rather than its stress rehearsal, I don't think 0:17:44.760 --> 0:17:47.320 it would have made much difference, for precisely the reason 0:17:47.440 --> 0:17:50.320 you say that they weren't stressing the things that were 0:17:50.359 --> 0:17:55.760 the SVB vulnerabilities with respect to stress testing generally, over again, 0:17:55.840 --> 0:17:59.200 over the last five or six years, the stress test 0:17:59.280 --> 0:18:03.960 has become eminently predictable, but it follows the basic pattern 0:18:04.119 --> 0:18:07.200 of the scenario that was developed when we began doing 0:18:07.680 --> 0:18:13.560 the annual stress test. The scenario, of course includes a 0:18:13.720 --> 0:18:17.960 reduction in interest rates because of the hypothesis of a 0:18:18.080 --> 0:18:21.440 recession and the Fed's reaction, so to some degree, the 0:18:21.520 --> 0:18:26.640 answer to your question is like supervision. Generally, the stress 0:18:26.760 --> 0:18:31.280 test has become less rigorous over time, and I think, 0:18:31.600 --> 0:18:35.800 more importantly it's become too predictable, and the whole purpose 0:18:35.840 --> 0:18:38.399 of a stress test is that you're trying to stress 0:18:38.440 --> 0:18:42.640 against the unanticipated, not the anticipated. It does our entire 0:18:42.720 --> 0:18:45.159 approach to deposits change, given what we're seeing in the 0:18:45.240 --> 0:18:47.000 fact is they're not as stick as we thought they were. 0:18:47.720 --> 0:18:50.320 That's what I was alluding to earlier. I'd like to 0:18:50.400 --> 0:18:54.680 have a sense of exactly what the deposit profiles of 0:18:54.920 --> 0:18:59.080 this group of banks is as a whole, because in theory, 0:18:59.160 --> 0:19:04.119 at least, the supervisor should already have been distinguishing among 0:19:04.440 --> 0:19:09.240 different kinds of uninsured deposits, some of which I've always 0:19:09.280 --> 0:19:12.920 been understood to be eminently runnable, others of which have 0:19:13.080 --> 0:19:16.840 thought too were thought to be at least somewhat stickier 0:19:17.240 --> 0:19:22.400 than insured retail deposits. If it turns out that those 0:19:22.720 --> 0:19:24.840 and this is what Stephanie I think was suggesting that 0:19:24.960 --> 0:19:30.600 those middle categories have changed, then you're going to need 0:19:30.640 --> 0:19:35.399 a change in regulation and not just in supervision. That 0:19:35.520 --> 0:19:38.880 was our Wall Street Week roundtable of Larry Summers, Dan Trulo, 0:19:39.200 --> 0:19:42.960 and Stephanie Flanders coming up. It was a week that 0:19:43.119 --> 0:19:46.240 called for courage, and we found it in a somewhat 0:19:46.359 --> 0:19:49.800 unlikely place. That's next on Wall Street Week on Bloomberg. 0:19:51.400 --> 0:19:55.600 This is Bloomberg Wall Street Week with David Weston from 0:19:55.800 --> 0:20:02.960 Bloomberg Radio. This is Wall Street Week. I'm David Weston. 0:20:03.000 --> 0:20:05.200 We're joined once again by our very special contributor to 0:20:05.240 --> 0:20:07.960 Wall Street Week. He is Larry Summers of Harvard. So, Larry, 0:20:08.040 --> 0:20:11.560 we now have had another week of turmoil, continued turmoil 0:20:11.720 --> 0:20:14.760 in the banking sector. What are you looking for going 0:20:14.920 --> 0:20:19.480 forward from our policy leaders in Washington? I think policy 0:20:19.920 --> 0:20:25.920 leaders need to be clear and decisive that depositors are 0:20:26.119 --> 0:20:30.920 not going to lose their money in large banks, in 0:20:31.160 --> 0:20:35.720 medium sized banks, or in small banks. They can do 0:20:35.960 --> 0:20:41.159 that within their existing authorities simply by being clear that 0:20:41.480 --> 0:20:47.639 in the event of failures, given the highly fevered environment 0:20:47.800 --> 0:20:52.359 with respect to contagion right now, they are prepared to 0:20:52.640 --> 0:20:59.480 use systematic systemic risk exemptions to allow the FDIC to 0:20:59.640 --> 0:21:07.480 pay off depositors with assurance that those funds will come 0:21:07.720 --> 0:21:13.400 from the banking industry. I think by doing that they 0:21:13.520 --> 0:21:20.200 can contain a significant amount of the pressures that we're facing. 0:21:20.560 --> 0:21:26.200 To provide confidence. I think they also need to increase 0:21:26.280 --> 0:21:32.000 the confidence they are providing in regulation. While it is 0:21:32.160 --> 0:21:41.160 true that the twenty eighteen Trump era legal changes were 0:21:41.720 --> 0:21:46.880 passed by the Congress were in almost every respect ill advised, 0:21:47.400 --> 0:21:53.560 and the important respects were driven by special interests pressure. 0:21:54.440 --> 0:21:58.000 It is also, i think clear that they are not 0:21:58.840 --> 0:22:02.800 the reason why we have had the problems we have had. 0:22:03.480 --> 0:22:08.760 The problems we have had reflect problems of management and 0:22:08.880 --> 0:22:14.560 a number of financial institutions, and reflect major failures of 0:22:14.880 --> 0:22:23.360 the supervisory and regulatory paradigm as implemented by the Federal Reserve, 0:22:24.080 --> 0:22:29.320 in particular the failure to do a stress test in 0:22:29.600 --> 0:22:35.520 twenty twenty two when interest rate interest rates were clearly 0:22:35.680 --> 0:22:39.680 on the upwards path. The failure to do any kind 0:22:39.760 --> 0:22:49.080 of stress tests about interest rate increases manifests a misunderstanding 0:22:49.760 --> 0:22:54.440 of what a major source of risk in the system was, 0:22:55.119 --> 0:23:00.600 and they need to signal an awareness of day shouldn't risk. 0:23:01.080 --> 0:23:05.040 They need to signal an awareness of solvency as well 0:23:05.200 --> 0:23:12.320 as liquidity issues in the regulatory paradigm going forward. Larry, 0:23:12.359 --> 0:23:14.560 we heard, of course from the Federal Reserve in particularly J. 0:23:14.720 --> 0:23:17.840 Powell news conference this week in which they did raise 0:23:17.920 --> 0:23:20.320 the rates again twenty five basis points. We're a little 0:23:20.359 --> 0:23:22.520 more vague on where they go from here At the 0:23:22.600 --> 0:23:25.320 same time the chair said that this was an outlier. 0:23:25.480 --> 0:23:28.320 Silicon Valley Bank was an outlier. I guess my question 0:23:28.400 --> 0:23:31.240 to you is how confident are we actually the FED 0:23:31.320 --> 0:23:33.600 has our arms around the problem now now we know 0:23:33.720 --> 0:23:35.200 there is the problem to interest rate risk when it 0:23:35.240 --> 0:23:38.119 comes to SVB, How confident that we know that there 0:23:38.200 --> 0:23:41.400 aren't other svbs out there. I think it's pretty clear 0:23:41.960 --> 0:23:47.160 looking at a variety of ratios that SVB and perhaps 0:23:47.240 --> 0:23:53.040 a couple of other banks were important respects outliers, but 0:23:54.040 --> 0:24:01.000 extreme examples tend often in life to point up digmatic issues. 0:24:01.840 --> 0:24:07.200 And as I've been pointing out, a world of high 0:24:07.320 --> 0:24:13.919 interest rates with digital banking click of a finger ability 0:24:14.080 --> 0:24:19.040 both to move accounts out and to open new accounts 0:24:19.920 --> 0:24:23.280 is going to be a different kind of world in 0:24:23.520 --> 0:24:26.200 terms of risk, And it's going to be a different 0:24:26.280 --> 0:24:30.560 kind of world in terms of what banks can rely 0:24:30.840 --> 0:24:34.960 on in terms of the stickiness of deposits, and to 0:24:35.160 --> 0:24:40.480 what extent that's true is something we're likely to learn 0:24:41.880 --> 0:24:46.800 in the next year or two. That's why I think 0:24:46.840 --> 0:24:51.560 it's appropriate, ahead of the curve to be sending clear 0:24:51.880 --> 0:25:00.720 signals of assurance with respect to bank deposits, because it 0:25:00.960 --> 0:25:04.280 is better to err on the side of overdoing it 0:25:04.800 --> 0:25:08.960 when you're talking about protecting against bank runs than it 0:25:09.160 --> 0:25:13.720 is to err on the side of under doing it. 0:25:14.000 --> 0:25:17.840 There are profound issues raised about the banking supervision here 0:25:17.880 --> 0:25:20.000