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Larry Summers explains the banking crisis
On GZERO World, Ian Bremmer and former US Treasury Secretary Larry Summers discuss a range of topics, including the global banking system, the impact of AI on the labor market, and a controversial solution for rebuilding Ukraine.
Summers, an expert on inflation, provides valuable insights into recent bank failures that have caused concern among investors worldwide. He discusses whether the current situation constitutes a banking crisis, explores the role that inflation is playing in contributing to the banking problems, and makes predictions about the duration of the current financial turmoil.
He and Bremmer also touch on the impact of AI on the labor market, with Summers warning of significant changes that will cause profound shifts in traditional hierarchies and ways of thinking, which may make influential groups uneasy.
Summers also offers a provocative solution for rebuilding Ukraine: seizing frozen Russian assets.
Note: this interview was featured on an episode of GZERO World with Ian Bremmer on April 3, 2023: The banking crisis, AI & Ukraine: Larry Summers weighs in
Is your money safe? Larry Summers on the banking crisis
Banks, in many ways, are the backbone of the economy, but when Silicon Valley Bank and Signature Bank recently failed, it raised some tough questions about the stability and regulation of financial institutions. On GZERO World, Ian Bremmer and former US Treasury Secretary Larry Summers dive deep into the crisis and explore the complex factors that led to the banking turmoil.
Summers explains that the failures of these banks were caused by a combination of factors, including an increasingly digital world with high interest rates, risky investments, and long-term bonds that decreased in value as interest rates rose.
This led to depositors becoming alarmed about the security of their money and quickly moving it to other banks that offered higher returns. The banks' inability to manage these withdrawals sparked fears of a bank run and ultimately led to government intervention.
Summers also criticizes the management of Silicon Valley Bank for their "incompetence" and the Federal Reserve's regulation for not “stopping the accident that was waiting to happen.”
“In many ways, the financial system is like an anesthesiologist," Summers remarks, "nobody much notices a job that they're doing until something screws up."
Watch the GZERO World episode: The banking crisis, AI & Ukraine: Larry Summers weighs in
Ian Explains: Banking turmoil and the panic pandemic
There’s talk of another surge. We're talking, of course, about…banking.
Much of what’s driving today’s banking drama—resulting in the most significant government intervention since the Great Recession—is a virus more contagious than COVID-19: panic, Ian Bremmer explains on GZERO World.
It all started with the US government's takeover of Silicon Valley Bank (SVB) to prevent a $42 billion bank run. This move, coupled with the FDIC's closure of Signature Bank, sent shockwaves across the market, resulting in the most significant government intervention in banking since the Great Recession. Panic soon spread across the Atlantic, with Credit Suisse's shares plummeting by 30% and Switzerland's largest bank, UBS, hastily buying its struggling counterpart in a bid to calm the markets.
But will the public and private intervention be enough to contain the panic virus, or is this just the first wave of many to come? Only time will tell.
Watch the GZERO World episode: The banking crisis, AI & Ukraine: Larry Summers weighs in
The banking crisis, AI & Ukraine: Larry Summers weighs in
The recent spate of bank failures has caused significant turbulence in markets and left investors jittery across the globe, from Silicon Valley to Switzerland. But is this a sign of a systemic banking crisis or of a more fundamental flaw in capitalism? In an interview with Ian Bremmer on GZERO World, former US Treasury Secretary Larry Summers provides an in-depth analysis of the situation.
Summers is critical of the management of Silicon Valley Bank and the federal government's intervention, which failed to prevent the banking turmoil. He also expresses concerns about the real estate sector, particularly when it comes to office buildings, and corporate lending to mid-sized businesses.
The conversation also delves into the impact of artificial intelligence on the labor market, with Summers cautioning that AI will "bring about significant changes" that will “profoundly alter traditional hierarchies and ways of thinking,” which may threaten influential groups. It’s even probable, he tells Bremmer, that we’ll see “restrictionist and protectionist policies that limit our ability to benefit from these technologies or slow down [their development].”
Summers also proposes a contentious solution to rebuild Ukraine: seizing frozen Russian assets.
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A graph comparing the US Federal Funds Effective Interest Rate with the year-on-year percentage change in inflation.
The Graphic Truth: US interest rates vs. inflation
All eyes are on the US Federal Reserve, as it is set to announce Wednesday whether it’ll raise interest rates amid the recent banking turbulence.
The Fed’s decision will hinge on what central bankers think is a bigger priority: fighting inflation or stabilizing the financial sector following the recent collapses of Silicon Valley Bank and Signature Bank.
While it could stay the course in its inflation fight with another rate hike, the Fed is coming under growing pressure to ease investors’ anxieties by leaving interest rates be. But doing that risks giving in — temporarily, at least — to lasting inflation. The longer the Fed waits to control rising prices, the worse chance it has to reach its 2-3% inflation target without triggering a recession.
Also, high-interest rates are partly to blame for the recent financial turmoil on both sides of the Atlantic. Right-leaning critics argue that near-zero rates for too long made lending too cheap. Meanwhile, some on the left say that raising rates too quickly made borrowing too expensive, hurting the balance sheets of banks like SVB.
What do you think the Fed’s next move should be? Let us know here.
Silicon Valley Bank collapse: Not 2008 all over again
Ian Bremmer shares his insights on global politics this week on World In :60.
With the Silicon Valley Bank collapse, is it 2008 all over again?
There's one very clear way that it's not, which is that it's not a big enough crisis for people to come together. And remember, after 2008, everyone understood that we needed to do everything possible to get the markets functioning, get trust in the system again, and avoid a great depression. Nobody's saying that right now. And it's not just because the US political system is more divided, it's also because people feel like it's fine to go after the "woke" banks. It's fine to go after the Trump era deregulation around the medium size banks. And everyone can point at their favorite villain while you don't really need to do a hell of a lot beyond the bazooka that Secretary Yellen threw at SVB and Signature Bank this weekend. So no, in that regard, it's very much not 2008 all over again. In some ways I'm happy about that and other ways I'm not.
As China reopens to tourism, is COVID finally behind us?
Well yeah, in the sense that we can travel everywhere. I mean, the fact that you haven't been able to go to China for three years now. First because of COVID, then because of zero-COVID policies is a real problem. I mean, engaging with Chinese policy leaders, corporate leaders on a Zoom, you're just not getting a lot of information. And Munich Security Conference was the first time I met with a senior Chinese delegation face-to-face, aside from China's then ambassador, now foreign minister to Washington in three years. So I mean, just my level of understanding of what the hell is going on in China is significantly less than I need it to be. And now that we can all start going to China again, that's a really big deal. So I think that makes COVID behind us. Of course, long COVID isn't behind us. And this is a permanent disease that, in terms of COVID's reality, people are still going to die from this thing, but in terms of treating it like a pandemic, yeah, I think it's pretty clear that that we are over and done with and I'm glad to say it.
Will the AUKUS deal shift the balance of power in the Indo-Pacific region?
No, I don't think so. I mean, it's a big deal for the Americans to be sharing advanced nuclear technology and hardware with the Australians, something the Americans wouldn't have done before. That is in part a growing concern about China. By the way, it's also potentially an intelligence risk because Australian level of security around their intelligence and information and their susceptibility to espionage from Beijing is a lot higher than that of the United Kingdom, than that of the United States. So there is a risk on board with that, but no, I think the important thing is that the Americans are continuing to focus on what is really a pivot towards Asia, more military equipment, more economic engagement, and of course, more concern of American allies and partners all across the region that they need the Americans from the security perspective, even as China becomes the critical economic partner. So that I think is important incrementally, strategically, but I wouldn't say AUKUS is the big mover, this week's San Diego meeting notwithstanding.
- SVB collapse: Don’t say the B-word ›
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- Hard Numbers: Colombia's grim record, Ukraine reconstruction planning, Chinese beach tourists, India's strong arm ›
- What We’re Watching: Battle for Bakhmut, Xi’s diplomatic muscle, AUKUS sub deal ›
- Who does Washington blame for the Silicon Valley Bank collapse? - GZERO Media ›
- Ian Explains: Banking turmoil and the panic pandemic - GZERO Media ›