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Relax Everyone! Larry Summers Thinks It's a Bad Time for Lectures on "Moral Hazard" [1]
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Date: 2023-03-10
Screenshot from www.bloomberg.com (March 10, 2023)
Famed economist, pundit, and ego with legs Larry Summers says the FDIC should fully bail out depositors at Silicon Valley Bank, and that now is not time for tut-tut speeches blaming billionaires or anything. Or throwing furniture. I have a couple thoughts about the latest economic doings below the fold.
Summers said that he hopes “if it’s necessary to provide some kind of support to get that kind of transaction done, the FDIC will do it.” He added: “I don’t think this is a time for moral hazard speeches.”
Most pundits think Silicon Valley Bank was done in by higher-than-expected withdrawals from their struggling tech-bro depositors, plus higher-than-expected interest rates that greatly devalued the bank’s bond portfolio. Here’s how the NYT explainer explained it:
The bank was caught by higher interest rates. Flush with cash from high-flying start-ups, Silicon Valley Bank bought huge amounts of bonds more than a year ago. Like other banks, Silicon Valley Bank kept a small amount of the deposits on hand and invested the rest with the hope of earning a return. That had worked well until the Federal Reserve began raising interest rates last year to cool inflation. At the same time, start-up funding started to dry up, putting pressure on many of the bank’s clients — who then began to withdraw their money. To pay those requests, Silicon Valley Bank was forced to sell off some of its investments at a time when their value had declined. In its surprise disclosure on Wednesday, the bank said it had lost nearly $2 billion.
I’m a borrower. I just borrowed another upper five-figure chunk of change at the prime rate (7.75%) today to finance Summer inventory purchases for our small retail business. (Yeah, I know: brick and mortar retail is dead, we’re doomed, whatever.)
Although the pandemic didn’t hurt our industry — outdoor people-powered transport and recreation (aka bikes and kayaks) — it has been both super hard and super expensive to replenish inventory.
Since the beginning of last year, the prime rate charged by banks for their most preferred customers (including us, with enough collateral) has doubled.
Screen cap from Federal Reserve Bank of St. Louis (accessed March 10, 2023) fred.stlouisfed.org/...
Why have interest rates risen so much? Based on the January and February data on jobs and inflation, you’d think the economy is too HOT HOT HOT! According to these reports, jobs jumped 500k in January and another 300k in February. However, those are the seasonally adjusted numbers (orange on the chart below). The blue numbers show the actual jobs data. Jobs actually fell by 2.5 million in January! But the seasonal adjustment expected them to drop by 3 million, so estimated seasonally adjusted jobs therefore is an increase in 500k jobs! Got that?
Source www.bls.gov (accessed March 10, 2023). Calculations by the author.
I’m not the only one skeptical of January data this year. Reuters probably had the most informative overall story about the economy today — here was their take:
Economists had viewed job growth in January as flattered by a host of factors, including unseasonably warm weather, annual benchmark revisions to the data as well as overly generous seasonal adjustment factors, the model the government uses to strip out seasonal fluctuations from the data.
The January inflation numbers were also weird. For the first time in 6 months, inflation jumped quite a bit more than expected, including both goods and services prices. The Bureau of Labor Statistics mostly blamed housing (rent) prices, which have a known lag getting into the price data. But there was no explanation for why goods prices should spike after being lower or flat in the previous 6 months. It could be as simple as seasonality again, with the seasonal adjustment factors expecting after-Christmas sales that don’t happen like they used to. I expect goods prices to resume their stall or drop in the February report, which will be published on Tuesday, March 14th. Either way, one month of data — particularly January when seasonality is weird — isn’t enough to give us much info about the economy and prices.
In my opinion, the Fed is overdoing it, helping put Silicon Valley Bank into failure, but possibly risking an unnecessary recession as well. We need to stop the rush to more rate hikes until we actually know what’s happening. I think Putin caused a lot of the 2022 inflation, particularly in the first half of the year, and we don’t need a recession to correct that — Ukraine is correcting it on the ground and Europe has not caved to energy blackmail. And Larry Summers is still a douche. Have a great weekend!
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