Sunday, April 19, 2009

Larry Summers: "Substantial risks; issues in the global economy, commercial real estate"

by Calculated Risk on 4/19/2009 06:21:00 PM

Here is the transcript of Larry Summers on NBC’s ‘Meet the Press’

A few excerpts:

GREGORY: Let me ask -- the president has talked about glimmers of hope in the economy. And obviously, what the government has done, through a stimulus package; what the Fed has done through buying up debt is try to create demand in the economy.

My question is, if you’re seeing any easing in the economy or an easing of the recession, is that because the government is propping the economy up?

Or do you see elements of recovery that are self-sustaining?

SUMMERS: Well, I think you’ve got to give the government credit, some credit for what’s happened, but these have the potential to build into something that’s self-sustaining. That’s certainly not something that’s been established to this point, and that’s why we’re going to need to maintain strong policies for quite some time to come.

But I think we can take some satisfaction that, after a period when there was literally no positive indicator to be found, when it seemed like our economy was in a -- a vertical, it’s a more mixed picture today. And you’ve got to give public policies a significant part of the credit for that.

But as the engine turns over, you know, at some point, it will become something that’s much more -- much more self-sustaining. But right now, we’ve got a long way to go in terms of supporting this economy.

GREGORY: Let me have you respond to some criticism. New York Times columnist and economist, and opponent on these matters of the administration, Paul Krugman wrote this week that the administration should be careful not to -- to count a recovery a before it’s hatched.

He wrote this, specifically, about whether a full-blown depression is still possible. This is what he said: “Can a depression happen again? Well, commercial real estate is coming apart at the seams. Credit card losses are surging. And nobody knows just how bad things will get in Japan or Eastern Europe. We probably won’t repeat the disaster of 1931, but it’s far from certain that the worst is over.”

What do you say?

SUMMERS: You know, I disagree with Paul about a lot of things, but he is right to be raising cautions. That’s why, when I just spoke about the economy, I said that, after a period when it -- when everything was negative, there were now some mixture in the indicators. We don’t know what -- we don’t know; we can’t know with certainty what’s going to happen next, and there certainly are real risks ahead.

That’s why the president’s approach to the banking system involves looking at a stress test that contemplates an adverse outcome and thinks about how the financial system will function in an adverse scenario. That’s why we’re very focused on maintaining the pressure.

No one is in any position to declare any kind of victory here. But the fact that no one can declare victory doesn’t mean that we shouldn’t take note of developments as they unfold. And the developments, as I say, are more -- are more mixed now.

But cautions that we’ve got a long way to go; that there are still substantial risks; that there are downside contingencies that we’ve got to prepare for; that there are issues in the global economy; that there are issues in commercial real estate, that’s right.
...
GREGORY: Let me turn to the issue of the banks. You have referenced these stress tests that the administration is administering to banks, and the idea here is to try to find out how much more financial shock the banks would be able to absorb.

The president has made it very clear that he would provide additional money to the banks if it were necessary for them to shore up their financial position. According to the Treasury secretary, you have roughly $100 billion left in the bailout fund. What if the banks need a lot more than that, in terms of capital reserves?

Where would the money come from?

SUMMERS: Well, David, what the president and the Treasury secretary have actually been clear on is that the first choice, the first resort for more capital is going to the private markets, going to the private markets directly to raise equity, going and working with the private markets in a variety of, kind of, so-called asset liability swaps that would have the effect of perhaps diluting some shareholders but also fortifying the level of capital that those banks had.

And so there’s the capacity to turn to the private market. There’s also the -- there’s also the possibility that, over time, some of the banks that are in the strongest position will find themselves in a position where they can repay a portion of those -- a portion of the resources, which would then enable the government to make further -- further contributions, if necessary.

GREGORY: That’s become a controversial point. You have some banks who are saying, “Look, we’re in pretty healthy shape here. We want to give back this bailout money. We don’t want the taxpayers’ money.”

And the administration has appeared to say, “Hey, not so fast.” Wouldn’t that be a good thing?

SUMMERS: Well, the administration’s been, I think, consistent and clear in taking what I would guess almost everybody would agree is the right position. We want -- we want to be out of the financial system. We want people to be paying back the government. But we don’t want people to be paying back the government in ways that will put themselves right back in trouble and leaving themselves with inadequate capital.

And we certainly don’t want people starving automobile loans or starving the mortgage market or starving the small business market in order to pay back the government.

So what Secretary Geithner has made clear is that he’s very open, and regulatory authorities are very open to being paid back, but it has to be done in a way that’s consistent with the stability of the financial institution and has to be consistent with maintaining the -- maintaining the flow of credit.
emphasis added
There is much more ...