00:00We start with the state of U.S. banks as earnings began rolling in this week.
00:05Those earnings give us a snapshot of how the financial sector did last quarter.
00:09But our special contributor Larry Summers takes us through the more sweeping changes we are witnessing.
00:15It suggests that the big banks are building capital and are in good shape and have relatively strong balance sheets.
00:23And it makes the kind of financial crisis that we had in 2008 less likely.
00:30But I don't think it's a fundamentally strong indicator of what's happening to the overall economy.
00:39I feel pretty good about the overall economy and think, if anything, the risks are more on the inflation side.
00:47What do you make of the fact that spreads have remained so tight despite everything?
00:51I mean, there just seems to be a lot of optimism in the credit.
00:54I worry less about bank lending than about credit funds lending and the growth of non-bank private credit,
01:06where there's extremely rapid growth, lots of new players entering into credit intermediation,
01:14lots of demand for spread product, much lighter regulation.
01:22The good news, of course, is that the money that goes into those things isn't the kind of fast trigger money
01:29that tends to sit in banks as uninsured deposits.
01:34And that means that systemic risk is lower.
01:39So, Larry, one of the hallmarks of the Trump administration, the second Trump administration, is deregulation,
01:46and specifically in the banking area, which has sent a signal, I think, to banks, particularly regional banks.
01:52We've seen some consolidation already.
01:55Is that a healthy thing as a practical matter to have some of the regional banks get together?
01:59Look, I think people always make a mistake when they go deregulation good or deregulation bad.
02:06I think you have to look at the particular area of regulatory policy.
02:12And when you see a failure to protect market integrity, as I think we have in some aspects of crypto regulation,
02:21that is, I think, a cause for concern.
02:23When we see huge facilitation of anonymous money, of money that can't be traced and that facilitates money laundering,
02:34that is, I think, a cause for concern.
02:37So I certainly think there are areas where we're probably deregulating and moving in the wrong direction
02:44or where there would be a case for stronger regulation.
02:48In the area of consolidation, it's a step towards efficiency because, in many cases,
02:55there are substantial economies of scale that can be realized as entities get larger.
03:02I think it's probably a step towards stability as well when institutions are more profitable,
03:08but also when they are larger and more diversified and, therefore, more insulated against risks.
03:17But welcoming that doesn't mean that these things shouldn't receive full antitrust scrutiny.
03:25While American banks seem to be in good shape, the same cannot be said of President Milley of Argentina and his peso.
03:33U.S. Treasury Secretary Scott Besant helped orchestrate a $20 billion swap arrangement
03:38to help prop up the South American currency, with reports that more may be on its way,
03:43and intervened directly in currency markets to support the peso.
03:47Larry Summers says it's not the first time the U.S. has gotten involved in Latin American finances.
03:53You actually were there during the Mexican peso crisis back in 1994.
03:59What can you tell us about when that makes sense and when it does not?
04:02I'm somebody who's a strong believer that the United States has to support global financial stability,
04:10that when countries face crises involving a sudden loss of liquidity,
04:18that there needs often to be an active response,
04:22and that the United States should take a leadership role in such responses.
04:28I do think that the approach taken so far is new and unconventional.
04:36First, the United States is going it alone.
04:41Usually and historically, the United States has wanted to share the burden,
04:46share the taking of risk, share the responsibility with other countries.
04:51In general, the Trump administration, take the defense area,
04:54has been the strongest advocate for other countries bearing a share of burdens.
05:02Yet in this case, the United States is going it completely alone, providing all the funds itself,
05:09not seeking to involve the IMF, not seeking to ask other countries.
05:15Maybe that will turn out to have been a good decision because it will have been a profitable investment
05:22or because we will reap some substantial political benefit, but it's a very unusual step.
05:31Second respect in which this is unconventional is the degree of risk that is being taken.
05:40The United States has never before bought a pegged currency under attack of an emerging market country.
05:54We would never, during the period when we were supporting Mexico,
05:59have taken the degree of risk that was involved in buying the Mexican peso.
06:05And certainly not when the Mexican peso was being defended and Mexico's reserves were being drained.
06:16So this is a very speculative approach.
06:21There may be agreements that are in place that we don't know about publicly that make this sounder than it appears.
06:31It may be that this proves to be a shrewd kind of speculation that ultimately taxpayers make money on the investment in the peso.
06:44So I'm withholding judgment at this point, but am nervous about the approach that's being pursued.
06:55Although Summers has concerns about the Trump administration's lifeline to Buenos Aires,
07:00he says he's less worried about the U.S. throwing its weight behind Argentina's incumbent.
07:06President Trump wasn't shy about supporting President Javier Millet during a meeting between the two at the White House this week.
07:13We are going to work very much with the president. We think he's going to win. He should win.
07:19And if he does win, we're going to be very helpful. And if he doesn't win, we're not going to waste our time,
07:24because you have somebody whose philosophy has no chance of making Argentina great again.
07:30The administration, the Trump administration, likes the reforms that President Millet has put into effect.
07:35It's just worried he's going to get voted out, that he's going to lose the midterms in October.
07:39He wants to keep him in office because they're afraid of a Peronist regime coming back in.
07:43Have we seen that before where, in a sense, it's almost like a political intervention to try to help a candidate we like keep office?
07:50I don't remember something that was so clearly linked in that way. But in fairness, I think it would be right to say that the Western alliance was strongly committed to Russia in the early mid 1990s.
08:09And that certainly had something to do with believing that Boris Yeltsin's government was better than a communist alternative.
08:18I think it's fair to say, going back to the Marshall Plan, that some part of the motivation for the Marshall Plan had to do with supporting the good guys at a time when there were Stalinist elements who were there in Western Europe.
08:38So I don't think it would be right to say that politics have never entered into U.S. decisions about support programs.
08:50There is a kind of proximity to an election in this case that is unusual.
08:58And the degree of commitment to a currency peg is something that is very unusual.
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