This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app. John one of the things we want to do is get qualified people to talk to her and do that right now.
The story is extraordinary. Jelenac Williams is a former FDIC chair. Yes, Akravth, Swain and Moore, but far more than that, She's enjoyed the failure of deposit insurance. Her father was flatten in Yugoslavia years and years ago over a failure of a bank. She wanted into Berkeley sterling academic career, including service in the law business in Palo Alto, California. There's no one more qualified to talk about this banking mess in the former FDIIC chair, Jo Thank you so much for joining
us this morning. Let me cut to the chase right now. Does this crisis have staying power or are we solving idiosyncratic tech banking problems?
I would say, and thank you, by the way for having me this morning. I would say that we're at the place where this crisis should not have had staying power, and yet here we are about five six weeks in, and I'm hoping that we're at the tail end of that.
The government does have a number.
Of tools they need to use, and I'm happy to chat with you.
About what those tools are.
But the problems are not so much indiosyncratic as much as this point, we have created a crisis of confidence in the banking system and that's where we are.
How does real estate fold into this? Many will say, Okay, it's not going to be the drama we've seen over the last number of weeks. But commercial real estate, what do you observe there?
A lot of the banks have, actually, especially regional banks, have high concentrations and exposure to commercial real estate. In good times, they're generally able to navigate the concentrations in.
Their portfolio very well.
But again, we are the point where there's so much volatility in the marketplace with the market expectations of the banks, and frankly, the empty offices in a number of commercial markets in the United States are not going to.
Help that, Jelena. Should these banks be in that business? I mean, this is sort of one of the questions at a time or seeing the number of smaller and regional banks shrink dramatically over the past few years, should it be their business to provide a majority of the commercial industrial loans, the majority of the commercial real estate lending?
You know, I think this goes back to the intrinsic question of the tiered banking says system in the United States. You have different levels of banks and different sizes, so one of them, you know, you have community banks. There are generally banks below ten billion dollars in asset, mid size banks above that, and I would say below one hundred billion. Then you get into the regional land, and that regional land is about one hundred billion to as
high as like five hundred billion. Above that, you get into the very large banks. And the truth of the matter is that if those banks, the regional banks and mid sized banks and community banks are not financing local real estate commercial real estate transactions, they won't get financed. The role of these banks in the US economy is so high that people actually frankly underestimate what these banks mean for our financial ecosystem. So should they be in it?
Should they not be in it? It's almost irrelevant that they are in it. They need to manage the risk in their portfolios and with the rising interest rate environment, it's going to be incredibly difficult for them. And frankly, the pandemic didn't help with people not wanting to come back to offices.
And you have tens of thousands of.
Square fit of commercial real estate, even in some of the most prime locations, sitting empty. I was just in San Francisco a couple of weeks ago, and it's a ghost down.
Well, as a former regulator yourself, should there also be the same kind of regulatory scrutiny and requirements at some of these regional banks as there are at larger banks.
No, actually, absolutely not.
And here's why our regulatory system needs to account for different tiers and different I would say strata in our banking sector. These banks present different types of risks than the GESIS, the global systemically important banks. They present different type of risk than mid sized banks, and the job of the regulators is basically to accommodate that risk. The
job of the bank is to manage that risk. The bottom line is when the bank fails to manage that risk, you get into in a situation that we have been in the past few weeks. But it's not you know, as much a blame as we can put on the banks and the bank risk management in some of the failed bank situations, I think there is there is a portion of blame that goes on the US government.
I just looked at the bank assessment rates that the FDI CE and my eyes glazed over. Ms McWilliams. I mean it's complex, to say the least. How much does JP Morgan or Bank of America pay each year for FDIC insurance? Do you have a number?
Well, there is a number. You can go to the FDIC.
I don't want to single out a bank. It's a lot of money. It is a lot of money. There are two different sets of formulas. There is a complex bank formula. There is a less complex or a small bank formula.
I don't mean interrupt, but I am Senator Warren would say, raise the raid on James Diamond and Brian moynan. Is there wiggle room here for the big guys to pay more? FDI Insurance to take the load off the back of Andrew Jackson's four thousand banks.
So it is very possible that the FDIC may just come out in that direction with the special assessment that they need to impose to make the deposit Insurance Fund whole. As you know, some of the banks that have failed and have been subsequently sold have created a deficit for the Deposit Insurance Fund and as a result of that, there is going to be a special assessment, and I believe that's where the.
FDIC is heading.
Elena, Are you concerned about the Federal Reserve in its role as regulator? Do you put the blame there? It seems like everyone's just basically quietly blaming Randy Quarrels and then leaving it at that, But do you think that this is something endemic in the oversight and the enforcement role that they've fed often plays.
Quite frankly, to blame prior vice chairman for supervision for something that has happened about a year and a half after he left office is a little bit preposterous. But I do think as a former Federal Reserve staff or I was there during two thousand and seven, eight nine ten crisis, I will tell you this. They're good people working at the Fed. They have a lot of mandates they have to satisfy. But we are at a place that is about financial stability and the whole debate about
monetary policy and financial stability. We're at the place if the banks are not stabilized, are not going to have financial stability. And so to the extent the Federal Reserve takes its financial stability mandate seriously, I think it's long overdue that they take a look at the banking situation in the United States and what the interest rate rises have done to the banking sector as they contemplate where to keep the interest rates.
Yelena, thank you for wank and on all of this. Thank you. Jelena McWilliams stack.
DA Lipsyng joins this chief Global Economist at PGUM Fixed Income with serious experience recently in the White House, in the in the office. Is it tomorrow They're going to have a meeting a conon fab on the debt. It's all politics, isn't it?
More in more than Lisa, Look, talking is always better than not talking. But I'd be surprised if we get a decisive break through tomorrow. The incentives are just not yet in place. McCarthy is his speakership. If he folds early to the president with a clean increase in the debt limit, the President can't give a nod to anything near the scale of spending cuts proposed by McCarthy because they would undercut much of his domestic agenda and lose
his political base. So I'm afraid market stress is still what's needed to create cover for face saving compromise. And that's why perversely market complacency asty.
You and Jeane Spirling have been very good at this of trying to link this policy dynamic into Wall Street. As Lisa mentioned earlier, Wall Street seems soundly removed from this discussion, this debate. Are they correct on that, to be removed to not worry about this debt crisis?
You know, look, it's muscle memory, and that muscle memory is dangerous because the context has changed pretty dramatically from the last time we had a serious flirtation with default back in twenty eleven. For one, Congress is as polarized as it's been in our country's history. Second, you know we are we are trying to roll over a debt stock that's twice as large as it was in twenty eleven three four, and holdings of treasuries are up to
seven trillion dollars. That's almost three trillion higher than what we had in twenty eleven. Or back in twenty eleven, Europe was in an existential debt crisis. China have yet to lure serious influence were abroad. Digital assets had yet to go mainstream. There were no alternatives to dollars. That's changed.
And lastly, and I think most importantly, we're currently the US spearheading the most severe economic sanctions campaign against the G twenty country and financial history that creates incentives, geopolitical incentives for countries to hedge. The debt ceiling just needlessly adds impetus to those incentives at a time of geopolitical peril.
Why do you think, Dalli, from your vantage point of having worked at the White House, of having worked at the Treasury, of having worked at the Fed, all of these different agencies, why do you think things have gotten so dysfunctional in Washington, d C.
Yeah, I mean, that's ceiling really is just symptomatic of that polarization, Lisa, I mean, I think it's derivative about the atomization of the media, extreme levels of inequality and technology that allows political movements to gain scale at speeds that we haven't seen before. And look, now we're on the cost of doing something that great powers just don't do. They don't default, they don't talk about default, they don't think about default. And your measure of greatness is when
no country questions whether you would ever do so. Some people brought us to this point.
Some people would say, de leip that there are already our economic consequences to even having this discussion in such real time, And given the fact that it does have a different kind of more polarized nature to it, what are the longer term impacts, even if there is a solution that is found the last minute, when the market finally wakes up and applies the real pressure that Washington's waiting for.
Lisa dollar primacy is a national treasure. It allows us to fund our government at twenty to fifty basis points cheaper than otherwise would that as up to real money one hundred and fifty billion dollars for every fifty basis points on treasure yields. It allows us to absorb a shock like the twenty eleven downgrade of our credit rating, and it allows us to deliver a shock. All of that is being put at risk in terms of the long term scarring effects of this type of debate. Just remember,
dollar primacy is nothing more than a network. Okay, it's rooted in trust and inertia and an assumed lack of alternatives. But every network, whether it's in biology or ecology or in finance, they have tipping points. They're usually psychological tipping points that you can't see in advance. And we're now pushing ourselves towards what I would consider to be a very dangerous place the closer we get to the X state. So this is very serious.
A lot is at stake.
Well, this is actually a really important point that a lot of people argue against, saying that the loss of the dollars supremacy as the global currency has been overstated. The death of the dollar has been perhaps overwrought. However, other people like yourself saying, actually it's becoming much more real. What are you looking for in the data to show that that is actually that what is transpiring, that people are moving away from the dollar is the main dominant currency of exchange.
You're not going to see it on paper. I mean the measure of privacy is really you use the dollar to buyer sell stuff? Do you use it to borrow money? And do you use it to price transactions? And on paper, there's nothing to see here. This is a tail risk. But we're gambling with an exorbitant privilege that has incalculable benefits, and so it's the kind of tail risk that you should never take. That's the point.
I look, dullypitt this and it's a history which you studied at Carolina and also up at MIT, the ageless history of our debt caution. I'm going to call it our almost debt religiosity. What do the people where they say, we got to get rid of the debt. It's just like Apple's corporate debt. Kyle Browner and others wrote a book forty years ago saying, no, it's not. How do you respond to people that viscerally feel this government debt is bad?
Yeah, this is a legitimate question, Tom, I don't think we're in a crisis. However, so long as our nominal GDP growth is higher than the average interest we pay, the math of debt sustainability improves over time, and right now, that's the case, our nominal GDP growth year every year is about seven percent. It's actually been in the double digits with much of the past two years. The way that average interest rate in our public debt is two
point six percent. Now for that to be sustained, of course, the market has to believe the money we're borrowing will be put to productive use. That's the key question, and I think look that argues for the kind of investments that the public sector is making, where the private sector is underinvested, R and D infrastructure, technology programs that grow
a workforce make them more productive. That's really the measure of whether the debt that we're borrowing is going to raise our nominal GDP growth to levels that can sustain arising interest rate costs.
And with that beautiful explanation good enough for Olivia Blanchard to Joseph Stieglitz as they've studied this as well. Wrapped around our start and the rest, the trust mechanism is that government will put it into good projects. Can't that be discussed tomorrow among a fractured polity in Washington?
It can, but not with a gun to our head. The consequence of not reaching agreement can't be we're going to burn the house down. We absolutely should have a discussion about spending in revenue levels. How are we going to use our resources to solve structural problems that the private sector will solve by itself, Extreme inequality, social disparity, vulnerabilities, are supply chains, the climate crisis, All of that should
be on the table. The point is, how do we have that discussion in a way that doesn't make us a global spectacle. That's the question.
This has been wonderful. Dully's saying my most favorite discussion so far in this debt idiocy. He's a pGEM fixed income.
Well, it's around a table. David Libovitz, the Global Market Strategistic JP, Morgan Asset Management, David Good, Mornings here morning. How long before we're talking about a June hike again?
So it's interesting and the point that I think you all were discussing prior to the break, I think is really what investors need to focus on, which is everybody's expecting that the FED is done. Everybody's expecting that the FED is going to start cutting rates at some point in the back half of this year. If you think about where the risk lies relative to that view, it very much lies to the upside, right, So the risk here is that people find themselves flat footed. I would
agree with you on the inflation point. The rate of inflation is entirely too high, not to mention Pal's favorite indicator continues to trend higher, right, which nobody's really talking about. And so you know, is the FED gonna do four, five, six more twenty five basis point hikes? Probably not. But if you're thinking about a portfolio and you're thinking about what could give the market jitters going forward, I think it very much lies in that upside risk about around
the Fed doing more than the market expects. That could even be staying on hold given the way futures a price today. But again, very much view of the risk as being to the upside.
Equity data ship, what does it come from? If that's your backdrop?
So I think, you know, the interesting thing that we've spent a lot of time talking to clients about is, you know, back in March when when we started to see stress in the banking system, why aren't equities going down? And the answer was the ten year fil fifty basis points and that boosted all of the tech names, and that allowed the s and P. Five hundred to keep
its head above water. I don't think you're going to see the market, the market broadly do particularly well in that environment because the big heavyweights in the market are just too sensitive to the overall movement of rates, and so I think what you end up seeing is kind of a nowhere market right where the average stock arguably starts doing a little bit better, maybe some utilities, healthcare staples, but you know, tech's not going to lead us out of this hole if the risk to rates is to
the upside.
I want you to talk about this because you're going into institutional and high network people and they're scared. You know what. The bottom line here is the rest of the market is witnessed by the SPX has come out of a brutal bear market in October and it's made back a huge part of that loss. I think that's underplayed by people addicted to covering Apple every fifteen minutes breathless.
Do you look at this as the bottom of a market in October and we're climbing out of it into a positive return for everything else besides Apple.
So I think at the end of the day, the problem with saying that October was the low. It reminds me of people telling me that June was the low right in the middle of last year, and we had priced it in recession because the median decline excuse me, as twenty five percent peaked to troth and we did that right, So we must have priced it in. But let's talk about the growth data. Let's talk about the jobs report. I mean, this is not an economy that is anywhere close to being in recession in our view
when you look across the board. I don't think we necessarily set a new low, but we could arguably retest those existing lows at some time before the end of the year.
So it's good news good news again.
I think good news right now. It's an interesting question because the market has shifted its focus away from inflation and back to growth, and on the one hand, that's allowed the negative correlation between stocks and bonds to take hold again, and so market performance this year has very much been better. But I worry that if the inflation data doesn't cool off, then good news becomes bad news because it means that the FED is going to have to do more. So we're in this kind of weird,
nebulous state today. Where it just doesn't seem to us like investors broadly are accurately pricing in the risks around monetary policy that we see on the horizon.
If there is another bank failure or another bank jitter that emerges, does the data matter about inflation or do people basically discount the FED no matter what.
So I think that that's the problem, and that's what's happening today, is that people are saying, look what's going on in the banking space. You know, it looks and feels and smells like something we may have seen before. The Fed's going to have to go on hold. But you know, again, I would make the point that banks fail every single year, right, it's just not usually the sixteenth largest bank by assets, And that's what really caught
people's attention. And so, you know, I think we could see continued stress in the banking system broadly, but very much at the lower end, as we work through some of these COVID excesses and we work through the duration mismatch that we know exists today. I'm not sure that we're out of the woods, but I do think that the big booms have probably been heard.
I don't want to get in trouble with mister Diamond. He hangs on your earvy word. But the bottom line is, are we going to see a banking roll up in this country? Keep JP Morgan out of it. Are we going to see a banking roll up in this country?
Well? I think what's interesting that really ties back to the structure of the US banking system right, which is much more fragmented than what you see in other parts of the world, and so arguably that caters more to M and A activity than would be the case in some place like Europe. I think it would be premature to say that we've seen the end of consolidation in banking.
He read. That's like when Powell's and his press conference reading off the piece of paper David did that absolutely nailed them.
Please you mentioned a bank failures and how much more regular they are related to how much they get talked about. The FDIC has got a nice little table. You can access it easily on Google. I just did twenty seventeen eight banks in America failed. I don't remember talking about in twenty seventeen, twenty twenty four went under, twenty nineteen
four went under. There's a reason, and you've pointed out they're that much bigger this time around, and there seems to be a feeling that perhaps that can bleed into and towards a credit crunch. More broadly, do you have those fears that we do get that credit crunch ultimately? And that's why you shouldn't be pricing in high up higher rates off the back of this robust data, because ultimately the banks are going to take care of business.
So I think that you do get a further tightening and credit conditions. But I think the mistake that people are making is they hear the word bank and they think two thousand and eight, and structurally, this is a very different issue than what we were dealing with fifteen years ago. And so could the market, right, we're back to the market doing the Fed's job for them. Could the market do some additional tightening and maybe that means the FED doesn't need to continue hiking rates. Absolutely, I
wouldn't be surprised to see that occur. You're actually already seeing right in some of the more cyclical parts of the economy, things like manufacturing cracks begin to form. But is the banking situation in general going to you know, get a FED, get the FED to do a complete about face. I think that that's a bit of a risk. I think, if anything, it speeds up any potential rate cuts later on this year. But I still think summertime for you know, easy monetary policy may be a little bit premature.
David appreciate it. Thank you, buddy, David Levitz, the of jp MULKAN Asset Management.
It's a really important time to talk to so Broader a job ahead of US rate strategy at sock Gen over the silence over the weekend off of a shocking jobs report and maybe a reset of what interest rates will do as the thermometer of the system. Sobrada, did you adjust? If I say to you, where's the ten year yield twelve months out? Is this an adjustable number or is it one big sock Gen guess No.
I think we've kept our forecast relatively stable. You know, we've seen sort of this up and down motion in the in the data week after week. You know, on the one side you have the digional banking crisis. On the other side you have strong fundamentals. But if you look at the bond market broadly speaking, from early March to now, really nothing has moved much. The two year
has stayed around four percent. Broadly speaking, the tenure has stayed between three forty and three sixty, and the two Stents curve has been anywhere around negative fifty five negative fifty basis points. So it's been a lot of movement, but within a very very narrow rage because the market really lacks clear conviction on where we go from here. But that said, I think that risks continue to be skewed to the downside for years. If we do get
strong data, the market's going to dismiss it. If we do get weak data, I think you want to see a little bit more of an outsized move lower in yields.
You went right where I want to go, Sobrada, If I look at the Bloomberg Total Return Aggregate all in index, it's a price index, folks, and it's basically a straight line. I think Bill Gross, Muhammad al Arian's success at PIMCO for fifteen years and then, as you know, Sobroada down seventeen percent and the mother of all all in bond bear markets. And yes there's been a bounce, but we don't talk about it like we talk about stock bounces.
Are we bouncing off a bond bear market? To something constructive.
Yeah, it certainly seems that way. Yels do seem like they peaked around four percent and tens in the second in the so she said fourth quarter of last year, and the trajectory seems to be towards lower yels. I think that this time around, the key difference is that we might you know, FED funds rate nobody's expecting Fed FUNDRAI to get back to the zero lower bound, and the decline in years from her on is going to
be much more modest and gradual. You know, even in our own forecast we have teny years only getting to three and a quarter percent by the end of the year. Why, because of the fact that you have blown will bond yields continue to rise and the easyb is poised to hike more. The Bank of Japan could widen its YCC band at the June meeting. So in this sort of context, and inflation is also high and sticky, it's going to be very hard for a meaningful decline in yields from
here on as well. So it's going to be one of those situations where yields remain range bound, we get perhaps very weak data, we price down to a lower range, But we're not going to go back to the zero lower bound and fed funds and tenny yield decline is going to be a lot more gradual than that context.
Supatra, What do people do when there's kind of this tight trading range and you don't really expect it to break out? I mean they basically just clock in for an hour, making sure nothing changes, and then go take a break. I'm serious, Like, I'm just wondering how sort of sleepy things are out there as people realize that there is no conviction and there's very little visibility to get an edge at one side or another.
Well, you can trade the volatility within the range because you've seen pretty sharp moves in gamma, so you probably want to be long gamma in the balls to the market and maybe pick up some returns there. But you're absolutely right, there are no larger directional moves to uh to to to play in this market given the fact that years have been ranged bound and people are positioning for the for the next leg lower in yields because that seems to be the broader directional they given tightening
credit conditions. I mean, we know that policy works with long and variable lags and the employment picture is going to remain relatively strong until the bottom falls off. So you're going to you're kind of positioning, if you will, for that sort of scenario where you see a meaningful store on in the second half, then you could see that next leg lower in yields. But again, you know, as you were speaking earlier in your program, I think that the market is underpricing the risk of the FED
remaining on hold for the remainder of the year. We're pressing in cuts for the second half of the year, if you know, if we can get as a regional banking crisis, I don't see any reason for the FED to jump into cut cutting rates in the second half.
What would it take to not be past the regional banking crisis? I mean, at a certain point people are pricing in that it will persist. When do we signal the all clear?
You know, that's a very very difficult, you know, question to answer, because you're looking at an economy of haves and have nots. The larger banks are doing, you know, quite well. The smaller banks and the small business business areas, if you will, are coming under a lot of pressure
because of the dependencies to regional banks. So this sort of bifurcation is going to really muddy the picture, and in some respects even that the Fed continues to say say, say that the financial stability concerns they have tools to deal with that, they have tools to deal with inflation. Uh. These two uh, you know, uh, these two opposing factors are going to make it very very difficult for the
Fed to really just policy in a meaningful way. They can't cut rates for financial stability and they can't high rates for inflation. So that's where policy gets very tricky. They're probably going to be on hold for the remainder of the year.
So badger. Never mind the Fed, We've got to talk about the ECB. Eric Nilsen Uni Credit Fantastic note over the weekend said this, My fear is that as the lacked defects of a monetary policy tightening now begin to hit the economies, the European underperformance will be longer deeper
than needed because of excessive monetary tightening. Savanta industrial production in Germany this morning, downside, surprise factory orders last week, ugly earnings from mess don't really scream that trade is good right now, Sabantra, do you think is a real risk here that perhaps the ECB, relative to the FED, is the central bank most at risk of making a policy mistake at the moment.
Well, that is.
Always a problem when you're following the FED and not leading the FED in an inflationary environment or a hiking and randal. Broadly speaking, this almost always happens in every cycle where the easy be you know, overshoots or delivers more hikes because they're singularly focused on inflation but not broader economic fundamentals, and then they have to play catch
up on the downside to the to the US. I mean broadly speaking, you know, if anything, coming into this year, I think a lot of people who are expecting the European economy to go into a recession. The European economies and UK even has done a lot better than people had broadly expected. That said, a slow down is to be expected given how aggressively the ECB has high grades.
So you know, the the trajectory I think ultimately will be that the FED will have to pivot and the ECB will have to pivot shortly thereafter.
So bat wonderful to get a perspective, as always, Sabato Chapa, the of selk Gen. I'm the lightest on the FED and the ECP.
This is a joy and we had a huge response from Professor two has joined us a few weeks ago. He is a Columbia University history professor, but far more than that, was the Barton Biggs professor or at Yale University and had to replace the giant Paul Kennedy very quickly. Adam, what was it like trying to replace Paul Kennedy at Yale? I can't imagine.
It was definitely a lesson in humility to absolutely honest. I mean Paul is still going strong, it should be said, because when I left, he came back and he's absolutely on all cylinders. But yeah, a legend in his own lifetime.
And I'm Your essay in March is my early choice for Essay of the Year in the Financial Times. You beautifully walk through the trillion dollar rebalancing as we move from pandemic to poly crisis. What is this poly crisis for living? And when does the joy end? When do we rebalance to some form of stability.
I think the absolutely first lesson, Tom is that we probably don't. I think we actually have to abandon that assumption that the best way to think about the world is as a self equilibrating system that will move back to normality. If you just look at the narrow space of finance, does that seem like a reasonable description of the world that we've been in since the two thousand and eight crisis, or if you're talking about Japan since the late nineteen nineties. It doesn't seem to me to
be that kind of reality. And that's a little bit. I think what we're seeing in the banking this mini crisis that's unfolding in the banking system, where ultimately the big driver of that is the interest rate shock rights and the interest rate shock comes somewhere when it comes from this unprecedented surge of inflation, which is quite unlike any inflation we've seen before, and follows immediately out of the COVID shock, which ditto is also quite unlike anything
we've seen before. So I think we're in this very broken play a world of a series of not just serious but quite unique and rather unprecedented disruptions.
Well, and Adam, you say that one of the responses to it has been basically bailout and the sort of moral hazard of not allowing failure, which you've seen in some of the banking institutions in a prior life. We're being considered too big to fail or systemic or any of these names. So what does that do in terms of the zombies. I know that Tom's been talking a
lot about the zombie roll ups. Do you think that we end up with a host of zombies or zombie assets that kind of are allowed to persist in a sort of inefficient manner for a longer period of time.
I think we clearly need new forms of discipline, We need new forms of workout. And if you look in the legal space, if you actually look in the mechanics of bankruptcy restructuring in the United States and indeed across the world, lawyers and corporate financial officers are very actively engaged in that process of trying to figure out new forms of discipline which aren't simply the old style Darwinian
process of free fall bankruptcy, which is increasingly the exception. Right, there are forms of discipline which don't have to consist in systemically dangerous bank failure, which is the sort of type that we have been at risk of. But certainly, Lisi, you're right, we need to be thinking very hard about how we adjust and how we find new forms of yes discipline selection, if you like, in Darwinian terms, to to avoid a process of ever greater zombification.
This morning this weekend, when I was reading about the regional banks and sort of where we are and the amount of lending that they account for and the amount of a real estate commercial real estate in particular that they lend to, I wondered, is this model being challenged. Is the private sector, private equity, private debts, some of these financing companies taking over a greater share of the business that regional banks used to do and really render them less necessary.
I think it's actually, I would say, rather the reverse, a very healthy reminder just of the actual structure of American society and American business, which, as Matt Williams was saying, is firmly and solidly routed not in the very large businesses, but in a deep undergrowth of small and medium sized enterprise. That's where a huge part of the job creation goes on. And the bank ecosystem that the United States have is
internationally unusual. America has a lot of banks, But what I do think we need to be taken care of is exactly as you say, the huge shifts which are going on and in terms of risk going forward, in a way, I'm more worried about that new private equity zone of very untransparent finance, trillions of dollars worth of it in the SA leverage loan market, then I am about the FDIC regulated small than medium sized banks, which, on the whole, when they're not terribly managed like Silicon
Valley Bank was or First Republic, are a crucial part of the American economy.
Adam, you straut of both sides of this with your academics. The book Folks Is shut Down, How COVID shook the world's economy, Adam TuS cancer. Enough about this effort from I'm going to call it eighteen months ago, and Adam, I want you to address the polarities in our politics with the too small to succeed. I'm absolutely fascinated by the focus of an America that is succeeding like Apple with an apptless five trunch bond offering this morning. That's
all you know, Bloomberg surveillance Babbel. There's a huge body of America that feels they're too small to succeed. Where are they in a number of years.
This, I think has got to be the big worry. I think we're seeing the bifurcation or maybe even a three way separation of the US economy right now. There are big slices of it which are continuing to thrive. Think of the innovative energy space, the Chips Act, the kind of money that's pouring into a genuine revival in manufacturing investment. But those are big players. And what I think we have to worry about is the credit crunch,
which looks as though it's beginning to unfold. If you look at bankruptcies amongst smaller businesses, those numbers are beginning to spike that that well as it will make that divide, dig that ditch ever ever deeper. And that's ultimately, I think, what is then reflected as it should be in democratic politics, which ultimately in distorted ways for sure, but nevertheless does
reflect the broad tidal shifts in American society. And at this moment we are think beginning to see the point at which the extraordinary labor market story, which is after all, the huge success of the recovery from COVID and America's never seen unemployment numbers like this could be tipping into something rather different, which would be a sort of two speed recession or two types of landing. You know, we've talked a lot about hard landings and soft landings and
low landings. What if one bit of the plane lands quite hard on the other bit, as it were, sows away.
Well, just quickly.
Then you mentioned that you are concerned that there's an increasing role of private capital away from some of these smaller banks that is playing a part in what you see as sort of this bifurcation that's developing.
Can you explain can you elaborate on that?
Well?
That I think would be a third element. This is where the story gets really complicated, because I think the credit squeeze is going to run through the stressed balance sheets of smaller banks. The bit which I think is riskiest in a sense, not risky the way that a you know, city group getting to into trouble in two thousand and eight or Aleman in two thousand and eight is risk be it. Nevertheless, high risk is precisely the space in between the high yield segment. These are big
players in that segment. We're not talking about small businesses here, but They are very untransparently linked at this point, and it's not by accident that in bankruptcy in the United States today, the private equity owned firms are absolutely dominating the corporate if you like, restructuring and crisis market. That's where this sort of capital goes to play. The returns are outsized if you can get in, and the privileged elite that can play in this market earns those returns.
The question we're going to face now is what happens when the risks come home to roost and where the safety nets are and whether they're even appropriate to have safety nets for this kind of actor.
And the new financialization as we move into the decade. Adam twos thank you so much with Columbia University. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal.
Thanks for listening. I'm Tom Keen, and this is Bloomberg