WHEN: Today, Tuesday, June 28th
WHERE: CNBC's "Squawk Box"
Following are excerpts from the unofficial transcript of a CNBC interview with former U.S. Treasury Secretary Larry Summers on CNBC's "Squawk Box" (M-F, 6AM-9AM ET) today. Following are links to the video on CNBC.com: http://video.cnbc.com/gallery/?video=3000529773, http://video.cnbc.com/gallery/?video=3000529764, http://video.cnbc.com/gallery/?video=3000529783 and http://video.cnbc.com/gallery/?video=3000529780.
All references must be sourced to CNBC.
SUMMERS ON LOW RATES
Larry Summers: Our economy has been at 2% for the last few years. That's just about potential. The interest rate's been zero. That suggests to me that the normal interest rate that goes with 2% growth isn't very different from zero. So I think that it's good that they took it down to 3%, but my reading of the neutral interest rate is that it's well below the 3% that they're estimating. If you look at what the market is predicting for interest rates out five to ten years from now it's well below what they're predicting. If you look at interest rates around the world it's a much lower number. So I think that there's a growing recognition of what, I must say seemed relatively clear to me, that something fundamental is changing neutral.
Steve Liesman: Let me cut you off Larry because I have to ask you does this do the market, does it do the economy harm that the fed has had this more wrong than it did before and still has it wrong? Do they need to come down and recognize that this long run potential interest rate is not 3%? It's much lower than that. Does that matter?
Summers: I think there needs to be much more awareness of it. Fundamentally what has saved the economy has been disbelief of the fed's predictions as to what it's going to do. If we had a rate structure that corresponded to what the fed's plans were in December -that we have four rate increases this year- if the market had believed that the dollar probably would have gone to a place, the market would have gone to a place, housing would have gone to a place, and investment would have gone to a place that would have in the first and second quarters tipped the economy dangerously close to a recession.
Liesman: But Larry we have guys that sit in this chair, smart people – Stan Druckenmiller, Kevin Warsh who say this is what the problem is with the economy. They say the interest rate needs to be raised and they say that lower rates have caused a preference for companies to buy back stock and increase dividend and not invest and the part of the problem of course is that people who are savers do not get interest on their savings anymore, reduces their spending, bottom line is they see low interest rates as part of the problem.
Summers: Low interest rates are in a sense part of the problem. We don't have enough spending in the economy. Because we don't have enough spending in the economy, we have no choice but to lower interest rates or to simply accept recession and stagnation. That's why my emphasis for the last years has been on stimulating investments in both the public and the private sector. Look we can issue bonds with as long as a horizon as we want at rates probably below 2.5%. At that price it is crazy not to be doing more to support public and private investment and that's where there needs to be more focus on policy. Unless we find other ways of promoting demand whether it's encouraging investment, whether it's encouraging exports, whether it's supporting more robust consumption we're always going to have a choice between low interest rates with the possibly toxic consequences of low interest rates and just running the economy for financial stability at the exclusion of employment stability.
SUMMERS ON THE EU BEING LESS ROBUST
Larry Summers: I think it is the worst thing in terms of European politics. The European Union has been the foundation of stability in Europe. You know, it was 1,000 years of intermittent wars in Europe and now, wars between the European countries seem inconceivable. And that's heavily a reflection of the European Union project and the gradual evolution towards greater cooperation. And that has been a forward process for 60, 70 years now. And that now by a major country has been put into reverse. That is not going to send countries to war, but this is serious business.
Andrew Ross Sorkin: Do you think – are you in the camp that says it is all undone, though? That the experiment that is the EU –
Summers: I don't think it all gets undone. When I think without the British influence, it will be a less sound experiment. I think without the British presence, it will be a less robust economy. And I think with this example, there's got to be encouragement to centrifugal forces everywhere. And that makes the risks that this won't work out more serious than it could have been.
Sorkin: So how do you measure the economic impact?
Summers: I think for Britain, it is likely to be very serious and it's got to be an even money chance that Britain goes into, at least, mild recession. That is what the bottom market is telling you. I think for the UK – for the EU rather – it's got to be a significant loss of confidence. And confidence, you know, we can't measure it very well as economists, but it is a very important variable. And I think everybody is going to say right now, "why should I make a major investment? Why should I locate a major investment in an environment this uncertain?" I think they are ramifications everywhere in the global economy. This has led already, and I think it will probably hold, it may even grow, a flight to quality which pushes the dollar up. It pushes the yen up. And that's going to create challenges for certain parts of our country. That's going to create major problems for people who have been traditionally tied to the U.S. dollar. Like the Chinese, like in Hong Kong, you have already seen in the last couple of days significant movements downward in the Chinese currency against the dollar. And I think this is all against a backdrop. And I think this is the most important sort of risk in the system. We are all accustomed to a world where monetary policy can regulate things to at least some degree. Not completely. But when bad things happen, monetary policy eases, and that returns things. And if you look at the history of the U.S. business cycle, you know, every half dozen years the Fed – a little more than half, 7 years – the Fed cuts rates in the neighborhood of 400 basis points to stabilize things. Well, nowhere – not in Japan, not in Europe, not in the United States, not in the UK – is there anything like 400 basis points of room to respond to an insipient downturn.
SUMMERS ON EU BANKS
Larry Summers: European banks are trading at price to book ratios that suggest much more concern about their futures. They are going to have much less protection in a way and there is going to be more risk of punitive regulation when the EU – when the UK is no longer part of the EU decision making process. This has been a bit of a blow to global confidence. So I don't think one should minimize the risks to the financial system here. Yes, it is nothing like the fall of 2008. But I think if you look in Europe in particular, there are institutions that are weak that should be getting more capital. And I think authorities have been slow to insist on the adequate capitalization of institutions in Europe in much the same way that they were slow in 2007 and 2008 to insist on capital adequacy. So I think it is a time when there is going to be increased scrutiny on at least some European financial institutions.
Becky Quick: Larry, you are not suggesting the liquidity is not there from authorities to – I mean it may be a great price to shareholders –
Summers: No, no. Liquidity is there just as liquidity was there in the Spring of 2008 and in the Summer of 2008. And you know, looking back, one wishes that a variety of institutions had raised capital from the private markets and then we hadn't had to get involved with the whole TARP thing. And I think that is something that demands attention in Europe and I think there is a certain amount of collegiality and desire not to upset the apple card that is inhibiting strong regulatory responses to some situations where capital may not be fully adequate and where leverage levels may be high. I think whenever you see companies trading – banks trading at less than two-thirds of book, that is a situation that should be getting very substantial scrutiny and one should worry about whether the accounting is really right, all the loans – all of the non-performing loans are being fully recognized, and assets are being properly valued. The market understood the bear was going to have a problem before the SEC did. The market understood that Wachovia was going to have a problem. And so, when you get these kinds of market signs, you can wait until it is conclusively established, but if you wait until everything is conclusively established, then you are not going to be able to raise capital from the markets. And so, I think, there needs to be a focus on the apparatus and the health of the banking system on the European continent in particular, and obviously, given some of the dramatic moves in British bank stock prices, that is going to need some regulatory attention as well.
SUMMERS ON TRUMP AND BREXIT
Larry Summers: I predicted and I think it is a reasonable prediction this event which was really quite unexpected to the establishment in Britain was really something that was pre-universally opposed by broad internationally cooperation oriented elites the fact that it happened none the less would make the possibility of a Trump victory more real and that would be unsettling in markets and I think that's happened fortunately in a way candidate Trump has behaved in so bizarre a way it has made these risks less salient than they could have been. Gabbing about opening golf courses in Scotland talking about the benefits to his golf tourism of their decline in the exchange rate is an extraordinary was to campaign for the Presidency of the United States so he's doing a lot to discredit himself.
Steve Liesman: The idea that the elite have this completely wrong that they don't read the politics of the public and these things that are seen and viewed and priced as tail risks can become the conventional.
Summers: Absolutely look the odds to the extent you think the betting markets know anything and that is sort of in doubt after what happened. The betting markets on the US presidential election are in the range of 75/25 and you know that's where they were. That's where they were before the Brexit vote. What that means is that things that are 25% happen sometimes and yes the forces propelling Brexit which are forces of nationalism, nativism and negativism are the same kinds of forces that are operating in the United States. Now I think there are some important differences the United States is a much more diverse country and so the minority groups are a much larger percentage of the vote and I think that distinguishes the United States from Britain in a way that makes Trump's election less likely. I think the United States I think that Trump himself has done a variety of things to make the spector of himself as president look deeply disturbing particularly there's nothing in the British situation that is parallel to the many offensive things that Trump has said vis a vis women frankly I think that the Democrats and Hillary Clinton will run a much more effective campaign.
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