A Federal Reserve headed by Lawrence Summers may give financial markets even stronger support in times of stress than it did under Ben S. Bernanke.
That’s according to David Zervos, managing director at Jefferies LLC in New York, who served as a visiting adviser to the Fed in 2009. In a Sept. 3 report to clients he outlined what he called the “Summers put,” a reference to investors’ belief in the “Greenspan put,” the idea that the Fed under Alan Greenspan always acted to support financial markets.
“Larry is no fool, and for someone who loves the art of the bailout, this is by far the best seat in the house,” said Zervos. “The chair of the Federal Reserve offers unprecedented monetary and fiscal policy-making opportunities – especially in a time of crisis.” A put option gives investors the right to sell their asset at a set price.
President Barack Obama needs to nominate a successor to Bernanke, whose second term ends in January. He has identified Harvard University professor and former Treasury Secretary Summers and Fed Vice Chairman Janet Yellen as candidates.
As speculation swirls around Obama picking Summers, Zervos is the latest analyst to debate what that might mean for investors. Economists at BNP Paribas SA said in an Aug. 29 report that a Summers-led Fed would mean 10-year Treasury yields would be 50 basis points higher than if Yellen were in charge and economic growth as much as 0.75 percent weaker over the next two years. Summers questioned the effectiveness of quantitative easing in an April conference hosted by Drobny Global Advisors.
Zervos is less sure that Summers would be more “hawkish” than Bernanke. He noted that as director of Obama’s National Economic Council, Summers played a role in bailing out banks and the automobile industry during the recent financial crisis. As Treasury undersecretary in the 1990s, Summers also helped craft a rescue plan to ease Mexico’s financial crisis.
Summers’ academic work also “always found a crucial role for government intervention,” said Zervos.
By contrast, Bernanke “rarely stepped in pre-emptively with policy bailouts or backstops,” so is perhaps less supportive of markets than Summers, he said. Summers could also profit from Bernanke’s approach to policy making, in which a “creative” reading of its statute allowed the Fed to pursue more aggressive efforts in establishing currency swaps, the Term Asset-Backed Securities Loan Facility and other initiatives.
Summers, though, may be less likely than Bernanke to use quantitative easing-style policies to fight deflation, Zervos said. Instead, a Summers-led Fed may prefer to start a program in which the Fed helps support private sector lending, he said.
“In that sense, I actually think a Summers put will be more potent and have fewer nasty side effects than a Bernanke put,” Zervos said. “I’m a buyer of the Summers put.”
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