And that populism in the U.S. is a huge risk.

By Stephen Gandel
May 11, 2016

Wall Street isn’t ready for Donald Trump. At least, that’s what Larry Summers, the former Treasury Secretary and top advisor to President Obama, thinks.

On Wednesday, at the SkyBride Alternatives Conference, the annual hedge fund confab that kicked off this morning in Las Vegas, Summers implied that a Trump presidency could be one of the biggest risks facing the economy in the next year. He didn’t name Trump specifically, but when he was asked what the greatest global risks are for the economy, Summers counted the rise of political populism in the U.S. among the biggest.

“Political risk driving huge economic risk is something I always thought you talked about in connection with emerging markets. Now I think it is something you talk about in respect to the United States,” he said. “And the kind of risk of high populism taking over and that leading to huge instability is a risk now in the United States.”

Summers said he didn’t think that political populism driving policy decisions is a huge risk, but he said that he didn’t think it was priced into the market. “In terms of a fat tail outcome, it’s adverse,” he said, using Wall Street lingo for events that can cause the market to plunge.

In general, Summers said there was a one-in-three chance that the U.S. economy could enter a recession in the near future. And he implied that wasn’t priced into markets either. A lot of people still expect the economy to accelerate from here, he said, but given that we are seven years into a economic expansion that’s not likely.

“It’s not when you usually see expansions accelerate,” Summers said.

Here are some others things that Summers talked about at the conference.

On Defending the repeal of Glass Steagall: “The things that saved the financial system—combining J.P. Morgan with Bear Stearns and Bank of America with Merrill Lynch—would not have been possible without the repeal of Glass Steagall. So we would have had a much more dangerous situation in 2008.”

On breaking up the big banks: “If you asked me what country came through the financial crisis the best, the answer would be Canada. And that’s because their banks are big and diverse. If J.P. Morgan Chase had been broken up into six pieces, one of them would have contained the London Whale, and that one would have been the size of Bear Sterns and that one would have been the source of major economic stability.”

On whether the Federal Reserve should raise interest rates: “Yellen should do whatever is right to do, and not be influenced by the election. And despite what the market thinks, the evidence is that the Fed generally ignores elections. The Fed needs to be data dependent and the data that should matter most is inflation. And until you see inflation heading higher, I think you have to worry about tightening. The market is making the judgement that we are not going to have significant tightening, which seems like a reasonable bet, and a reasonable policy to me.”

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