February 11, 2025

Maximize Office Insights

Easier Work, Maximum Results

Larry Summers warns bubbling asset prices are hitting levels of froth last seen prior to the financial crisis

Larry Summers warns bubbling asset prices are hitting levels of froth last seen prior to the financial crisis
  • Investors have become complacent about risk, warns Larry Summers, and have succumbed to the kind of exuberance that preceded the 2008 crash or the dotcom collapse. A measure of underlying valuation in equity markets is at the top end of the range, and cryptocurrencies are booming.

Fear has surrendered to greed, with investors far too complacent about the growing imbalances in U.S. asset markets, Larry Summers warned.

In an interview with German business daily Handelsblatt, the former Treasury secretary said bullish sentiment reminded him of the giddy days that preceded the 2008 financial crisis and the dotcom bubble at the turn of the century.

However, this exuberance is misplaced, he says, amid lagging global growth, a Federal Reserve with precious little maneuvering room, and a United States whose finances haven’t been in this poor a shape in at least 160 years.

“The USA is facing its biggest fiscal sustainability problem since the Civil War certainly and quite possibly in its entire history,” Summers told the paper on the sidelines of the World Economic Forum in Davos. “The greatest danger threatening us is fearlessness itself.“

In a world where investors can expect an almost 5% risk-free return from Treasuries, companies could struggle to find sources of capital without paying through the nose. This could depress earnings growth that underpins valuation assumptions.

Moreover major investments that tend to pay dividends over the long term require the kind of planning certainty that lasts beyond election cycles. Summers didn’t specifically reference the issue, but the Trump administration’s decision to pull the U.S. out of the Paris climate accords a second time represents a third straight reversal in government policy in as many administrations.

Summers also appeared skeptical that Trump and his advisors would behave impartially by fostering a level playing field free from the need to declare political loyalty. Joe Biden warned in his final speech as president of the emergence of an oligarchy, a term normally reserved for Vladimir Putin’s Russia.

“There is that much more reason for concern when the business environment depends more on a small number of individuals rather than institutions that act in an unbiased manner,” Summers said in the Handelsblatt interview. “I understand the enthusiasm in the corporate community, but I’m afraid that enthusiasm could be like the one I saw in 2007 in Davos.”

That was shortly before the 2008–09 financial crisis began.

link