By Tom Ozimek
Billionaire investor Carl Icahn said that the U.S. economy is at a breaking point, blaming “worse than mediocre” leadership and warning that soaring inflation threatens to topple America’s position on the world stage.
Icahn made the remarks during an interview on CNBC’s “Closing Bell” program on Tuesday.
“The system is breaking down, and we absolutely have a major problem in our economy today,” Icahn told the outlet, while labeling the United States as “one of the worst countries in the world as far as corporate governance.”
The renowned investor then warned about the dangers of persistently high inflation in the United States, which at last count came in at 6 percent in February, in annualized terms.
“Inflation is the worst thing an economy can have, and I think people underrate that,” he said, adding that, historically, “every hegemony has been destroyed by inflation.”
Some contributors to inflation were running higher than the headline pace 6 percent last month, including ones that lower-income households spend a high proportion of their money on, like food and shelter. Food prices rose 9.5 percent year over year and shelter rose by an annualized 8.1 percent.
Besides inflation, Icahn said he sees other “major problems in this economy right now,” including leadership at corporations and on Capitol Hill.
“I’m not going to get into politics, but you do feel that in Washington nobody knows what’s really going on,” he said, before turning to the issue of boardroom weakness.
“Leadership is worse than mediocre” in many U.S. corporations, he said, acknowledging that there are exceptions.
“You go into a company today … it’s really horrible what you find,” Icahn added.
‘Too Much Money Floating Around’
In an earlier interview on Fox News, Icahn addressed the collapse of Silicon Valley Bank (SVB), saying he sees the ultra-easy money policies of the past years as part of the problem.
“I think the banking crisis is something that you might expect in Silicon Valley Bank. There’s so much money floating around in the system,” he said.
“There’s just too much cash. By definition, if you keep printing out money … If we have too much money floating around in the system, you’re going to have inflation by definition,” he said, adding that he believes the Federal Reserve is right to hike rates to cool price pressures.
In its fight to tame inflation, the Fed has raised rates at the fastest pace since the 1980s. One of the knock-on effects has been a drop in the value of longer-dated securities, which banks like SVB hold in their portfolios.
The lightning-fast collapse of SVB last week came after it took a $1.8 billion loss on a forced $21 billion bond liquidation and then announced it was looking to raise $2.25 billion in capital to fill the hole.
Spooked depositors rushed to withdraw their money in a classic bank run, sending SVB shares—and those of other banks—plunging.
The collapse of SVB marked the second-biggest bank failure in U.S. history.
“There’s an old adage that says the Fed tightens until something breaks,” Jurrien Timmer, director of global macro at Fidelity, said in a note. “It looks like we have a sense of what is breaking during this Fed cycle.”
The collapse of SVB and, days later, Signature Bank, sparked fears of systemic instability and financial contagion.
This prompted U.S. financial authorities to adopt a “systemic risk exemption” and expand the Federal Deposit Insurance Corporation’s (FDIC) deposit guarantee to fully cover all depositors and their savings at the two banks.
Normally, the FDIC caps its deposit insurance coverage at $250,000 per depositor per account category, with everything above that limit subject to market discipline and loss-taking if a bank fails.
The expansion of deposit coverage for SBV and Signature customers was met with praise by some and criticism by others.
Some, like billionaire investor Bill Ackman, called for a further expansion of deposit guarantees to the entire U.S. banking sector to restore confidence in the nation’s banking system and prevent a spate of bank runs.
Former FDIC chair Sheila Bair, on the other hand, penned an op-ed in the Financial Times arguing that the move to provide blanket deposit coverage to customers of the two failed banks sets a “dangerous precedent” by raising expectations for “future bailouts.”
Bair is convinced that the depositors of the two failed banks, which had combined assets of around $300 billion and are a minuscule part of America’s $23 trillion banking system, could afford to lose some of the uninsured portion of their deposits.
“The uninsured depositors of SVB are not a needy group. They are a ‘who’s who’ of leading venture capitalists and their portfolio companies. Financially sophisticated, they apparently missed those prominent disclosures on the bank’s websites and teller windows that FDIC insurance is capped at $250,000,” she wrote.
Bair also argued that by rushing to rescue the two midsized banks, U.S. financial authorities are sending the wrong signal by implying that the U.S. banking system is fragile.
“My instinct tells me that most regional and community banks are basically sound. The main thing we have to fear is fear itself cascading into bank runs that will force otherwise healthy banks to collapse,” Bair argued.
“The government needs to be very careful in its communication, lest its own overreaction causes the very deposit runs it wants to avoid,” she added.
When Bair chaired the FDIC during the financial crisis of 2008–09, the agency adopted a temporary blanket deposit guarantee for business accounts used for payroll and other operating expenses.
She said the program was successful in ending runs on community banks, but that Congress made a mistake by banning this kind of help, even though lawmakers preserved the ability of regulators to carry out one-off bailouts by means of systemic risk exceptions.
If regulators truly fear widespread bank runs in the United States, Bair said Congress should approve a program to bring back expanded deposit guarantees for institutional transaction accounts.