Sheila Bair Talks to OZY About Fixing Markets

Sheila Bair Talks to OZY About Fixing Markets

Why you should care

In the debate over how to make financial markets safe and fair, Sheila Bair continues to offer a critical voice as a Republican against big money.

Sheila Bair fought her share of Washington battles as head of the Federal Deposit Insurance Corp. during the 2008 financial meltdown. She closed 140 insolvent banks in 2009 alone, and another 157 in 2010.

She pushed back hard against White House policies championed by then-Treasury Secretary Tim Geithner and White House adviser Larry Summers. In many ways, those battles continue amidst a spate of books this year in which each author defends their opposing position.

You will never have a housing recovery if you don’t fix the mortgages.

 

Today, Bair chairs the Systemic Risk Council at the nonprofit Pew Charitable Trusts. Think of it as the How-to-Avoid-Too-Big-To-Fail Council. She’s also a columnist for Fortune Magazine.

The lawyer, Kansas native, mother of two, amateur poet and avid free-market Republican continues to worry about Wall Street’s influence and the dangers of a new crisis. “They want to get the party going again,” Bair says.

OZY sat down recently with Bair to get her take on the financial landscape:

OZY:

What role should the government play in housing?

SB:

I think you still need to fix the mortgages. You will never have a housing recovery if you don’t fix the mortgages. We’re bumbling through everything. There’s still 10 million underwater mortgages [where the mortgage is bigger than the house value] out there. Plus the government has taken on all this new risk, particularly from the Federal Housing Administration, the FHA. I’m very worried about some of the loans they back. Between the FHA [and other government entities], you have the government on the hook for about 90 percent of the mortgage market now. I don’t know if that’s healthy either.

OZY:

What unfolding issue worries you?

SB:

Student loans drive me crazy. What’s going on with the federal student loan program for all these for-profit schools that rake in most of the money? They have conflicts, no doubt, when it comes to student aid. Well, let’s say maybe a few of them do it right, but I think overall, taxpayers are getting bad value and the kids are getting bad value, and they’re racking up this debt, and they are not getting jobs with these degrees.

OZY:

If people default on these loans, taxpayers are on the hook. Isn’t that a bailout for for-profit schools?

SB:

Exactly. These kids are trying to make something of themselves, and these guys, they defend themselves by saying, “Well, we’re helping the low-income people who need the job.” They’re not always helping them. They’re frequently just ripping them off.

OZY:

The Dodd-Frank financial market reforms are aimed at preventing the next financial crisis. But they take away authority from the Federal Reserve and the FDIC for some of the emergency maneuvers both did during the crisis. Is that a mistake?

Obama with Barney Frank and Christopher Dodd after signing the financial reform bill.

U.S. President Barack Obama (2nd L) points to Senate Banking Committee Chairman Christopher Dodd (D-CT) (C) and House Financial Services Committee Chairman Barney Frank (D-MA) after signing the the financial reform bill into law.

Source Corbis

SB:

No. I think Dodd-Frank still gives the Fed flexibility to [offer assistance]. It puts more restrictions on the FDIC, which doesn’t make sense. But it did ban this one-off stuff, where Citibank gets a special [bailout] deal, and Lehman goes into bankruptcy. Now, federal authorities would have to make a determination that there is a broad crisis afoot where generalized support needs to be provided. No more one-off bailouts. One-off bailouts are absolutely prohibited by Dodd-Frank, and they should be, because that takes us down the path of crony capitalism: people in government helping people who they know and not so much the people they don’t know. We need consistent rules that apply evenhandedly to everyone.

OZY:

What do you think about what’s happening in the Republican Party?

SB:

I haven’t given up on them yet. The thing that troubles me about some in my party now — a pox on all our houses — is there’s a difference between being pro-market and pro-industry, right? If you’re pro-industry, you’re going to be happy writing big bailout checks. That’s going to help the industry, but that’s not pro-market. That’s market distorting. It troubles me that I see, too often, members of my party taking pro-industry positions that are not necessarily pro-market positions. But we see that on the Democratic side, too. Wall Street has too much influence with both sides. There are individual members in the House and Senate who are independent and stand up, but more often than not, you have people who are either captive or really just afraid of the industry.

OZY:

Some argue that because the bailouts ended up making money for taxpayers, reforms aren’t needed.

SB:

I want to throttle people when I hear that. Rationalizing the bailouts based on cash flow — it drives me crazy. What about the millions of people who lost their jobs, lost their houses? As I said in my review of Tim Geithner’s book — that is why I fear the overall message in his book: that bailouts saved the system. It gives bailouts a positive connotation and makes them seem inevitable, that we’ll always have them. I think those attitudes reflect a paradigm that is inherently destabilizing, because if Wall Street thinks taxpayers or the Fed, or both, will always come to the rescue, they will just go out and keep doing this.

What about the millions of people who lost their jobs, lost their houses?

 

OZY:

A new book, House of Debt, by economists at Princeton and the University of Chicago, suggests you were right during the crisis to push for home loan restructurings, including reducing loan balances. Why do you think Larry Summers and other Obama advisors didn’t agree?

SB:

I just don’t think they cared about foreclosure prevention. They thought it was messy and hard. … For some reason they thought it was okay to shovel a lot of money at the banks not knowing if it was going to work. We couldn’t shovel money at homeowners not knowing if it was going to work; that was not okay. That was going to be “moral hazard.” It was maddening.

OZY:

Any advice for new Federal Reserve Board chairman Janet Yellen?

SB:

She is doing a wonderful job. My only advice would be: Pay as much attention to financial regulation and system stability as you do to monetary policy.

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