Inside Story - Preventing another financial crisis
Al Jazeera English
Transcript
President Obama takes on the fat cats he tells Bankers to get behind the Wall Street reforms to help the economy but does the new legislation go far enough and will it prevent another financial crisis from happening again this is inside story hello there warm welcome to the program I'm Shuli go so President Obama seems to be running out of patience with us Bankers whom he's accused of fighting Common Sense Consumer Protections in a meeting on Monday he urged them to support new legislation to reform Wall Street and he told them they owed it to the country to help the economy by lending more money to small businesses it comes after a clearly irritated president said he didn't run for office just so he could help out a bunch of fat cat Bankers Kath Turner reports in the heart of New York's Financial District Main Street collided with Wall Street house the neighborhood Association Corporation of America rallied hundreds of its members together in protest against the lack of banking regulation and flexibility with customers mortgages they're giving out big bonuses it's time it stops their destination Chase Bank one of seven US Banks which received and paid back taxpayer bailout money and under the government's $700 billion rescue program Chase has a culture of no they try to find a reason and they do find reasons which are not justified to say no to Affordable long-term mortgages you're trash we have your money you're no more use to us if you can't pay us what we want you're no good to us that's how that feel that's how really how I feel and it's horrible traffic in downtown Manhattan came to a standstill as the crowd headed for the Chase building and then swarmed [Applause] we employees emerged from their offices shocked to discover the building Lobby had been taken over by a noisy angry protest after several minutes police eventually stepped in and politely asked the rally leader to leave the building there are plenty of banks here on Wall Street but one of the reasons the protesters chose Chase is because in 2008 it paid the most million doll bonuses to 1,000 Executives to the tune of more than $8.6 billion those bonuses were discussed at a meeting behind closed doors in Washington between Barack Obama and several Bank Executives the US president urged them to cooperate on financial reform being debated in Congress and to also lend more money to help grow the economy analysts point out that as these Banks return to profitability loans to customers and small businesses remain curtailed having recovered from with the help of the American government and the American taxpayer our banks now have a greater obligation to the goal of a wider recovery a more stable system and more broadly shared Prosperity some bankers admit they're not surprised by the level of public anger and demands for accountability today we realize we're under the microscope to show every step that we take to do a better job of listening to customers paying attention to their needs and being more available than we have been in the past but there's skepticism over whether Obama has done enough and whether his words will lead to real change and he knows that the American people are angry they don't like the bailouts they don't like these Banks so he's responding to that but now is going to act he's going to have to regulate these banks in a serious way until he does that it's all rhetoric and few believe the banks even care do they have a heart they have any conscience to see people out here in the call just protesting against it so I think they should you know they open their open up their hearts and you know help help people out but with financial Lobby groups so far resistant to any regulation help could be a long way off KF Turner Al jazer New York well let me introduce my guests to in Madison Wisconsin we have John Nichols a writer at the nation magazine in Washington DC Anthony Randazzo a fellow at the reason Foundation also in Washington DC Economist Thomas P welcome to the program gentlemen uh clearly a lot of angry people there John uh President Obama uh saying that fatat bankers and Banks just don't get it is he right well that's a complicated question of course the banks get it if if the point is to make a lot of money they're doing exactly what uh their stockholders and and frankly their CEOs want to do but if the president is referring to some sort of social responsibility some sort of uh commitment to the broader good of the United States to the broader good of the US economy no they don't get it in fact in fact the ceed even show up exactly and and President Obama is saying that they owe a commitment because they had all this government help they went cap inh hand to Washington uh when they needed support well of course they they should have that commitment but it is it is pretty silly to assume that they will these banks are in competition if one of them started to become responsible somebody else would step into the irresponsible place the fact of the matter is the person in your clip was right the guy who said look you're going to have to regulate these Banks a failure to aggressively regulate means that nothing will change Thomas do you think banks are listening the Bank of America corpor says it will increase loans to small and median businesses by $5 billion doll next year do people think that that is what is needed well uh $5 billion is a trivial amount in terms of the American economy I think John Nichols said it exactly right uh they're in the business of maximizing profits and uh that unless that business activity is surrounded by appropriate regulation it doesn't uh produce the best outcomes for society and the president got it right also when he said look you know you come here and you'll say you you hear what the country wants but yet all your lobbyists on the Hill are opposing everything we're trying to do but Thomas banks are saying that any intrusion on their businesses uh is unneeded uh unwarranted uh it affects profits and it affects competitiveness uh Sur this is a a complicated issue and let me try and help your viewers understand uh perhaps one way of thinking about this issue uh there are three questions we should ask ourselves uh is the legislation that's being proposed a good thing uh is it enough and will it fix the economy and I would say yes it is a good thing it's not enough and by itself it will not fix the economy uh but why is it a good thing well looking back at the experience we've just had we see that greed plus deregulation plus a tidal wave of credit is a recipe for disaster the way to make the market work for the country is to put in place regulation that allows uh profit maximization to work in the appropriate Direction and that's really the the the the the framework that we should be thinking about this issue Anthony do you agree uh this legislation does not go far enough no I I absolutely disagree I I think it actually is going too far I think that the the legislation that was passed by the house and in instead of do it actually does too much uh it's attempting to solve the two big to fail problem but what it winds up doing is it puts into US law that certain banks are going to be labeled too big to fail it creates a permanent bailout fund if Americans and people around the world are upset with the banks getting bailed out they should be up with this legislation okay well let's just uh tell our viewers what the legislation is all about the Wall Street reform and consumer protection act covers all financial institutions and consumers including homeowners borrowers and credit card holders it creates the financial services oversight Council made up of senior government Finance officials who will monitor the markets for potential threats companies will need contingency plans for their own failure and the government will be able to dissolve any firm that could threaten the economy a Consumer Finance Protection Agency will oversee consumer lending such as mortgages and credit cards and give greater powers to states to deal with lenders and executive salaries will be voted on by company shareholders Federal Regulators will have to approve compensation practices although not actual pay um John Anthony there saying that it goes too far I mean I'm not an expert in economy but this looks like um the the bill is geared towards protecting consumers isn't that a good thing it's absolutely great that parts of the bill are geared toward protecting consumers but remember this is an Omnibus Bill this bill is supposed to deal with a whole range of issues beginning with uh the woman who wants to get a loan to buy a car and working all the way up to the CEO of the biggest bank in the world and it does some things well it does some things poorly what it does well is establish a Consumer Financial Protection Agency this is something that we've needed for a long time an agency that will look after the interests of working Americans ordinary folks and really people even outside the United States who may have Financial interests here that's good the second thing that it does that's very very good is establish an audit of the Federal Reserve that's our essentially our our overseer of banking and our big Bank in the US and that's never been done in an effect way the audit is a very healthy thing what this bill fails to do is to begin to address that too big to fail issue Anthony is right in a sense that the it locks in some of these very large Banks when and now Anthony will disagree with me on this when I think and a lot of people think those big Banks should be broken up there shouldn't be a bank that can be defined as too big to fail and then allowed to continue so this bill not address of the basic pathologies it doesn't um address the issue of dismantling the the the really big Banks the ones that uh caused the problems in the first place I I don't think the problem is that banks are too big I think the problem is is that the government for decades was essentially saying had this implicit guarantee that they would rescue any of these large firms what what I think that's a lot of what this bill tries to do is it tries to get at some of the problem that built up in the system over year over the years that actually wound up blowing up in 2008 and it's and the attitude of Congress is okay well uh Capital regulations were a problem and derivatives were a problem and so we're going to go we're going to try and solve those what I think a better approach would be is to say not break up the banks but to put in place certain uh broad regulations with bankruptcy and basically say to the banks look if you fail you're going to be dissolved we're going to have an ordered process for how to deal with people that lend you money so that you do not pose a systemic risk to the rest of the economy and we're going and there going to be a very ordered sort of breakdown if you get too big or if you fail and you are too big but we shouldn't be breaking apart these Banks we shouldn't be capping the size of banks because then you are saying essentially to companies you can only succeed so so far and you can only succeed up to this particular level and that's not good for competitiveness that's not good for the like the growth of a robust economy Thomas what what's your take take on this banks are going to have to plan for their own failure well let me let me back up on on three things um first of all I think this is a a good bill in the right direction and I'm a little surprised to hear Anthony say apart uh that he's in disagreement with so many pieces of the bill uh one of the great pieces of the bill which John uh mentioned is with there's something called SE on pay uh we have in this country a CEO top management pay problem we need to restore some shareholder control uh the bill does it that's something that I think a conservative Economist should support the bill has derivatives regulation in there it forces a lot more derivatives to pass through uh clearing exchanges that's going to be good for transparency that's going to improve pricing efficiency by increasing information that again is something a conservative Economist should support I don't know why they're against it we have consumer protection in there and I think this is a good thing too uh bear with me while I wrap up here uh consumer protection is is a good thing we we the FED Federal Reserve that is has responsibility for that issue under existing law it has failed the the culture of the FED has no respect for the consumer it's much more interested in monetary policy there's a mismatch between the banks the financial businesses and ordinary uh working individuals who are not financially sophisticated the Consumer Protection Agency is vitally needed to fix that mismatch now the big thing uh the last issue is this too big to fail and I'm afraid I disagree with both John and Anthony here uh Anthony is living in some sort of Fairy Land some Wonderland uh if you look back at the crisis look the banks that failed were be Sterns were Leman Brothers they wouldn't have qualified as too big to fail the point is there's too much integration in there once the confidence in the system evaporates you have to step in and and fix it and be a lender of Last Resort in fact Much More Than A lender of Last Resort in this crisis and that's what the FED did and the point is that if you don't have that in place uh the thing is going to collapse so the too big to fail is a is is a bit of a a red herring John says break them up I don't think that's right either uh this is a global economy you need big Banks to finance uh uh to participate in the global economy to uh to to a fully integrated efficient Financial system if you need big Banks then and if you can't avoid and and you then in that case you need to make sure that they are properly regulated and that's the solution here a living will for the banks as part of it if they get into trouble they'll be wrapped up orderly conf in in an orderly way confidence will be maintained because the Federal Reserve is is backstopping the system part of this legislation also giving part of this legislation also gives the government the right to uh wrap up healthy firms uh if they think that there could be some risks to the economy well that's indeed that's indeed right not to wrap them up it'll be a case of probably uh splitting them up or something like that there's there's no right of confiscation or anything like that if the firm is posing a systemic risk then the systemic risk regulator has the right to intervene and change the rules and that's entirely appropriate because the market will not work well without these type of regulations that maintain the confidence of all the participants Anthony uh I I wonder how much the the banks are going to um back this given that President Obama has asked them for their support it's interesting that many banks now are rushing to pay back their their government funding City Group in Wells Fargo are the latest um is that because they're back on the feet or because they just want the government out of their business well it's probably a little bit of both I'm sure none of these Banks want the the government integrated into their business I mean there's a joke here in Washington that City Group can't do anything with the treasury Department say so I mean I'm sure City Group doesn't like that but that's that's not good for the way these banks are supposed to supposed to be run people in the government uh are not uh the bank operators is that's that's not good for for Wall Street or for Washington uh but in some in some cases in case of Wells Fargo I think they really are back on their feet I mean some of them probably are are maybe rushing a little bit uh to to pay back this money because they don't want to pay caps I mean Bank of America is trying to find a new new CEO and it's probably hard to find a new CEO that's going to come in and not get paid very much money to do the job because Washington has these arbitrary payc caps but that that sense of arbitrariness is actually is really the core of some of the problems that are in this bill and to sort of respond to some some of the things that Thomas was saying there's not an inherent problem with many of the things in this bill such as derivatives it's a great idea to add more transparency to derivatives and to set up these Clearing Houses and in of itself I don't have a problem with that I do have a problem though with the government coming and saying we're going to force this to happen we're not going to let it evolve naturally same thing with consumer protection when you it's great to have consumer protections and the FED did not do everything well to ask the FED they admit they they were not perfect we shouldn't have the the FED shouldn't be handling consumer protection but we can take that and we should couple it with banking regulation we should have an agency that doesn't just have consumer protection uh it should have an oversight of both cons consumers and the way that Banks run it should think about the rules that it passes in tandem because when you just have a focus on consumers and you just have a focus on banks separately and you're trying to set up your regulations that way you wind up with all these unintended consequences you wind up passing a law that you think is going to help consumers but if you look at some of the things that this Consumer Financial Protection Agency is going to do it's going to protect consumers to death it's going to protect small businesses to death it's going to add so many compliance costs on the top of things that businesses are are trying to do that we're going to see unemployment get worse in the United States John what do you think of that so it's going to protect consumers to death I strongly disagree the fact of the matter is that if you get out of Washington and get out to the United States you will go through communities that are desperately looking for uh banks that are engaged with those communities that are committed to building relationships to ultimately giving loans and and supporting development at the Grassroots level that's what's needed and the problem is that so many of our banks are so focused on New York City and the world they want to go up not down to where the American people are so you're going to need some sort of agency in there that says hey you have responsibilities you cannot simply reap the wealth of America take everybody's savings take everybody's interest payments and then shoot it off into to derivative experimentation in Wild games that's why you need an intervention by an agency like this the problem that I have is at the other end of the bill the problem that I have is that while there is some regulation of derivatives there is near not nearly sufficient regulation the fact of the matter is this $600 trillion Market $600 trillion is essentially still left with great loopholes great vulnerability and the fact of the matter is when we talk about too big to fail we're not really talking about an individual Bank what we're talking about is a system that is set up to play Financial games at such a high level and with so little transparency and so little accountability that we still run a very real risk that the US banking system could collapse because of a lack of Regulation it's uh John it's interesting um you were talking about the vagueness of the uh of the legislation there um in the report right at the start of the program we heard the US bankor G chief executive Richard Davis saying we realize that we're now under a microscope do you think this is going to uh add to the transparency and accountability well that's a very good question and and the truth of the matter is that we're discussing this at an important stage in the discourse rather than the end of it there still has to be a Senate bill that will be passed these will be reconciled then the president will sign or veto the legislation so we're a long way from the end of the process what needs to be done in the coming weeks and months is to strengthen the transparency components and strengthen the accountability components I think it is absolutely vital that we get a much tougher oversight of derivatives trading than is currently contained in the house bill if that doesn't come in the Senate bill then at the end of the day many of the risks and many of the vulner VAB abilities that caused such a crisis last year will remain and the talk of financial reform will be more of a promise than a a realized uh change okay so I'm going to ask all of you uh whether you think this legislation could prevent another crisis occurring given what Jonna said that it still has to go through Senate Thomas what do you think um no it's it's it's probably not enough uh John's point about the loopholes regarding derivatives training trading that Banks can trade privately out with the customized products is very real I I didn't read in there anything about uh restrictions on uh on types of credit default swaps uh there's this problem what's called a naked credit default swaps that is when you a credit default swap for your viewers is a sort of insur insurance contract you buy protection on a bond and if the bond bellies up you get paid now in life insurance we don't allow you to buy insurance on another person's life why because it gives you uh uh an incentive perhaps to bump them off now we do allow people to buy Life Insurance on other corporations we allow Banks to speculate on the creditworthiness of other corporations and that in a way gives them an incentive to bump off those other corporations and indeed that may have been a very big part behind the failure of be Sterns and Leman brothers and as AIG started to go under then you you got a Cascade developing I think naked credit default swaps should have been banned outright I think again as John said our programs in danger of being bumped off very shortly anony just very quickly from you do you think that that uh that this could in any way prevent a future crisis no it's it's not going to prevent a future crisis and I think that that actually is a great question to think about are we trying to prevent a future crisis can we prevent a future crisis I I would argue that we can't we've TR every crisis the United States and the world has faced uh decades before go the most are going back to 2001 2002 the do com bubble we try to put these things in place to prevent another crisis another one happened there's going to be another crisis it's the natural order of the market it's the way it works and it's not necessarily a problem because every time there is a crisis you're cleaning things out in the market and you're actually putting ourselves on a better foot to actually continue to March forward uh I don't think that the attitude behind this financial reform should be to prevent any other crisis from ever happening again it should be to try and strengthen the market and put in some some resiliency so when another problem happens we don't have it be as bad as it is right now okay gentlemen it was very good to talk to you thank you for joining us John Nichols Anthony Randazzo and Thomas P and thank you for joining us on this Edition of Inside Story do email us at insidestory al.net but for the moment for me Shy go bye-bye