Wednesday, March 12, 2014
The Associated Press
(Continued from page 1)
The Associated Press
Q: A lot of criticism centers around the failure of the Fed and other regulators to deal with the explosion of subprime mortgages, which were packaged into securities that then turned bad and were at the center of the troubles. Should the Fed have handled subprime mortgage regulation differently?
A: The problem is that we didn’t know about it. It was a big surprise to me how big the subprime market had gotten by 2005. I was told very little of the problems were under Fed supervision. But still, if we had seen something big, we would have made a big fuss about it. But we didn’t. We were wrong. Could we have caught it? I don’t know.
Q: You’re not a big fan of the Dodd-Frank Act (the 2010 financial regulation law that aims to prevent another crisis). Why not?
A: It was written politically, in a way that the regulators get the responsibility to solve the problem. There is a whole list of things the act wants done, and it specifies how individual regulators are going to solve the problems. Regulators are now required to do vastly more and to square it with other agencies.
Q: You got to know Larry Summers during his eight years at the Treasury Department during the Clinton administration, and you also worked with Janet Yellen when she was a member of the Fed board. Can you talk about both of them? (Summers and Yellen were rivals for the Fed chairmanship.)
A: The one thing about Larry is that we had breakfasts a couple of times a week for years. And never did a word get out. Those were important meetings. You get a certain trust for somebody. I know Larry’s shirts stick out the back of his belt. Who cares? The guy is very smart, and he is unquestionably qualified for most any job you can think of. But then so is Janet. There were times when I came to her and I said, ‘I don’t understand what this academic is saying.’ And she would explain it to me. That is a valuable resource. She is very sharp.
Q: What advice would you give Yellen, who has served the Fed as a board member, president of the San Francisco regional bank and since 2010 as vice chair?
A: I had a learning curve on a lot of different aspects of how the Fed operates. Janet clearly doesn’t need that. Don Kohn (a longtime Fed staffer and vice chairman) mentored me through the early stages.
Q: The size of the Federal Reserve’s balance sheet stands at a record $3.7 trillion, reflecting all the Treasurys and mortgage-backed securities the Fed has bought to push long-term interest rates down. You have expressed concerns about this size, which is more than four times where the balance sheet stood before the start of the financial crisis. What are your worries?
A: My basic concern is that we have to rein this thing in well before the demand for funds picks up and makes it very difficult to rein in. (Inflation) is not immediate. It is down the road. But historically, there are no cases where central banks blow up their balance sheets or where countries print money which doesn’t hit (with higher inflation).
Q: You write that our highest priority should be to fix our broken political system. How?
A: Unless you are willing to compromise, society cannot live together. What is happening now is an increasing proportion of positions are getting beyond the point where the system can effectively hold together. I am concerned about it. It’s not long ago when a Howard Baker and Bob Dole and Daniel Patrick Moynihan and Lloyd Bentsen spoke to each other. In the Ford administration, Jerry Ford used to be at Tip O’Neill – toe to toe, bang, bang – and then Tip would come over to the West Wing at 6 o’clock and have a bourbon with Jerry. That’s what I mean that the system is broken. We have got to find a way back to the comity that we had not long ago.