Analysis of President Obama's Word of Warning
Monday, September 14, 2009
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SUSIE GHARIB: I turned to two prominent Washington and Wall Street watchers for their analysis of President Obama, Wall Street and the financial crisis, Glenn Hubbard, a dean of Columbia University's graduate school of business and former economic advisor to George W. Bush and Alan Blinder, professor of economics at Princeton and former vice chairman of the Federal Reserve. I began the discussion by asking Glenn for his reaction to President Obama's speech.
GLENN HUBBARD, GRADUATE SCHOOL OF BUSINESS , COLUMBIA UNIVERSITY: First of all, the president was absolutely right to use this anniversary as a chance to talk about the need for financial regulatory reform. There's much to be done in terms of systemic risk regulation, capital adequacy and transparency. Unfortunately the president's own proposals didn't quite add up to that but his themes were exactly right.
GHARIB: Alan, that's exactly right. The president is really pushing hard today for those regulatory reforms and implying that they would prevent a future financial crisis. Do you think that these reforms really will fix the flaws in the system?
ALAN BLINDER, ECONOMICS PROFESSOR, PRINCETON UNIVERSITY: Well not all of them. There are many flaws and we're going to have financial crises in the future as we've always had in the past. But that said, I think these reforms do go a reasonable way towards filling some of the holes in the regulatory structure, giving the government better weapons to deal with the next crisis that comes down the pike. So in general, I think these sets of reforms -- it's the same thing that was in the Treasury draft several months ago. For the most part, the right things to do.
GHARIB: Glenn, the president said that he wants to put an end to the idea that any financial firm is too big to fail. You know, one thing we've seen in this financial crisis is that these financial firms are getting even bigger because of all of these mergers. In reality if there were to be another financial crisis, wouldn't the government bail out a big financial firm?
HUBBARD: I think President Obama is right that a firm that's too big to fail is essentially too big. The right way to tackle this -- and the president mentioned it in his speech -- is a broader resolution authority for what happens to a troubled financial institution that's large. But there's a lot of work that remains to be done there and a lot more leadership needed on his part. He asked the right question.
GHARIB: Alan, the president said that the financial storms are breaking, that things are getting better. Do you think the financial crisis is really over?
BLINDER: You know, Susie, this is starting to depend on the definition of a crisis. A lot of us have forgotten that prior to Lehman, the period from August '07 until Lehman in September '08 was called a financial crisis. I think we're basically back to the sorts of conditions we were dealing with then. That is, a financial market that are not quite right, but are much, much better than they were in the months that followed Lehman. So in that sense it's not over. But in the important sense, things just look much, much better than they did, say, six months ago almost everywhere.
GHARIB: Glenn, what do you think because this financial crisis, a lot of it was about the banking sector. Are the banks recovered from this crisis?
HUBBARD: I agree with Alan that we have come back from the abyss and that part of the crisis is likely over. But we are not out of the woods yet. I sense a kind of complacency in Washington and Wall Street that, well, maybe this need for reform is a little less intense than a year ago. I really disagree with that. We really have to make changes or we're likely to be back again.
GHARIB: So Glenn, is it business as usual?
HUBBARD: I don't think it's business as usual right now certainly in financial markets. But I worry that the regulatory climate has lost some of its steam for reform. So in that sense I really salute what the president is doing today.
BLINDER: I'd like to second that, Susie. You know, I think that's the reason that the president gave this speech. When Congress went on recess in August, there wasn't much talk about regulatory reform. I mean these proposals were out there but nobody was paying any attention. I think someone -- and the president of the United States is the best someone to do it -- needs to get these things front and center again for just the reasons Glenn said.
GHARIB: You know, for many Americans not working on Wall Street, this financial crisis has meant that they've lost their jobs and many economists are talking to us saying that this is going to continue even after the financial crisis, millions of people without jobs. Glenn, is this a new reality?
HUBBARD: Well, it's certainly true that the job market will lag any recovery in the real economy. So the fact that the recession may well be over doesn't mean that we won't see a lot of unemployment for some time. But it is good news for Americans. The credit markets are working better. Assets markets have begun to recover. But none of that means we should take our eye off the ball of reform. That's what's ultimately better for all of us.
GHARIB: And the other aspect of this financial crisis, what kind of got us here in the first place is the housing crisis. Has that stabilized and not just in terms of prices, Alan, but also in terms of people being able to afford to stay in their homes and pay their mortgages. What do you think?
BLINDER: Well, I think you've got sort of a bifurcated situation. You still got mortgages that are going bad. You still got people whose teaser rates are going up and things like that are happening and people are losing their jobs as you mentioned and therefore while they were working, they could afford their mortgage. When they're not working, they can't afford their mortgage. All of that is going to go on. So in that sense there's more bad things to happen.
GHARIB: So to both of you, just to wrap up our discussion, what have we learned from this turbulent year? What has been the key lesson? Glenn?
HUBBARD: Well, I think we've learned a couple of things -- one, the importance of connecting the dots in the world around us and not getting in silos. I think a lot of leaders of financial institutions missed some pretty big problems in the world around them. And second, that we had a regulatory system that really wasn't up to the task of the 21st century, you know, very much the subject of the president's speech.
GHARIB: Alan, what do you think is the take-away lesson here?
BLINDER: I would summarize it in one four-letter word which is risk. Risk was under appreciated by regulators who were not sufficiently vigilant. Risk was under appreciated by the leaders of our main financial corporations. And risk was under appreciated by both traders in these markets and ordinary Americans that took untoward risk and that's what needs to be fixed.
GHARIB: Gentlemen, thank you very much for coming on the program, really appreciate your time.
BLINDER: Most welcome.
HUBBARD: Thanks.
