One on One with Former Fed Governor Alan Blinder
Monday, June 15, 2009
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SUSIE GHARIB: For more on the Fed's role in this new regulatory system, we turned to a former Fed governor for his analysis, Alan Blinder. He's currently a professor at Princeton. My first question, are these reforms good policy?
ALAN BLINDER, ECONOMICS PROFESSOR, PRINCETON UNIVERSITY: I do. We're only looking at an outline at this point but I think the outline was very sound. It hit most if not all of the bases and really should something like that come to fruition which is another question, that would make a much stronger financial system.
GHARIB: Alan, the new reforms give the Federal Reserve vast new powers. It will be the systemic risk regulator. Is that a good thing?
BLINDER: I think so. I realistically don't think there was any other choice but to give those powers to the Fed. Then if you are worried about the Fed having too much power, you are going to think about what kind of other powers you could take away from the Fed. It's kind of implicit in this that the Fed is going to lose, although it doesn't quite say so. Its influence over consumer protection and things like that, lose it to a new agency. We've heard this from the administration before. That would be one example of something that could leave the Fed.
GHARIB: Whenever there is a financial crisis, everyone is calling for new regulations. But others suggest that the problem here isn't new regulations but enforcing, enforcing them. So will the Federal Reserve be the new cop on the beat?
BLINDER: Well, I think we need many cops on the beat. You know, on the subject of not enforcing them, I've made the point that when you think about the terrible lending practices, it doesn't even merit the term underwriting that went into the sub-prime mortgage difficulties which really are at the root of all of this, although not the only cause. The truth is that the bank regulatory agencies, all of them, the Fed and the others have the power to stop this and they didn't use it.
GHARIB: One of the big concerns for the financial community is that any new regulation will inhibit innovation and risk-taking. What are your thoughts on that?
BLINDER: My first two thoughts is there was too much risk-taking and probably too much financial innovation. Not that I'm against financial innovation. There are productive financial innovations that actually help the real economy and we ought to remember that that is their goal, not just to make the gambling casino work better but to help the real economy do things. And many financial innovations do that. But there are lots of others that I think don't. I've always been kind of dubious about CDO squares, for example.
GHARIB: But could there be any other unintended consequences that come as a result of these reforms?
BLINDER: Look, that is always the case. You do something with the best of intentions. You think it's going to work to cure such and such a malady. Often it does, but then it exacerbates malady B instead. That's why you can never really think you've laid everything to rest and this is it for the rest of eternity. Nobody thinks that. Even if all of this was to pass as proposed by the Treasury soon, there would probably have to be adjustments made in the future.
GHARIB: Do you think these proposals will pass?
BLINDER: No, not all of them. Presumably some of them will pass. But I anticipate a just vicious and difficult lobbying battle with money and words and everything being thrown around. I have no idea, frankly, what will actually come out the other end of the sausage grinder.
GHARIB: Well now that you've said that, is there anything among the proposals that is missing? Is there any one think that you would like to see?
BLINDER: Well, I think most of the bases are touched so lightly. And we don't know the details. For example there's some language in the op ed in the "Washington Post" by Geithner and Summers that says something about the credit rating agencies won't be the only way to assess the riskiness of assets. I don't know what that means. I hope they know what that means. I think they do. But I don't know what that means and nobody will until it comes out. There are other questions where it says all derivatives will be regulated. That's easier to say than to do and many other things like that, details that we need to see.
GHARIB: Well, this conversation will be continued once we get those details but meanwhile, thank you very much, Alan for coming on the program. It's always a pleasure to talk to you.
BLINDER: Glad to be here, Susie.
