Austan Goolsbee, Chief Economist of the President's Economic Recovery Advisory Board Talks About The Reform Plan
Wednesday, June 17, 2009SUSIE GHARIB: One of President Obama's top economic advisors said today the regulatory reform plan will make banks a little more boring and a little less profitable. He's Austan Goolsbee, chief economist of the president's Economic Recovery Advisory Board. Washington bureau chief Darren Gersh spoke with him a short while ago and began by asking whether the reform plan will prevent a repeat of the current banking crisis.
AUSTAN GOOLSBEE, PRESIDENT'S ECONOMIC RECOVERY ADVISORY BD.: Well, I think if this plan had been in place let's say three or four years ago, you can never say it would have completely prevented everything, but there are certainly many of the most onerous damaging aspects of this crisis would have been lessened or prevented. So A, you would are had resolution authority so that when an AIG or a Lehman or one of these big systemically threatening institutions got into trouble, there would be a way that they could wind them down without bringing down the system. There would have been accountability on the part of the people issuing these securities. They would have had to retain skin in the games and they would have had less incentive to just take the $500 and pass it on. Yeah, for mortgages. You would have seen higher capital and liquidity requirements on most of the big financial institutions. So they would not have been able to get themselves so far out off the edge of the diving board that they couldn't come back.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Let me ask you about that. It sounds like banks a fair reading of this is that banks are going to be a little more boring, a little less risky going forward.
GOOLSBEE: Maybe a little less boring is what we need. I'd say they're certainly not going to be able to leverage themselves up 10 to one, 30 to one and go out and take risk that if everything goes wrong they really just melt down in a toxic waste heap. And I'd say another part of this plan that's really quite central that would have been very helpful over the last three or four years in preventing crisis is that for any institution that is big enough, there's going to be a supervisor on them on a day-to-day basis, regulating them as a complete entity. So that days where an AIG can kind of squeak itself in between the cracks of the regulatory system and nobody is watching what they're doing, that ends as soon as this is in place.
GERSH: Isn't there kind of a tax on bigness here? Because basically the bigger you are, the more threatening you are to the financial system, the more you're going to be regulated and face tighter controls, so in a way it's a --
GOOLSBEE: I wouldn't say it's a tax. But it is certainly, you got a higher responsibility and requirements. There is a disincentive for guys to just continue accumulating and become massive behemoths that are so interconnected that they would bring down the whole system if something were to go wrong. I think that's what we needed. We learned that we really wish there had been things in place over these last several years that was discouraging people from getting too big and too interconnected to fail because we got in a tough spot.
GERSH: Doesn't that essentially mean with higher capital standards and other kinds of restrictions that basically banks are going to be somewhat less profitable than they were in the boom years?
GOOLSBEE: Well, the thing about the profits in the boom days is they're super profitable when times are up and then they're super unprofitable when times are down. I think one of the things we've determined over this crisis is a little more slow and steady wins the race is probably a little more prudent. And I think you're going to see more prudence on the part of financial institutions because of this regulatory environment this year.
GERSH: Austan Goolsbee, thank you for your time.
GOOLSBEE: Thank you.
