GWEN IFILL: In spelling out his proposal today, the president said he was trying to find the right balance between tougher regulation, consumer protection, and the power of the free market. The question is: Did he strike that balance?
We ask two people who studied the new proposal today. Paul Krugman, professor of economics at Princeton University’s Woodrow Wilson School and a columnist for the New York Times, and Diane Casey-Landry, chief operating officer and executive vice president of the American Bankers Association.
Diane Casey-Landry, we just heard what Christina Romer had to say about what your initial response was. Do you think that the president went far enough or too far?
DIANE CASEY-LANDRY, American Bankers Association: I think we’d say the president went too far. We think there are certain aspects of the proposal that are absolutely correct. Dealing with systemically significant institutions is overdue and something that needs to be done, but the creation of a new agency to burden our system that’s already overburdened we don’t think is appropriate.
GWEN IFILL: In response to Judy’s question, Christina Romer said that there had been a lot of consultation. Just curious: Did the president talk to you about this or anybody in the White House?
DIANE CASEY-LANDRY: Absolutely. We had several conversations with the White House, as well as the Treasury Department. They were very open and were soliciting of comments and feedback.
GWEN IFILL: OK, Paul Krugman, to you. Too far or not far enough?
PAUL KRUGMAN, columnist, New York Times: Oh, not far enough, which is sort of the predictable thing for me to say, right? Ideally, I would like to see something even stronger. I would like to have seen it really tackle the issue of compensation schemes in the financial industry, because basically we’ve had an industry where people have gotten rich, you know, by making huge mistakes, but which look good for a short time, and they didn’t really address that.
But the main thrust of it looks very good. I have to say, one thing that I was concerned about was whether this Consumer Financial Protection Agency would be toothless, but the opposition of people like Diane’s organization makes me believe that it’s not such a bad idea after all.
Questions over compensation cap
GWEN IFILL: I want to follow up on your comment about compensation, because just last week the president came out and came up with this pay czar, this compensation cap idea. That wasn't far enough for you, either?
PAUL KRUGMAN: Well, it's not clear that there's anything very effective in all of this. And, certainly, the regulation proposal that was released today does not have more than some good words.
Now, maybe more details will be filled in, but I guess everybody's expectations is that, as this goes through the legislative sausage-maker, it's going to get weaker, not stronger. So it doesn't really address that.
But, look, the really big things are the systemic risk, which means -- just to translate this -- that, in the past, it wasn't clear that there was anybody who could say to a complex financial institution, "Hey, you're taking on undue risks." The regulators really only had effective control over the conventional banks or the conventional bank parts of these larger holding companies.
Now they'll have the able to say, "Hey, this is a systemic risk. You have to have more capital. You know, we can define you as a tier one financial holding company," which is yet another obscure term, but it really does create a whole way of policing a system that had run out of control.
GWEN IFILL: Diane Casey-Landry, one of the institutions which has been given a lot of power for policing under this plan is the Fed, the Federal Reserve. Is that the appropriate role for the Fed to take on, this oversight responsibility?
DIANE CASEY-LANDRY: Yes, we definitely believe the Federal Reserve is the right place to put additional responsibilities. They've already stepped up and have been taking their responsibilities for the crisis we've been going through.
But I'd like to point out something: The traditional banks in this country did not cause the crisis that we've gone through for the last six months. And many of the reforms that are being proposed are going to undermine traditional banks that have continued to lend throughout the crisis.
GWEN IFILL: How? How?
DIANE CASEY-LANDRY: Well, first of all, they plan to eliminate the thrift charter, the savings and loan. George Bailey is turning over in his grave right now.
GWEN IFILL: The Office of Thrift Supervision...
DIANE CASEY-LANDRY: And the charter. They want to eliminate the thrift charter. They want to eliminate a focus of a charter that focuses solely on putting people into homes.
Many of the thrifts that are still out there have never engaged in a single problem with respect to what's been going on. That was Wall Street. And we actually are attacking Main Street.
o creating a new consumer regulatory body when, in fact, banks and thrifts have been subject to consumer examinations by the federal banking agencies for the past 30 years. I should know; I started as a bank examiner 30 years ago for the Federal Reserve Bank of Cleveland.
Demand for transparency
GWEN IFILL: So you believe the FDIC, the Federal Deposit Insurance Corporation, should have been left in charge of this?
DIANE CASEY-LANDRY: Well, I think you can't separate safety and soundness when you're doing your examinations for banks from the consumer protection. We think they actually fit together very nicely.
We do believe there should be consumer protections for those other nonbanks, shadow banks, that grew up around our system that were not subject to any of the same protections that the banks offer to their consumers today.
GWEN IFILL: Paul Krugman, let's talk about transparency, because this is something which comes up a lot with this administration.
PAUL KRUGMAN: Yes.
GWEN IFILL: Do you feel that this plan provides for enough transparency, especially for the problematic credit default swap instruments which were so much of the downfall of the economy?
PAUL KRUGMAN: You know, I'd like more. I'd like more. But I think -- put the pieces together and it would certainly help a lot.
I mean, part of it -- they do, actually, refer a number of times in this to the AIG problem. And it's clear that they are hoping that the various pieces together, an AIG-like institution would, in fact, probably end up being classed as one of these tier-one financial holding companies and, therefore, regulated. Consumer protection would probably help there.
And, mostly, they do talk about differential regulation for standardized products. It all gets very technical. But I think they've got it set up in such a way that it would reduce the risk.
Now, as people say, if people are determined to be stupid, it's very hard to stop them from doing that. But I think it does make a pretty good step in the right direction on all of that.
Preventing the crisis
GWEN IFILL: I want to ask you both a question that Judy just asked Christina Romer. I wonder if your answer is different, which is, if these plans -- if this plan had been in place, do you think it would have forestalled the credit crisis we're in now, Diane Casey?
DIANE CASEY-LANDRY: I actually think that if we had had systemically significant institutions having some oversight, closing the gaps in regulation, that it would have protected or prevented some of the crisis that occurred.
I think the depth of the crisis was also exacerbated by other elements that went on in our system, but I do believe that would have -- if we had put in place closing the gaps of the regulation, looking at systemically significant institutions, that would be good. But we don't need the government coming in and telling us what products we should be offering.
GWEN IFILL: So is what you're saying is that there's just too much regulation involved in this plan?
DIANE CASEY-LANDRY: I think, on the consumer protection side, what you're doing is you're layering on another agency. You're also eliminating a thrift charter.
I spoke with one of our members today from New Orleans who's a thrift institution, who's been in business for 90 years, didn't make a single toxic subprime loan, and he said, What's wrong with my charter? I've just been trying to get my town back together after the Hurricane Katrina. And now you're telling me you have to eliminate my charter and tell me what products I can offer?
We don't think that that's the right thing to do.
GWEN IFILL: Go ahead, Paul.
PAUL KRUGMAN: No, I was going to say, look, they're just simplifying, consolidating the regulation. Most people are saying that they aren't doing enough consolidation.
Having this distinction between thrifts -- it's just -- this is -- we're not in George Bailey's world anymore. That's many decades past.
So, sure, there will be some people who have been doing nothing wrong who will find that there are additional regulators looking over their shoulders, but that's inevitable, and overall this is going to make a safer system.
And in answer to the question, we would still have had a housing bubble. We would still be in recession now, but we wouldn't have come so close to the edge of the abyss as we did. We had a frantic scramble to prevent the whole system from collapsing. If we'd had these regulations in place, it wouldn't have gotten that dangerous.
DIANE CASEY-LANDRY: I'm sorry, but the reality is, is that -- Dr. Krugman had mentioned that AIG. AIG was not a bank. They didn't have bank examinations. They didn't have the process. Many of the players in this crisis were not banks and didn't have the same process of going through...
PAUL KRUGMAN: That's the point. That's why the regulations are creating a new category which could include things that are not banks, but play crucial roles in the financial system. That's the part about this plan I like best.
Disagreements on Capitol Hill
GWEN IFILL: The disagreement you have speaks to me the kind of disagreements which are going to play out in Congress when this finally makes its way to Capitol Hill. So my question to you, Diane Casey-Landry, is -- the president said yesterday he didn't want to tilt at windmills, and that's part of the reason there was so much compromise in the plan. Do you think that he will be tilting at windmills to try to get this enacted?
DIANE CASEY-LANDRY: I think he's taken on too much to get this enacted the way it's currently drafted. You know, the most important thing is exactly what Paul Krugman just said, and that is to deal with the systemically significant institutions, have a mechanism for resolving these institutions, closing the gaps in regulation that did exist in our system.
But we don't need to turn around and eliminate a charter. And for some of our members, George Bailey still does exist, and they are. We don't need to eliminate that. We don't need to create a regulator who's going to create pure vanilla projects or products.
We might turn around and say, "Hey, I like chocolate. You know, I like strawberry. I don't need a pure vanilla product designed by the government"...
GWEN IFILL: ... unless chocolate and strawberry is what got us where we are it he first place.
DIANE CASEY-LANDRY: It was probably butter pecan.
GWEN IFILL: It was probably butter pecan.
Paul Krugman, what do you think? Is the president tilting at windmills?
PAUL KRUGMAN: No, this is a long way short of what the most aggressive reformers would have wanted. It's a fair ways short of what I would have wanted ideally.
This is the moment. I mean, while the memory of the crisis is still fresh, while we're still seeing the effects is when you're going to get major changes in regulation. If you say, "Well, let's just go with the minimal things and let's revisit the issue," three years from now, it will all be forgotten, the financial industry lobbyists will have their run of Congress completely untrammeled once again.
If we don't do it now, it's not going to get done. That's the lesson of the New Deal financial reforms, and we need to do that again. We need to get just about everything we think we're going to need to do. We need to do it while -- strike while the iron is hot.
GWEN IFILL: Paul Krugman, Diane Casey-Landry, thank you both very much.
DIANE CASEY-LANDRY: Thank you.