Tavis: Mark Zandi is chief economist at Moody’s and a noted author whose next book, “Paying the Price,” will be out later this year. He joins us tonight from Westchester, Pennsylvania. Mark, good to have you on this program, sir.
Mark Zandi: Thank you, Tavis.
Tavis: Let’s get right to it. Is this move by the SEC against Goldman Sachs a crystallizing moment in this debate about financial reform?
Zandi: Yeah, I think that’s the right way to phrase it – it’s crystallizing. The merits of the case notwithstanding, I think this brings into relief everything that we’re worried about with respect to our financial system – its non-transparency, the conflicts of interest, all the different things that have made us concerned about a well-functioning financial system have come together with this particular suit.
Tavis: So Goldman says, of course, that they’re going to vigorously fight this. They find these charges fraudulent and wrong so they’re going to fight it. That said, I wonder if the timing could not be any better for those who support financial regulation, starting, of course, with the White House.
Zandi: Yeah, it couldn’t be better. I think financial regulatory reform would have been passed anyway. I think the differences between the Democrats and the Republicans on regulatory reform are small enough that they would have been closed and we would have gotten legislation.
But I think this pretty much seals the deal. I can’t imagine that they won’t bridge that gap and we’ll get a piece of legislation pretty soon.
Tavis: What’s that reform, you think, going to look like? Because if you’d asked somebody two years ago what healthcare reform would look like, you would have gotten a very different answer than what the end result was. So to your mind, Mark, what’s that going to look like, ultimately?
Zandi: Well, there’s a lot of moving parts, Tavis. I think at the top of the agenda, derivatives trading, which goes to the heart of the Goldman Sachs suit, will be brought onto exchanges so that it can be monitored and it can be regulated. I think there will be a very clear resolution process for failing financial institutions and there will be some mechanism for the government to step in, in cases of emergency, so that we don’t have another Lehman Brothers.
I think there will be a systemic risk regulator at the Federal Reserve who will have the responsibility and authority to look over the entire financial system and determine whether there’s too much leverage and risk in the system and not enough liquidity, and to change it if, in fact, they see there is a problem.
Then finally, I think we will get a consumer financial protection agency probably that resides in the Federal Reserve whose sole mission will be to make sure that financial products that you and I consume are good products and in our best interest.
Tavis: A couple of things on your list just now, Mark, I want to go back and pick apart, if I can. We’ll start with the thing you mentioned first, derivatives. We saw a few days ago, of course, the president push back pretty hard and say that any financial reform package that he signs will have to have some real teeth in it where derivatives are concerned, which suggests to me that if the president has to come out on the front side and say, “Don’t send me something weak on derivatives,” there must be some move on the other side, on the Hill, to weaken the particular part of the bill about derivatives. Am I misreading this?
Zandi: No, I think you got it just right. There’s a lot of money in the derivatives market. Right now it’s over-the-counter, meaning it’s not on an exchange. It’s a customized relationship between two investors with an investment bank as an intermediary. Because of this there’s a lot of profits that are being made in this industry, so the industry is very nervous about any kind of regulation, any kind of increased monitoring on what they’re doing, because it could reduce profitability.
So I think there is a lot of resistance to regulatory reform with respect to derivatives trading, but at the end of the day I think everyone realizes that the system wasn’t working as we now have it in place, and we need to change it and we need to bring that trading above ground and put it on exchanges.
Tavis: So derivatives are at the top of your list. At the bottom of your list was this consumer protection agency we had on the -
Zandi: There was no order of importance here, Tavis.
Tavis: Fair enough, I take that, but the last thing you mentioned was this consumer protection agency. A week ago on this program we had Elizabeth Warren, who, as you know, is in charge right now of the TARP program. She’s the one who suggested this consumer protection agency. President Obama is behind it and there are all kinds, of course, of rumors that if this agency gets established that she would be the person that the White House might call upon to be the leader, the head of this particular agency.
All that said, Elizabeth informed us on this program last week that the banking industry is spending about $1.5 million a day – $1.5 million a day, by her estimate, fighting against this consumer protection agency unit. Your thoughts about that?
Zandi: Well, the industry is obviously very concerned about increased regulation over consumer financial products and they are, in fact, fighting it. They’re throwing a lot of lobbying dollars against it. But I think there is a good deal of logic to bringing all the various regulatory activities overseeing consumer financial protection into one place because it’s clear that the current regulatory structure doesn’t really do a very good job of protecting consumers.
It’s one of the key reasons why so many bad mortgage loans and other consumer loans were made, and of course it was those bad loans that was the fodder for the financial crisis, the financial panic and the great recession.
So I think we need to see a more consistent, cohesive regulatory oversight so that we get good consumer financial protection. I think at the end of the day everyone is going to come to some agreement on this, and the compromise is that we’re not going to have an independent, separate consumer financial protection agency that’s outside of the purview of any other regulator. It’s going to probably reside within the Federal Reserve, and that would be the compromise to get it done.
Tavis: To your point about the great recession, there’s still great debate about this, and that is whether or not the recession is over. Your thoughts?
Zandi: It is over. The economy is growing. It’s not growing fast enough to create a whole lot of jobs. We are starting to see some job growth, and I am hopeful that six to 12 months from now we will be seeing substantive job growth. All the preconditions have come into place. Businesses are making lots of money, profits are up, stock prices are up.
Businesses are regaining a big of confidence. So I think six to 12 months from now we should see enough job growth that we’ll get unemployment down and everyone will be convinced that the great recession is over, not just economists.
Tavis: Speaking of economists, I’m not an economist, as you know. So if I told you that I hate, absolutely abhor the term “jobless recovery,” which too many economists say with relative ease, your response would be what?
Zandi: Well, I feel your pain. It is very unfortunate that we haven’t seen more job growth. But again, I think we will. Let me just give you sort of a timeline about how I think these things are going to go. We’re getting job creation in healthcare and educational services. We’ve been getting that all alone. It’s demographically driven, it’s funded by the government, and that’s held up.
We’re now starting to see job growth in manufacturing, in logistics, transportation, distribution. The tech industry, I think, is on the verge of some big hiring. Later in the summer we should see some job growth in professional services and some other parts of financial services, like asset management.
Towards the end of the year we’ll see some retailing jobs in leisure and hospitality, by this time next year even some construction jobs, and I think we’ll be off and running.
So I think that there’s a progression here. We’re just now beginning it and I think we’ll feel a lot better about things not too far down the road.
Tavis: From your mouth to God’s ears. Chief economist for Moody’s, Mark Zandi. Mark, good to have you on the program.
Zandi: Thank you, Tavis.