WEBVTT - Sheila Bair Talks Interest Rates, Fed

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>For more on well to Expect, We are joined by

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<v Speaker 2>Sheila Bher. She's the former chair of the FDA c

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<v Speaker 2>of course, especially during the financial crisis, of course, the

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<v Speaker 2>senior fellow at the Center for Financial Stability. And you

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<v Speaker 2>think a lot about Dudley's comments here was really rooted

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<v Speaker 2>in the worry about a recession if you did not

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<v Speaker 2>see a rate cut soon enough. Do you share those concerns?

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<v Speaker 3>No, I think the Feds handling it right. It sounds

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<v Speaker 3>like they're going to stand cat next week.

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<v Speaker 1>They should.

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<v Speaker 3>A lot of this is just reverting to pre pandemic norms,

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<v Speaker 3>So you know, I think we don't. We want to

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<v Speaker 3>keep our heads here in unduly panic. And I do

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<v Speaker 3>think not certainly with mister Dudley, who I have a

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<v Speaker 3>lot of respect for him, worked within a lot during

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<v Speaker 3>the Great Financial Crisis. But I do think a lot

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<v Speaker 3>of this Wall Street clamoring for rate reductions, it's really

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<v Speaker 3>more they're saying is for main street I get those

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<v Speaker 3>credit card rates down, But it's really for them because

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<v Speaker 3>that will boost their asset valuations, maybe generating some refinancing

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<v Speaker 3>income help.

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<v Speaker 1>There get distress burrows help them.

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<v Speaker 3>I mean it really, it will be a clear booth

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<v Speaker 3>to Wall Street when rates start to go down again.

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<v Speaker 3>But it's not clear it is for main Street what

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<v Speaker 3>main Street is hurting. Those credit card balances are high

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<v Speaker 3>because of inflation, because it's more expensive to live these days,

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<v Speaker 3>and that hits everybody, not just farmworths.

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<v Speaker 1>So I think if it is handling this right.

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<v Speaker 4>Well, Sheila, that's so interesting to hear you say that,

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<v Speaker 4>because the point has been made again and again that

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<v Speaker 4>the medicine is worth worse than the illness. At this point,

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<v Speaker 4>you're taking the opposite view here that actually, no, inflation

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<v Speaker 4>is the main thing that consumers are suffering from right now.

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<v Speaker 4>It's not necessarily those higher interest rates.

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<v Speaker 1>No, I don't think it is.

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<v Speaker 3>And you know, look race or not high historical standards.

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<v Speaker 3>These are kind of normal interest rates, and there are

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<v Speaker 3>benefits from higher rates. You get more discipline capital allocation,

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<v Speaker 3>You reduce incentives to lever up, and that's.

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<v Speaker 1>Painful because we had a lot of leverage build.

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<v Speaker 3>Up during the long protracted era of surp and so

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<v Speaker 3>people are having to deal with that now.

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<v Speaker 1>But higher rates are actually productive for the economy.

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<v Speaker 3>Low rates for productivity, there are a number of academic

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<v Speaker 3>studies that show that so their economic benefits to it.

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<v Speaker 3>And yeah, but I also think any kind of incremental

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<v Speaker 3>reductions and rates and I think at some point that

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<v Speaker 3>fat can nage them down a bit. But how much

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<v Speaker 3>that's going to flow down to help main street is

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<v Speaker 3>a question for me. And I think the real problem

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<v Speaker 3>is we've had some real wage booth, thank goodness, but

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<v Speaker 3>things are more expensive. We need to focus on real

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<v Speaker 3>wage growth as a way to empower consumers, just not

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<v Speaker 3>more debt, whether it's twenty five basis points less or

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<v Speaker 3>what have you. And housing mortgage rate, which is the

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<v Speaker 3>other area that Wall Street targets.

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<v Speaker 1>You know, that is a supply problem.

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<v Speaker 3>Lower rates, fine, you're going to juice demand, it is

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<v Speaker 3>still supply constrained. You're just going to get a home

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<v Speaker 3>is going up more So that doesn't help a mainStreet either.

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<v Speaker 1>So I think we need to look at the root

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<v Speaker 1>causes and stop you know, saying that monetary calls he

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<v Speaker 1>has a solution to all these problems.

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<v Speaker 5>I mean, higher rates should also encourage more savings. Right, theoretically,

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<v Speaker 5>you've got a rainy day fund, you get in five

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<v Speaker 5>and a half percent on your CD or whatnot, Sheila.

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<v Speaker 5>I wonder though about your confidence in the Federal Reserves independence.

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<v Speaker 5>Some people running for office right now may want to

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<v Speaker 5>weigh on the FED more heavily than others. Are you

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<v Speaker 5>concerned about FED independence?

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<v Speaker 1>Well, I am.

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<v Speaker 3>I mean mister Trump clearly is not very respectful of itaid,

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<v Speaker 3>he's already you know, pressuring them to he doesn't want

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<v Speaker 3>them to lower now if he wants them to lower

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<v Speaker 3>when he becomes president.

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<v Speaker 1>If he becomes president. So yeah, but I have a

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<v Speaker 1>lot of confidence in the time.

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<v Speaker 3>Said, I've not always agreed with them, but I have

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<v Speaker 3>never questioned that they have political motivations behind the decisions

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<v Speaker 3>they're making on monetary policies. So I do you know

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<v Speaker 3>it's going to be all about the leadership. But if

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<v Speaker 3>mister Trump comes in, there are strong status for productions

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<v Speaker 3>against FIT independence. I think if he tries to assault

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<v Speaker 3>that independence, there could be a significant local barrier to

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<v Speaker 3>doing that. And if it's Kamala Harris, and if she

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<v Speaker 3>wins as kind of an unknown mister.

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<v Speaker 1>Biden has respect to their independence, I hope she would

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<v Speaker 1>continue to do the same.

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<v Speaker 2>I want to switch gears here and talk to you

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<v Speaker 2>about an opinion article that was written in Political this week,

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<v Speaker 2>and it's entitled why is the government encouraging a tax

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<v Speaker 2>payer bailout? The idea here is that mortgage origination and

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<v Speaker 2>servicing has really moved out of the banking system. This

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<v Speaker 2>is the system here, of course, at the federal regulators

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<v Speaker 2>really oversee and out of the purview for the most

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<v Speaker 2>part from these regulators. Just this week, one of the

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<v Speaker 2>companies named mister Cooper became even more powerful by buying

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<v Speaker 2>a set of assets from New York Community Bank, arguably

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<v Speaker 2>unbattled a little bit at this point in time. How

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<v Speaker 2>do you feel about this move from the banks to

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<v Speaker 2>the non banks and the move by regulators to really

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<v Speaker 2>try to backstop this system.

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<v Speaker 1>Yeah, well, I think it's unfortunate.

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<v Speaker 3>You know, it bears repeating over and over again that

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<v Speaker 3>the majority of these toxic subprime loans that cause so

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<v Speaker 3>much heartache for families and so much disruption in our markets,

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<v Speaker 3>the majority were originated by non bank lenders. So the

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<v Speaker 3>irony that they go from about what I think thirty

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<v Speaker 3>four percent two thirds of mortgage originations now is supremely ironic.

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<v Speaker 1>And the servicing has moved too, is about four percent.

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<v Speaker 1>During the crisis. Now it's well over half.

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<v Speaker 3>So this is a problem with bank regulation when you

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<v Speaker 3>just clamp down on the banks and capital quirements on

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<v Speaker 3>mortgage servicing rights I think are part of the reasons

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<v Speaker 3>why the.

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<v Speaker 1>Servicing have also moved to the non banks.

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<v Speaker 3>But you just force this activity into less regulated sectors

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<v Speaker 3>and then to have an answer, Okay, we're going to

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<v Speaker 3>clamp down to the banks, we're going to push this

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<v Speaker 3>and not to say we didn't need more capital. We did,

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<v Speaker 3>of course, but you can't do that in isolation without

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<v Speaker 3>paying attention to kind of risks are being created when

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<v Speaker 3>it moves out of the banks.

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<v Speaker 1>So this is a problem.

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<v Speaker 3>They need more prudential supervision. They don't need bailouts. And

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<v Speaker 3>there are plenty of tools now. I used to be

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<v Speaker 3>the chair of the Fanning Made Board. Fanny Freddy Jinny

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<v Speaker 3>can set standards. They do, set standards of financial and integrity.

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<v Speaker 3>Their businesses are at risked these mortgage servicers get into problems.

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<v Speaker 3>They could strengthen those requirements. FAHFA could help them with that,

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<v Speaker 3>and so I think there are current tools.

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<v Speaker 1>It would be great if Congress.

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<v Speaker 3>Provided more regulatory direct regulatory authority over them.

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<v Speaker 1>But pending that.

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<v Speaker 3>I think the tools are there now, and that's where

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<v Speaker 3>the focus should be, not on creating bail out funds.

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<v Speaker 3>I mean, that's just you know, if they if the

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<v Speaker 3>FED thinks or Fstock thinks mister Cooper's is systemic, you know,

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<v Speaker 3>there's a process called Title one designations. They can designate

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<v Speaker 3>mister Cooper's as a Title one systemic entity, put it

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<v Speaker 3>under the FED supervision supervisor regime, make them have a

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<v Speaker 3>resolution plan, increase circapital requirements. Those tools are there if

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<v Speaker 3>they really think these services are systemic.

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<v Speaker 2>I think this is an important conversation because you know,

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<v Speaker 2>I did ask at one point even JD. Vans if

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<v Speaker 2>the private equity community and the private credit community and

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<v Speaker 2>the non banking community at large needs more regulation, and

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<v Speaker 2>he even he agreed, for example, that there should be more. So,

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<v Speaker 2>you know, there's another story in the Financial Times about

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<v Speaker 2>how private equity has been tangled in a web of

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<v Speaker 2>bank debt. Bloomberg reported this morning that there are banks

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<v Speaker 2>looking to restructure one of those debts, for example Bright Speed,

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<v Speaker 2>they might be stuck with losses on their books. Is

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<v Speaker 2>there a deeper connection than meets the eye between the

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<v Speaker 2>private community, non banks and the banking system that regular

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<v Speaker 2>are not privy to.

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<v Speaker 3>Yeah, I think there absolutely is that there's a there's

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<v Speaker 3>a real lack of transparency around what the exposures are

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<v Speaker 3>on these private funds.

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<v Speaker 1>My gut tells me they use leverage on leverage, you know, the.

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<v Speaker 3>Conventional wisdom is they rely much more on equity financing,

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<v Speaker 3>are less leverate than banks. I don't think that's the case.

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<v Speaker 3>And here again banks have tremendous lending exposure to them.

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<v Speaker 3>Is a lot of the you know, the lending and

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<v Speaker 3>other financial services that moved out of banks driven by capital,

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<v Speaker 3>the capital regime and the lack of these capital requirements

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<v Speaker 3>in the non banks. This this business has gone out,

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<v Speaker 3>but the banks are still lending to the private.

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<v Speaker 1>Funds that are now doing this.

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<v Speaker 3>But the capital treatment is more lenient because they basically

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<v Speaker 3>do it on a collateralized basis. The exposures are structured

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<v Speaker 3>differently than just making ones and holding them on your

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<v Speaker 3>balance sheet. So again it's a phenomenon of only slapping

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<v Speaker 3>regulation and tougher standards on the banking sector that looking

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<v Speaker 3>toy what you're doing on the non banks, And at

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<v Speaker 3>very minimum, we could impose tighter requirements, things that the

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<v Speaker 3>banks should know about those private funds, having a holistic

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<v Speaker 3>view of their financial position, not just looking narrowly at

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<v Speaker 3>the collateral and Gosh only knows they probably bought that

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<v Speaker 3>collateral with the loan.

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<v Speaker 1>Who else has a claim on that collateral? They don't

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<v Speaker 1>have good The banks don't have it. I don't think

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<v Speaker 1>the regulators have it too.

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<v Speaker 3>And I think if T had a very good piece

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<v Speaker 3>on this kind of breaking down all the different financial

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<v Speaker 3>engineering that's used to pile leverage on leverage.

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<v Speaker 1>In these funds, and it doesn't you know, we talk

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<v Speaker 1>about recession risk.

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<v Speaker 3>I worry more about that so much private credit has

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<v Speaker 3>shifted into the non bank sector and if that sector

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<v Speaker 3>implodes and that fulls back.

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<v Speaker 1>Into the banks, then we are going to have a

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<v Speaker 1>real problem. Then we are going to have a deeper

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<v Speaker 1>sept along the lines we have.

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<v Speaker 2>Unfortunately I have to leave it there, but something to

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<v Speaker 2>rediscuss very soon. Shei la bert Up, formerly of the

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<v Speaker 2>FBI c