Speaker 1: This is Bloomberg Business Week with Carol Masser and Jason
Speaker 1: Kelly on Bloomberg Radio. Michael P. Vavar He is executive
Speaker 1: director of the Milkin Institute's Center for Financial mark It's
Speaker 1: former SEC Commissioner. He served as a senior economist at
Speaker 1: the President's Council of Economic Advisors in both the George W.
Speaker 1: Bush and Barack Obama administrations, so during the financial crisis
Speaker 1: and also in its immediate aftermon math. He joins us
Speaker 1: on this Thursday on the phone from Washington. Michaels so
Speaker 1: nice to have you here. I feel like I have
Speaker 1: a million questions. UM. I think so often when we
Speaker 1: talk about some of the programs that are being um
Speaker 1: put together out of Congress and the President to help
Speaker 1: this crisis and the stimulus programs, we make the comparison
Speaker 1: to the financial crisis. Is that a fair comparison? Yeah,
Speaker 1: in some ways, there's some similarities and in many ways
Speaker 1: their differences. If you think back to the to the
Speaker 1: global financial crisis two thousand and eight two tho nine,
Speaker 1: it really started in the financial sector. What we had
Speaker 1: was we had banks that were under capitalized, they had
Speaker 1: too much leverage. Most of it was hidden. It was
Speaker 1: off balance sheet. Remember, we had special investment vehicles sieves.
Speaker 1: We had over the counter derivative that regulators had no
Speaker 1: insight into what were the exposures or the counterparties. And
Speaker 1: we had a crisis to begin in the financial sector,
Speaker 1: and then that's filled over to the real economy, and
Speaker 1: then that we had the subsequent recession, the current crisis.
Speaker 1: Obviously we start with the health crisis UM in the
Speaker 1: government response in many ways, particularly with UM, things like
Speaker 1: you know, lockdowns and quarantines and stay at home orders
Speaker 1: and closing of non essential businesses. UM. What that's doing
Speaker 1: is that's creating the spill over into the real economy.
Speaker 1: And by all accounts, the financial sector UM is in
Speaker 1: very good shape this time. In fact, if you look
Speaker 1: at what the government is doing, you know, the last time,
Speaker 1: during global financial crisis, the banks were the problem. If
Speaker 1: you look at many of the ways the channels through
Speaker 1: which the government is trying to get money out to
Speaker 1: individuals and small businesses, banks are now part of the solution.
Speaker 1: So UH, in that way, it's very different. UH. Some
Speaker 1: of the similarities are that when you're in it, it's
Speaker 1: very scary UM, and when you're in it you see
Speaker 1: big scary numbers like you know, the unemployment numbers that
Speaker 1: came out today. Um. And it's also similar in the
Speaker 1: fact that we're gonna get through this and it's just
Speaker 1: a matter of time and on the back end of
Speaker 1: this will recover and it's just a matter of of
Speaker 1: of of fighting the fire with the with the right tools.
Speaker 1: And so, Mike, given all of that, what's the advice
Speaker 1: you would give people who are on the front lines
Speaker 1: right now? And I bet you are giving them advice.
Speaker 1: What are you telling them? Yeah, So there's different uh
Speaker 1: folks that we're that we're talking to with the Milk
Speaker 1: and Institute. We're engaging with members of the administration, with Congress,
Speaker 1: with the regulators to try to be as helpful as
Speaker 1: we can. UM. You know, my message to UM the
Speaker 1: government officials is, UM, you know, do whatever you can
Speaker 1: to keep them markets open. UM. You know, it's been
Speaker 1: a lot of volatility in the markets recently, but by
Speaker 1: all accounts, the financial markets have held up well. UM.
Speaker 1: They're providing necessary liquidity for investors who want to sell
Speaker 1: their providing opportunities for investments who uh for for people
Speaker 1: who view investment opportunities. UM, they're producing prices that that
Speaker 1: that give information to investors but also to policymakers to
Speaker 1: think through what are the next steps in terms of UM,
Speaker 1: what type of assistance they want to do? They want
Speaker 1: to give targeted to specific industries or specific companies, and
Speaker 1: so they're working. Is they're working well? I want to
Speaker 1: ask you specifically though about the financial sector. UM. Yesterday
Speaker 1: the Fed is going to it came out and said
Speaker 1: it's gonna let Wall Street banks take on more leverage
Speaker 1: so they can absorb UM what's really a severe lack
Speaker 1: of liquidity for treasuries and a surge in customer deposits
Speaker 1: because of the coronavirus pandemic. So basically they're relaxing a
Speaker 1: key limit on the level of debt Wall Street contain
Speaker 1: take on. Now, this fundamental leverage ratio was part of
Speaker 1: the response in the two thousand Are coming out of
Speaker 1: the two thousand eight crisis? Are we potentially though stepping
Speaker 1: back rolling back some of those backstops that we put
Speaker 1: in place after the financial crisis that could get us
Speaker 1: into trouble? Mike, Um, we could end up there. But
Speaker 1: the particular thing that the Fed did on Wednesday is
Speaker 1: not troubling in any way. UM. The FED has a
Speaker 1: sort of two sets of capital requirements. One is a
Speaker 1: risk based set of capital requirements, which requires you to
Speaker 1: have a hold a certain amount of capital, or the
Speaker 1: opposite of that is limits the amount of leverage that
Speaker 1: you can have given the risky nous of the assets
Speaker 1: on the asset side of your balance sheet. So it
Speaker 1: takes into account if risk your ass risk for risk
Speaker 1: your assets UM, you need to fund it with more,
Speaker 1: with more equity capital and less debt, less risky assets,
Speaker 1: you don't have to worry about that. The key restraint
Speaker 1: that they lessened on on Wednesday with something called the
Speaker 1: supplemental leverage ratio, and that's the second type of backstop
Speaker 1: that they have, which is the leverage ratio is just
Speaker 1: a simple ratio that takes into account the amount of
Speaker 1: leverage or or the converse is the amount of capital
Speaker 1: that you have to have UM without taking into account
Speaker 1: the riskiness of the assets. It's just a simple leverage ratio.
Speaker 1: And what they did was they relaxed that a little
Speaker 1: bit and moved more towards the risk based where they
Speaker 1: said they're not going to count UM treasuries or assets
Speaker 1: held in reserves at any of the federal reserve banks.
Speaker 1: Those are completely riskless and so the fact that they
Speaker 1: pulled back on those um is it does doesn't give
Speaker 1: me UM any pause at all. What it what it's
Speaker 1: going to do is allow the banks to increase the
Speaker 1: size of their balance sheet and in effect do more
Speaker 1: lending UM and not take into account they have these
Speaker 1: these riskless assets. If I can squeeze in really just
Speaker 1: thirty seconds, you've gotta be quick. Do you think that
Speaker 1: there's any point amid the volatility that we should think
Speaker 1: about shutting down the markets, and you do have to
Speaker 1: be quick if you could, Yeah, sure, absolutely not. The
Speaker 1: markets are functioning as they showed a few weeks ago.
Speaker 1: We had some of the market circuit breakers trip UM.
Speaker 1: That's a measure of the success of some of the
Speaker 1: structures that are in place, not a measure of of
Speaker 1: of things that we should be worrying about. UM. Of course,
Speaker 1: the regulator is going to look at calibrating those to
Speaker 1: make sure that we have those correctly. But in terms
Speaker 1: of incorporated fundamental all abilities to market, the working perfectly. Well.
Speaker 1: Let's continue our conversation with Michael Pepavar. He is executive
Speaker 1: director for the Milican Institute Center for Financial Markets, former
Speaker 1: SEC chair, former staffer on the White House Economic Council,
Speaker 1: joining us on the phone from Virginia. Uh So, Michael,
Speaker 1: I wanna bring up a topic with you that's been
Speaker 1: very friend of mine with us. Uh. We spoke earlier
Speaker 1: in the week with Robert Reich. He was talking about
Speaker 1: the program, the fiscal stimulus program, as it relates to
Speaker 1: getting money to corporations. And this will come as no
Speaker 1: surprise to you. Not a big fan of corporate bailouts,
Speaker 1: Robert Reich. Uh isn't, But I do want your take
Speaker 1: on what is the best way to get money pumped
Speaker 1: back into this economy. Yeah, I'm not a fan of
Speaker 1: corporate bailouts either. Um. As you mentioned, that was at
Speaker 1: the White House during the global financial crisis, and you know, unfortunately,
Speaker 1: you know, we had the bank bailout the bank UM.
Speaker 1: And the reason, the main reason for that is because
Speaker 1: banks did not up until Dot Frank did not have
Speaker 1: a really good way to go through bankruptcy and go
Speaker 1: through a restructuring Chapter eleven type bankruptcy UM and so
Speaker 1: failure was not an option. So, UM it was. I
Speaker 1: found it abhorrant, but we had to end up doing it.
Speaker 1: I'm not a fan of corporate bailouts at all. So
Speaker 1: so what's the alternative, And that's to to get checked
Speaker 1: in the hands of individuals as quick as possible. And
Speaker 1: so I think that has um the potential to be
Speaker 1: the biggest impact UM and to have the left the
Speaker 1: least amount of political blowback on the back end of
Speaker 1: this is to get as many as much money and
Speaker 1: checked into people who need it UM as quick as possible.
Speaker 1: And so let's continue down that thread, because you know,
Speaker 1: how do you best do that? Is it checks? Is
Speaker 1: it unemployment insurance? I mean that seems and an extension there, Well,
Speaker 1: what are the best mechanisms to to really get that
Speaker 1: money and how do you essentially do it in such
Speaker 1: a way that there's not a lot of red tape
Speaker 1: and people actually get the money. So right now, UM,
Speaker 1: the government has taken the correct approach, which is UM
Speaker 1: to the answer your question, which way do you do it?
Speaker 1: The answers, yes, you do all of those right now,
Speaker 1: and then you adjust on the fly. Right, you worry
Speaker 1: about things like UM, people going on unemployment insurance because
Speaker 1: they can make more money than than you know by
Speaker 1: not working than by working we can make those adjustments
Speaker 1: in real time. Um. Those are second order of facts.
Speaker 1: Those are second order type of of considerations. But right
Speaker 1: now you want to get that money. You want to
Speaker 1: do everything you can right now, um, and then dynamically
Speaker 1: adjust for that. I mean, we saw the number of
Speaker 1: the unemployment numbers, UM, this this morning. We're the big
Speaker 1: scary number, right and it's going to continue to be bad.
Speaker 1: So okay, naive question of the day, perhaps of the year,
Speaker 1: perhaps of the decade. So why does it keep happening
Speaker 1: that we get corporate ball outs? I mean, um, Bob Rice,
Speaker 1: of course, you know, talks about how it's the companies
Speaker 1: that have the d pockets that do the lobbying to
Speaker 1: make sure that they're heard in Washington. Is it just
Speaker 1: is it just that? And what a shame? And how
Speaker 1: do we change the system. Well, if you look at
Speaker 1: this time, what what Congress and the administration are trying
Speaker 1: to do is avoid that happening and and and try
Speaker 1: to get as much assistance to not only individuals but
Speaker 1: small businesses, main street businesses. Right, you have the the
Speaker 1: paycheck program, the paycheck Protection program that the SBA and
Speaker 1: Tragedy are trying to do for small businesses. The FED
Speaker 1: has announced that they're going to stand up a new facility.
Speaker 1: You know, they've basically rea stood up some of their
Speaker 1: old facilities that they rolled out during the financial crisis,
Speaker 1: and the announced they're going to do another one specifically
Speaker 1: for main street businesses. So my hope is that we
Speaker 1: don't end up with UM. You know, the biggest corporations
Speaker 1: get the biggest bailoff because they have they spend the
Speaker 1: most amount of lobbying money. But there is still five
Speaker 1: billion that's going to hard hit industries, and that includes
Speaker 1: you know, whether it's the airlines and so on and
Speaker 1: so forth. Do you think something like that is the
Speaker 1: right thing to do to help out UM. I mean,
Speaker 1: it's it remains to be seen. We have to I mean,
Speaker 1: we have to use that money judiciously to try to
Speaker 1: figure things out. I mean, obviously what we care most
Speaker 1: about is UM the employees who work for those companies, right,
Speaker 1: So we can talk all the numbers we want UM,
Speaker 1: but it really comes down to individuals. And so what
Speaker 1: you want to do is put the employees first, UM
Speaker 1: and think about them, and then at the back of
Speaker 1: the line you want to make considerations of creditors and
Speaker 1: and shareholders, right, because the last thing we want to
Speaker 1: do is bail out shareholders. And what we saw in
Speaker 1: the last crisis is that also creditors sending to get
Speaker 1: bail out sailed out too. So UM, you know, we
Speaker 1: want to make sure that we're taking into account UM
Speaker 1: the employees first. All right, I'm gonna master you with
Speaker 1: a thirty second question here, Michael, to round it out. UH,
Speaker 1: next set of stimulus. What's the single most important thing
Speaker 1: we need to do. UM, There's there's a couple of
Speaker 1: things out there. I would say the number one is
Speaker 1: UM to look at state and local government right now.
Speaker 1: They're going to be hit very hard. They were hit
Speaker 1: very hard during the global financial prices. They were sort
Speaker 1: of like the second wave of things that came in,
Speaker 1: and I expect that they're going to be a they
Speaker 1: a lot of them haven't recovered since the global financial prices,
Speaker 1: and so they're in they're in bad shape right now.
Speaker 1: So I think getting UM money to those so they
Speaker 1: can we can pay our you know, our firefighters and
Speaker 1: our our police officers and our teachers and the like
Speaker 1: is important. All Right, We're gonna leave it there. We
Speaker 1: hope you will come back and spend some time with
Speaker 1: this such great conversation, we really appreciate it. Michael Pivovar
Speaker 1: is executive director for the Milk And Institute Center for
Speaker 1: Financial Markets. Agree. We know, well, there's some smart folks
Speaker 1: who work in that group. For sure, love the milk
Speaker 1: And Institute, and I love what he had to say
Speaker 1: about states. Joe Wisenthal of Bloomberg wrote about that you
Speaker 1: sometimes need to think about the state does emerging economies
Speaker 1: that they all, you know, have different things they benefit
Speaker 1: from or lose from, and so we need to kind
Speaker 1: of think about that and in providing assistance for them.
Speaker 1: So really smart point.