After a five-year term that included the biggest economic disaster in 80 years, outgoing FDIC chairwoman Sheila Bair gave a going-away speech Friday night in which she blasted leaders of the nation’s largest banks and members of Congress for focusing too much on short-term economic and political gain, even as the long-term problems that caused the recession remain unaddressed.
And she used her exit interview as an opportunity to argue for the enactment of bank regulations she believes will spare consumers from paying trillions of dollars in future bank bailouts.
“Some of the rhetoric in the financial reform debate has been either short-sighted or simply inaccurate,” Bair said in her speech before the National Press Club. “Far from being an assault on the free market, these provisions are designed to restore the discipline of the marketplace to the megabanks, to end their ability to take risks at the expense of the public, and to eliminate the competitive advantage they enjoy over smaller institutions.”
Bair blamed resistance to tougher bank reforms on “myopic” short-term decision making by politicians looking to the next election cycle, and bank CEOs and their employees looking no further than the next annual report. The same reasoning that led big banks to make big bets on risky mortgages, which caused the recession, is now being used to argue against requirements that banks keep more capital on hand and limit their exposure to risk.
“Some banking industry representatives are claiming that higher capital requirements will raise the cost of credit and could derail the economic expansion,” Bair said. “This is a terrific example of the sort of static, short-term thinking that got us into this mess in the first place.”
Though she was appointed five years ago by President George W. Bush, who made no bones about his anti-regulation beliefs, Bair won praise from many consumer advocates during her tenure for being the only federal bank regulator to recognize the risks that the subprime mortgage bubble posed to the larger economy, and the only one to support tougher banking rules.
“She has been really a model of what a regulator should be through some of the most difficult times in our recent history,” says Travis Plunkett, lobbyist for the Consumer Federation of America. “During the dark days of economic meltdown she was the only regulator who was prescient enough to connect the dots between abusive consumer lending in the mortgage sector and the overall health of the economy.”
Others believe that such praise is overblown. Bair was the first federal regulator to understand the problems posed by the explosion in subprime lending, but she did little to contain he damage, argues Vern McKinley, a research fellow at the Independent Institute think tank and author of “Financing Failure; A Century of Bailouts.”
“She was raising some red flags in 2006, but there was never any follow-through to address any of the subprime issues,” McKinley says.
In her speech, Bair did not announce what she plans to do after she leaves the FDIC on July 8.
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Image: Ryan McFarland, via Flickr