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If you look back over the last four
You’ve seen Washington up close and personal. Do you think we’re capable of the nuances that you feel are necessary?
We’re capable of it. That doesn’t mean we’re going to get it. I was at the Treasury at the time, so let me take whatever responsibility I am due, but, with respect to the Sarbanes-Oxley legislation [which increased regulation on public companies] and the post-Enron reforms—I feel very sad about how they turned out. Not because I’m against improving corporate governance, but I think implicitly throughout the Sarbanes-Oxley legislation we were empowering the second-guessers. We were saying, “Let’s empower the auditors and the independent directors; let’s have more second-guessers in corporate America.” With the benefit of hindsight, I think this wasn’t quite the right answer. What was the right answer?
I would prefer for us to have focused even more on disclosure, making the first-order decision makers more accountable. I think there are ways of doing that. I think we’ve kind of overencumbered and made more litigious and burdensome that process rather than thinking about, where do we really want to shine a spotlight?
A lot of people say we’re in this mess because there wasn’t enough regulation.
It’s not about the quantity of regulation. It’s about the quality. I don’t think the right thing is to measure regulation by how many pages it takes up. I think that we haven’t thought clearly enough about how to regulate leverage beyond banks. You obviously have a strong interest in public policy, as you said, seventeen years of it. Is there any way to trace any of that back to your time at CA?
I was always interested in American history and particularly in the populist era and the challenges of the banking system. I can remember having that interest at CA with Bill Bailey, but I don’t think I translated it into an interest in finance until later. Maybe I should have gone into acting or, as one friend suggested, taken my law degree and become an agent for actors. That would have been a different career path. If anyone had told me you’d be sitting in a chair at BlackRock, I would not have believed it.
Well, those who knew my math skills at CA may have been surprised finding me at the Fed, but we don’t have to dwell on that. Do you think the worst is over?
I hope so, but it will take us a while to recognize it. By early 2009, the banking system will begin to be stable as a whole. We’re still going to see banks being closed; that’s going to be very upsetting. So somewhere here in the fourth quarter and early in the first quarter we’re going to find our way to stabilizing the biggest banks. The other banks and other financial firms are going to have to get sorted out during the first half of 2009. In the real economy, I think we will also see the nadir in consumption come some time between now
recessions, when you get the low in
consumption, the high in unemployment and the low in income come many quarters later.
and June, and then things will start improving. But lagging indicators will continue to weigh on confidence. For example, if you look back over the last four recessions, when you get the low in consumption, the high in unemployment and the low in income come many quarters later. How many?
It varies from recession to recession, but between four and eight quarters later. It’s a long time later. So this is going to be years?
Before we really feel this is all behind us we’re going to really be in 2010. This is going to be a sharp recession and then take us a while to crawl out.
they can rush for the exits at the same time but, in fact, we can’t. We can’t all sell at the same time without disrupting the system. It is surprising and disturbing and I wish I had a better answer for why we had to repeat the same fundamental mistake about too much leverage, too little capital, and too much false reliance on the ability to sell it to somebody else. These are amazing times. I thought you might be more frazzled. I imagined you were having many sleepless nights.
Oh, I can have those, too. But I’m the gray hair. I’m the guy who has supposedly seen something like this before.
When I was rereading the Lowenstein book, When Genius Failed, about the federal bailout of LongTerm Capital Management, it struck me that some of the players are the same players and that some of the lessons that should have been learned were not. How come we can’t learn lessons?
I wish I had a simple answer to that. There are a lot of differences between 1998 and today. This is so much huger—it’s a huge swath of the economy. That was . . . one big hedge fund overexposed . . . It was pretty small potatoes compared to this. What I think you’re pointing to is that the mechanics seem to be similar: too much leverage and a liquidity illusion. Everyone thinks 21
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need reform to make the system work better. But adopting the metaphor of car wrecks, we need to get tough, but tough on what? Should we put a policeman on every corner to hand out more tickets? Should we demand that every car and truck have a second driver, to critique and second-guess the primary driver? No, that would be a dumb idea. I would suggest that we get tough on highway safety, that we think hard about speed limits, traffic flow, and highway design. It’s easy to say “Let’s have tougher regulation”; it is harder to give content to that idea.