Summers: Reform Bill Could Have Prevented Crisis
The financial reform bill that Democrats are scheduled to bring to the Senate floor Monday has been a lightning rod of political rhetoric on both sides of the aisle, with Republicans vehemently opposed.
President Obama made clear in a speech Thursday in New York that he wants financial reform. Dr. Lawrence Summers, director of the National Economic Council and Mr. Obama's top economic adviser, talked with CBS News "Face the Nation" anchor Bob Schieffer about why a bill rewriting banking regulations needs to be passed.
Summers said that if the reforms in the bill had been in place in 2007, the financial crisis that began in earnest in 2008 could have been prevented.
"There wouldn't have been unregulated sub-prime mortgages that preyed on people and set off a housing bubble," he said. "There would have been a procedure for resolving institutions like Lehman Brothers that got in trouble without big taxpayer bailouts. There wouldn't have been the kind of non-transparent derivatives that we saw at AIG that led to the need for more than $100 billion of bailouts."
He added that there would have been much less borrowing and leverage that created a "house of cards" which led to the collapse of the financial system.
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"[I]f you look at the things the experts have identified as causes - whether it was the sub prime mortgages, whether it was the derivatives, whether it was the concept of 'too big to fail' - they are all addressed by this bill," Summers said.
Regulations passed after the Great Depression kept the economic system in check for many years, he said, but legislation hadn't keep up with changes in the marketplace.
"We saw innovations - the credit card, innovations in mortgages, innovations in many areas," he said.
"But our regulatory system didn't catch up with all that innovation. Then you had the things that are as old as time: Greed, avarice, irresponsibility, hubris, without any proper regulation system. That's what led to this crisis, and across the board that's what this bill addresses."
Deregulation that began during former President Bill Clinton's term has been cited by some as the start of what helped fuel the current financial crisis. When Schieffer asked about Summers' role in the Clinton administration and his part in deregulating the financial industry, Summers brushed it off.
"You can debate things that went on in the 1990s," said Summers. "I don't believe that the decisions made in the 1990s went to the issues that were important in this crisis, unlike a number of decisions that were made in the post-2000 period - for example, to allow the investment banks to double their level of leverage with no regulation."
Richard Shelby (R-Ala.) said Sunday that he needed assurances from the White House that financial institutions will no longer be "too big to fail." Minority Leader Mitch McConnell, R-Ky., has also accused the bill of perpetuating the idea that institutions facing collapse could be saved by taxpayer-funded bailouts.
Schieffer remarked that Shelby and McConnell believe the reforms being proposed will actually encourage bailouts.
"Our central objective - the president talked about this during his campaign, the president talked about it in the first months of his presidency, Secretary [of the Treasury] Tim Geithner, when he laid out our plans emphasized - we must end 'too big to fail,' " Summers said.
He added, "That is central to our vision."
Regarding the differences that Republicans and Democrats have over ending the concept of "too big to fail," Summers said, "[O]f course there are going to be debates about the precise mechanisms and how best to do it. Let's be absolutely clear with your listeners. There is no one, certainly no one associated with the White House, who believes that 'too big to fail' is acceptable, who believes that it is acceptable for financial institutions to rely on the prospect of bailouts to raise money and who thinks it's anything other than an absolute imperative to make sure that the days of 'Heads I win, tails the taxpayers lose' end."
He said that's why Mr. Obama has proposed a financial fee to assure that the banking and financial industries bear the costs of what happens in their businesses.
Bailouts have been unpopular with taxpayers, but have happened under previous administrations.
The Emergency Economic Stabilization Act of 2008 and the Troubled Asset Relief Program under former President Bush, and the General Motors bailout under Mr. Obama have been controversial and divisive among taxpayers.
Schieffer asked when the Obama administration decided bailouts were bad.
"Chief Executive Officer [of General Motors]? Gone," said Summers. "Senior management team? Changed. Bond holders? Largely wiped out. [T]he president did decide [to bail out GM], and it took courage because many people opposed it."
He continued, "General Motors paid back the loan part of the support this year. The value of General Motors is today much higher than anyone thought likely a year ago. [T]he president took an enormous amount of criticism for what he did. But if you look at what has happened, that support has largely come back. It has largely come back with interest. In some of these areas the taxpayers are actually earning a profit."
In the past couple days, e-mails between Goldman Sachs employees have been made public that appear to show Goldman employees talking about how much money the company will make when the housing markets collapsed. Schieffer asked if it's appropriate for a company like Goldman to be in a position to earn money when the economy is faltering.
Summers didn't answer the question directly, but did say, "This underscores what is at the center of the president's vision here. The importance of transparency, the importance of things being in the open, the importance of it being known. Who's in a position to benefit from what? Who's got a stake in success, who's got a stake in failure? We need far more transparency."