LYNN SHERR, for The Takeaway: Eliot Spitzer, let me
start with you. One year after we bailed out these big financial
institutions that were supposedly too big to fail theyre getting bigger
and bigger. What's going on?
ELIOT SPITZER: Well, I totally agree with the premise
you just said. They were too big to fail before; they are still too big
to fail. We have there was no question we were going to bail out the
banks and we have put trillions of dollars into the financial system. The
question is, are we getting the reform that we need and unfortunately the
answer is no, we are not. We are rebuilding the same edifice, the same
structures; the same government guarantees implicitly behind what these
banks do because if they were to begin to flounder today, once again, we
would have to step in. The government has not - and I have not seen a
plan that says here is how we are going to fundamentally restructure the
financial services sector so the next time around we do not face the same
SHERR: What do you think needs to be done?
SPITZER: I wrote an article a long time ago - and I'm
not the only one - many, many people have said: too big to fail is too
big. Let us finally take a hard look at a system of financial
concentration that became the policy of this government 10 or 15 years
ago where banks were allowed to merge so they became these enormous
structures. Let us finally say you cannot be that big. You should not be
that interconnected, which is the word that is used these days basically
the same thing. You can break them down on regional lines; break them
down on business lines. You can basically say you will not be guaranteed
next time. So the natural course - economic pressure would force them
apart. There is nothing that says they have to be this big. This is a
conversation going on in other countries.
SHERR: Who should be doing this?
SPITZER: The Federal government. There's no question
that the Treasury Department, the Fed ... look, let's be very clear. The
Fed failed. Everyone says the Fed has saved us by printing trillions of
dollars. The Fed is the very institution that was supposed to be
monitoring this along with the Treasury Department. They utterly failed
to do it.
SHERR: Were talking to Eliot Spitzer, former Attorney
General and former governor of New York State. Let us go now to Tyler
Cowan, professor of economics at George Mason University. Mr. Cowan, what
do you think? Banks to big to fail? Are they bigger and bigger? Should
they be regulated?
TYLER COWAN: The key is to reintroduce market discipline
and let creditors know that if their counter parties fail, they will take
a loss. Weve been bailing out institutions since at least the 1990s. I
dont think making them smaller is the answer. Lehman was not that big.
And if you go back to Long-Term Capital Management in 1998, we bailed
them out and they were a very small firm. So I dont think shrinking banks
is the answer. The most we can do is have some very simple restrictions
on leverage and send the message that bailouts will not be automatic.
SHERR: Do you have objections to what Mr. Spitzer is
suggesting, about letting about having the Fed get in there and do more?
COWAN: Well, it is the Fed's responsibility. But the key
problem lies in congress not the regulators. Regulators respond to their
congressional committees. And congress for too long has decided that as
long as jobs are being created in their district or more people are
buying homes, all is well. And that's a big mistake. But its congress
that needs reform. Not the Fed.
SPITZER: I dont think we fundamentally disagree.
Congress obviously put pressure on the Fed and the regulatory agencies to
act in a particular way, but the Fed was supposed to be the repository of
wisdom on this issue and was supposed to look out for systemic risk which
is obviously what brought us down. You are correct. It is not only scale;
it is the fact of the bailouts. But the bailouts by the Fed were
predicated on the notion that Lehman was too interconnected with or so we
thought it was too interconnected. We found out that in fact it was. AIG
was too interconnected. And so therefore they said interconnected equals
big, equals bailout. You're right. The bailouts - what we call the
socialization of risk and the privatization of gain so that asymmetry
take all the risk you want. If it goes bad we'll bail you out but you
can't keep the upside. That has not worked as an economic principle. That
is not market discipline.
SHERR: But gentlemen...
SHERR: Isn't what both of you is saying it seems to me,
on for all the specifics we need to deal with. Part of it is that we as
consumers trusted... We trusted the banks to be in doing what theyre
doing. And we trusted the government and the regulatory agencies to do
what theywho are we left to trust and where are we at this point?
SPITZER: I hate to jump in, but years ago when I was
Attorney General, I said that I would not trust the SEC to do a house
closing for me. And now, after we read the report about Madoff and back
when I said that of course people said you'ro being too edgy. The fact of
the matter is the regulatory system utterly failed. It was captured by
the industry. You had bankers and when you look at what they did and you
look at the AIG bailout and you're right about the counter parties. AIG
got 80 billion dollars, went straight through to the counter parties who
were paid 100%. Nobody to this day has explained why Goldman Sachs got a
check for $12.9 billion. 100% of the counter party risk that it
supposedly had taken. Why? Goldman says it wasn't at risk. Why give them
the money? Government bailed out. The Fed failed. The SEC failed. Who do
we trust at this point? Very few people in the federal government.
SHERR: Elliot Spitzer, former Attorney General and
former governor of New York. And we're also talking to Tyler Cowan,
professor of economics at George Mason. Professor Cowan, go ahead.
COWAN: I would just note that consumers were part of the
problem. That many of us were caught up in the euphoria and the bubble
and many people thought they could take on more debt and buy any house
they want and put down maybe zero money. And its easy enough to blame the
banks, the regulators; all those criticisms make sense. But the problem
was more systemic, was an overall excess of optimism and complacency in
the entire economy, including consumers.
SPITZER: Tyler, you're absolutely right. The history of
bubbles is that everybody gets swept along and we all buy into the same
group-think which is, somehow risk can be absorbed and there will never
be a day when we have to pay the price and unfortunately we find out
COWAN: That's right.
SHERR: Gentlemen, thanks to both of you. Last question
for you, Eliot Spitzer. You've been back in the public eye recently. You've
been speaking, writing, teaching. Some rumors any truth that you are
going to run for public office again?
SPITZER: No. I enjoy participating in the debate and
lending my voice when I'm asked to do so. That's it.