Analysts Discuss Financial Reform

By The NewsHour, The NewsHour - September 14, 2009

JUDY WOODRUFF: Jeffrey Brown looks now at where things stand one year later.

JEFFREY BROWN: And joining me for that are Nassim Taleb, a statistician, trader and author of several books on probability and risk, including "The Black Swan." He's an adviser to Universa Investments and teaches at New York University.

Donald Marron is chairman and CEO of Lightyear Capital, a private equity firm, and former chief executive of Paine Webber.

And Alan Blinder, professor of economics at Princeton University, he was vice chair of the Federal Reserve from 1994 to 1996.

Donald Marron, you were at the speech today. Was the president right to warn of complacency on Wall Street? Has enough changed in the year since Lehman collapsed?

DONALD MARRON, Lightyear Capital: Yes, I think a lot has changed. He was very straightforward. I think he gave an outstanding speech. He was articulate. He certainly knew the issues.

Basically, he said three things. The first one is, we need an agency to protect individuals against others who create products and against themselves. Secondly, we need more regulation to regulate all these securities firms and banks. And, third, we need legislative power to make sure this never happens again, that somehow it can be stopped before it goes over the edge.

And I think he delivered each of those positively. Obviously, God is in the details on these things. But this is certainly a speech and a set of issues that wouldn't have occurred a year or year-and-a-half ago. It was an important change.

JEFFREY BROWN: Well, Nassim Taleb, you had warned of instability for many years before what came to pass occurred. So where do you think we are now?

NASSIM TALEB, New York University: Still the same situation. We have the same leverage in the system that we had before. The too-big-to-fail effect is right there, no different from what it was before. And banks are taking the same reckless risks they don't understand as they did before with the very same pseudo-scientists managing the risks.

So I don't see what changed. And we have 6 million Americans at home now more than we had before. I don't see what changed. The risks are still there. We need to lower the leverage, make the world more robust, and it's not.

JEFFREY BROWN: All right, a lot of things to pick up there, but let me bring in Alan Blinder. First, a kind of general assessment. The president did talk about growing stability and gave credit to his team for bringing that about. You've talked about that on this program in the past, the need for all of that. What do you think now?

ALAN BLINDER, Princeton University: Well, I think things look enormously better than they were, say, six months ago, I guess the bottom of the stock -- I think President Obama called the bottom of the stock market on March 9th.

I think things his team has done have helped a lot. I think things the Fed have done have helped even more. The Fed's not part of his team, I might point out. It's an independent agency and needs to stay that way.

But between the Treasury and the Fed and the FDIC and a few others, I think they've made an enormous difference doing, by the way, extraordinary things that I'm sure if you asked any of them two years ago would they ever do something like that, they would have said no.

DONALD MARRON: Yes, it's a key question. I think what we did, first of all, is we brought a larger percentage of Wall Street under the banking regulators, the Fed. And that was a necessary thing to do. I'm not sure it was the best thing to do, but we had to do it. And that, in turn, has resulted, obviously, in lower leverage in various controls that are going there.

The other thing that we did, obviously, is tell the public and the clients and the world that there's a few institutions that are going to be there no matter what. The result of that is they are getting bigger proportionally to the rest of the system. I'm not sure that's a great thing.

And I think one of the questions you have to ask about too big to fail, are they too big to manage? Part of this whole business that we don't talk about is talent, the talent to manage all these complex products, services that are produced. And this is an industry that can easily spawn other organizations.

So I think what you're going to see going forward, particularly with the limitations on compensation, is a lot of talent moving to smaller organizations, finding a way to build them and to compete in the real world. The question is, will the new regulatory environment encourage that? Or will it discourage it?

This country and Wall Street is built on being entrepreneurial. The trend that we're going to now is basically the reverse.

JEFFREY BROWN: But, Mr. Taleb, you're taking this further.


JEFFREY BROWN: You see the chance for continued major failures looking ahead?

NASSIM TALEB: Well, I think what's happening is both risky and immoral. Why immoral? Number one, we're transforming private debt into public debt. Private debt normally with a system of transforming debt into equity or through bankruptcy would disappear. When you fail, you disappear.

We're transforming that into debt for our children. And, of course, we're going to have to raise bonds with the deficits, and that may cause inflation.

The other problem is that the Obama administration has been rewarding failure, OK? Instead of strengthening people who are countercyclical, just like they gave a deal with the Cash for Clunkers to people who bought the wrong car -- I bought the right car, I'm not eligible for Cash for Clunkers, so I'm subsidizing the one who made the mistake, likewise, you have a raise of taxes, penalizing those who are countercyclical, doing OK in 2009, and giving a tax break to those who got us here, the Wall Streeters.

I have not seen from the Obama administration the right kind of leadership that we should be having. I haven't seen anybody stand up and said, "We need blood, sweat and tears." Let's reduce the debt in the system, and let's not tax our children with all these stimulus programs, have not seen that.

The only people who are talking about are the U.K. Conservative Party. Outside of that, I have not seen anything. The risk in the system is being transferred to our children. That's not acceptable.

ALAN BLINDER: Yes, let me separate that into two responses, very briefly. First is the fiscal stimulus. The argument for this is as old as Cane's. When there's not enough demand in the system to get people employed or to prevent them from losing their jobs, one thing the government can do is spend more or cut people's taxes and get them to spend more or something else to induce spending, but all of those things raise the deficit transitorily, not forever, but transitorily, and we're still in that position.

And we're a lot better off today than if we had tried to balance the budget on the backs of a dying -- I don't want to say a dying -- a sick economy at the beginning of this year. The rest of it, hopefully, will not be spending. It's in the form of guarantees, asset purchases, loans. Some of it, as President Obama has mentioned, has already come back, turning a modest profit to the U.S. government.

Some of it will probably be lost, but lost for a good reason, lost so as to prevent or at least reduce, to de minimis the risk of what Ben Bernanke called Great Depression 2.0. If we had gone down that path, the amount -- the losses to Americans would be a multiple of the debt that's piling up.

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