In her final speech on Friday before departing her five-year term as chairman of the Federal Deposit Insurance Corporation, Sheila Bair blamed the country’s current economic malaise on a pervasive culture of “short-termism,” in which some in businesses and governments choose to forfeit long term stability in exchange for short term gains.
“Some banking industry representatives are claiming that higher capital requirements will raise the cost of credit and derail the economic expansion,” she said a luncheon at the National Press Club. “This is a terrific example of the sort of static short-term thinking that got us into this mess in the first place.” She said deep political divisions have failed to make long-term investments in education and public infrastructure that would pay dividends over many years.
Bair, 57, urged the FDIC and the Federal Reserve to fully implement the Dodd-Frank financial reform law and push for tougher rules with banks – or risk another financial crisis. She also stressed that U.S. regulators should resist pressure from some Republican lawmakers who are trying to repeal sections of Dodd-Frank.
In an interview with The Fiscal Times, Bair said that the most immediate strategy policymakers can offer to jumpstart the anemic economic recovery is to provide a fiscal package that “provides clarity to the market about what they are going to do and how they are doing to do it.” She added, “Whether that [involves] tax changes, entitlement changes, stimulus spending – nobody knows right now. I think if they provide some clarity and a credible plan – that would be huge.”
A Bush Appointee -- Praised by Barney Frank
During her term, Bair worked to bolster public confidence and system stability as the country endured the worst wave of banking failures since the savings-and-loan crisis of the 1980s. A native of Independence, Kansas, she was appointed by President George W. Bush and has overseen the takeover of more than 300 hundred failed banks.
She said banks will be able to meet higher capital requirements and “have plenty of capacity to lend.” The reason “banks are not lending more is a combination of risk aversion on their part and reduced borrower demand.” During her tenure, Bair was praised for striking the right balance between her regulatory duties and helping consumers. She was one of the first federal regulators to publicly sound early alarms for interagency guidance to address high-risk mortgages, and was among the first to see the dangers of unaffordable mortgages to the broader banking sector and to the economy as a whole, making her popular with both Democrats and Republican lawmakers in Washington. At congressional hearings on the 2008 financial-bailout package, Bair recommended that $24 billion of the $700 billion rescue package should be used to help struggling homeowners. Federal Reserve Chairman Ben Bernanke praised her decision.
With a willingness to challenge the status quo, Bair found herself in the spotlight; but that didn’t sit well with everyone, especially critics who disagreed with her on issues like the mortgage modification program. Rep. Barney Frank, D-Ma., co-architect of the Dodd-Frank financial overhaul, praised her contributions in drafting the legislation. On Friday afternoon Frank told The Fiscal Times, “She suffered a little bit because she was the first woman, I think, to be a bank regulator.” Frank added, “I think there was some resistance based on her gender, and the disagreement with her became resentment that she was being too pushy.”
Under Bair, the FDIC’s powers and authority were expanded by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The law extends the FDIC's resolution process to large, systemically-important financial institutions; the FDIC can now borrow an unlimited amount from the Treasury Department, which can help troubled banks. The FDIC guarantees bank deposits up to $250,000.
In 1990, Bair ran for a Republican congressional seat in Kansas but lost by fewer than 1,000 votes. When asked if she would consider running again for office, she flatly said no. “I loved campaigning. I loved interacting with voters. I hated the fundraising, asking people for money. That was the singularly most degrading thing I ever had to do. It’s a shame what we put members of Congress through.”
Bair officially leaves office on July 8. She’ll serve on the FDIC board through 2013.
President Obama intends to nominate Federal Deposit Insurance Corp. Vice Chairman Martin J. Gruenberg to succeed Bair as chairman. Gruenberg has served as the agency’s vice chairman since 2005; his nomination is subject to confirmation by the Senate.
Related Links:
Bair Urges U.S. Regulators to Keep Tough Rules (Reuters)
Bair Delivers a Warning in Her Swan Song as FDIC Chairman (Wall Street Journal)
Bair Says Banks Have ‘Plenty of Capacity’ to Lend with Capital Rules (Bloomberg)
