How to Avert the Next Financial Crisis

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May 29 (Bloomberg) –- Warburg Pincus Partner and Senior Advisor Bill Janeway and U.C. Berkeley Professor of Economics Brad Delong discuss banking and how to avert another financial crisis. They speak with Trish Regan and matt Miller on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Day, apple, gaining 1.5%. it will acquire headphone and music streaming provider beats.

This is apple's largest purchase to date.

You heard the bell.

We are ending the market higher.

S&p higher, nasdaq higher.

This is happening, despite the u.s. economy declined by 1% in the first quarter of this year.

-- is facing demands from the u.s. justice department to pay more than $10 million to and robes -- to end probes of allegations with transactions of countries including iran.

They are seeking to pay to and the criminal -- top end the criminal investigation.

We will bring this story to you shortly.

I want to get additional context with julie.

She is joining alongside me, taking a look at the sectors in the s&p. it goes back to what you're saying about gdp.

This has been true of many earnings reports.

People write off the first quarter and say we're going to get some of the demand coming in the remainder of the year.

There is optimism surrounding that.

A cyclical group is up, but consumer staples are up today.

There seems to be a general -- people are dismissing this number.

Priya is still here with us.

Bill janeway, partner and senior and visor and author.

Great to have both of you here.

What is your take on people's willingness to shrug off this economic news?

The market is operating in an environment of effectively very low interest rates.

Anything that indicates interest rates are going to stay low, the bad news becomes the not so bad news.

It continues to justify asset valuation, given that you are just counting the future.

You are saying we are going back to an "alice in wonderland" where down is up?

In an economy that is still struggling and still slow and still has unused capacity, that cannot generate him laois, even if it wanted to, and everyone in every market would love to raise prices.


I think we are still back in the -- that is basically telegraphed for ever that they will do all they can.

Interest rates will stay low as long as the system needs them to.

The old-fashioned bug would be that we have to have inflation because the fed created all of this money supply.

That does not make sense because you need them demands.

You need people who want to borrow the money and put it to work productively.

That is what we do not have enough of.

That is why i could not agree more with the guests earlier.

I think it is coming back.

If there is ever a time for the government to borrow that money and put it to work productively into infrastructure and into innovation -- we have enough debt on our hand.

You have to trust the government first.

Where are all the shovel-ready projects?

The u.s. navy was responsible for wireless.

That is why you guys are here.

It is called broadcast.

What about the fdr?

It could use a little help.

Why is it that interest rates are so low?

Simultaneously, they pour themselves into equity.

This is a conundrum where you think people will go for one asset class versus another and then you get to asset classes that are on fire.

I do not think this is a usual safe haven.

Normally, you see it as a whole.

What we are seeing is -- what we hear from the fed, we heard a few weeks ago.

He is very clear that they plan to and qe by the end of this year.

The fed is starting the nominal station process.

The bond market is not listening to that.

They believe that even if they start, we are not going to -- the fed will start the cycle and stop before they normally would have stopped.

There is pessimism in the stock market about the protections for the u.s.. that is negative.

There is a disconnect at this point.

The ecb -- i wonder if this is their action.

We will get back to the ecb and the meeting next thursday.

We have some breaking news.

We have been talking about the retailers and the troubles they have been having.

Express is also having troubles.

The company is coming out with comparable sales that they'll 11% in the first quarter.

That was more than had been estimated.

The earnings per share were less than half of what was estimated.

Six cents where 14 judges what they were looking for.

-- $.14 is what they were looking for.

Its second-quarter losses going to be wider -- it will have a second-quarter loss per share of three cents.

Either way, it is below what analysts were looking for.

Typically you have a memorial day emotional event that drives traffic and it did not work time.

-- work in this case.

It is interesting where you have a currentompany that still has issues.

The idea that the government should ro more money and put that money to work in infrastructure projects -- do you think that is the only thing that is going to create demand?

You have the household sector saving money, not spending.

The savings rate went from negative to positive 7%. it is still very positive.

You have the corporate sector porting cash -- hording cash.

It does not create jobs.

It kills jobs.

If you want job killer, you have a corporation takeover and get all the synergies, which is what justify the price of first -- justified the price in the first place.

If somebody does not borrow that and put it to work, you go right back into the slump.

Matt would have a lot to say on this.

If you have two companies that are merging, theoretically, you're becoming more efficient.

That should make you better as an economy.

This is the dirty secret that nobody wants to talk about, including mainstream economists.

The pursuit of efficiency is the enemy of innovation.

You need the ability to tolerate the kind of trial and error that gave us the internet, the kind of trial and error that the national institute of health funded that gave us these miracle drugs.

Permissions that are politically legitimate like attacking cancer, winning the cold war, like maybe for those who are capable at accepting the overwhelming judgment of all of the scientists who have worked on the job, responding to global warming.

There is a mission that is worthy of public investment before it is too late.

You want to have your grandchildren corp.

-- curse you ? listen to marco rubio.

The deficit has declined by about 60 or 70% from the peak.

If you had not borrowed that money, you may have had --. we might have challenged the worst economic year history.

That is possible.

It could have been over -- over sooner.

If the government had not done -- if the obama administration had not been the stimulus bill.

Either you take a -- there is one school of thought and one school of knee-jerk reaction mindlessly responding to self interest and ideological lessons from defunct economist of and other age.

I was thinking you sound very ideological.

Where the money was borrowed and spent, the recession was over sooner.

We are five years ahead of britain.

I've years ahead of all of europe, except germany.

Germany did it by having the ability to generate a massive trade surplus and lend the money to italy, spain, greece, so they could i the -- you run the risk if you spend and find, you will have a situation where our grandchildren will be stuck with the bill.

You cannot pay the debt payment.

I do not think spending money on infrastructure is a bad idea.

For me, it is the inefficiency.

Thank you for being here.

Bill is sticking with us.

The university of california economist is coming up.

We will see you back here.

? welcome back.

My guest host for the hour, bill janeway.

He is the author of "doing --." also with me, the author of "macroeconomics." you know matt miller.

I want to talk about the econ data we saw this morning.

Gdp, lousy performance.

The markets are dismissing it.

We will chalk it up to whether.

This is the first time we have seen a decline in gdp.

Is there more to be read into this than what the market seems to be saying?

It is what i said before.

You have on the one hand, households working their way out of the greatest accumulation of private actor data -- debt -- private sector do get that led to near death experiences.

They are clinging to their money.

With consumers not spending, the pressure to expand to do something other than by another company -- how many are spending just to -- i wonder how much private debt households still hold as opposed to the worst years of the crisis.

Had they not paid any of that off yet?

They are holding a lot more than they want to, as indicated by the number of people in their 20's and 30's living in their sister and parents off . -- parent's basements.

It is harder.

Harder for them -- more debt on student loans than credit cards in this economy.

That is another can of worms, we will not get into that.

We can have a whole hour on that.

It is encouraging people to take on that debt, which may not be the right wing.

This morning's number, it is lower than people were expecting.

There is a pent-up the manned they thought the quarter would be back to normal.

Do you think we will be back to normal?

The normal we get will be an extraordinary normal.

It is 8% below where we thought it would be in terms of the level of production in the level of the economy.

We thought we would have 8% more real stuff being made now.

We thought we would have a price level 3% higher.

11% of the total spending than in 2007 we thought we would have today is gone.

It is not coming back.

Bill is right.

Private households are fearing the debt they owe.

We are back to levels that we were seeing at the end of 2002. it is a shockingly high figure when you look.

If you look at the chart, it went way up.

Isn't that good?

People get their balance sheets in order.

We have 6% of the workforce -- of the employable workforce who dropped out.

We have the lowest employment to population, not unemployment rate, ratio that we have had in this country.

More people are 70, 80, and 90. know, that is less than 65. below retirement age.

For you to say that you have just given up -- how can you just give up?

How can you give up looking for a job?

When unemployment runs out, you do not get counted.

Maybe that will change the rate and cause unemployment to increase.

The debt to annual gdp is back where was in 2002. back in 2002, people do not have the amount of uncertainty.

They had not experienced the housing crisis.

People were comfortable with their income back in 2002 and are no longer comfortable now.

We will consider this conversation on the other side of the break.

? i am back with il janeway and brad delong.

Also here, matt miller.

We are talking about policies to get the economy on safe ground.

Are we out of the weeds just yet?

Here is my concern.

We are in a situation where people are flocking into treasuries and they are flocking into equities.

It is a conundrum.

Those classes do not typically rise together.

It begs the question, are we in a situation because of the very low interest rate environment and policy out of the fed, where we could see another asset bubble?

I do worry about it.

I worry that we come out of this . if we want to avoid another go round, another right on the merry-go-round that ends with the world store crash, we need to make banking boring.

There is one way to do it.

We reduce the leverage, increase the equity.

Banks wants upon a time -- once upon a time, before they could assume they would be bailed out by government, before they got the enormous subsidy -- surely you were in favor of that.

What i am in favor of, in 2008, yes.

I want to make inking so safe it will not need the government.

I want banks to hold the same kind of equity that they held 5070 -- 50, 70, 90 years ago.

If a bank is too big to fail, it should be able to invest in treasury bonds and only in treasury bonds.

Between the 1945 and about -- backup or a second.

Think about long-term capital.

Let's go back to 1999. let's go back to long-term capital.

That was not a bank.

It was leverage.

It was a bank.

You have to kill the leverage.

No one is allowed to leavever . between 1945 and 1985, banks, pretty much everyone was run by people who had been on wall street during the great depression.

These people have a very limited appetite for risk.

Back then, every goldman sachs analyst was also a risk manager.

Private or public, it does not matter.

Any company is big enough to bring down the u.s. government with a collapse, it should be broken up.

Or, it should be required, and this is a requirement, to hold enough equity to be absolutely sure that the stockholders pay for, not the taxpayers.

Breaking it up is a much easier way to do it.

It was only when bill janeway's artificers retired and people like him took over.

How do you know -- i saw the movie.

How do you know it is too big?

It is a little like pornography.

It is also -- not as much fun.

I am not sure, when you see what some of these guys were up to.

A very good point.

I want to know how it is a little like pornography.

We have to take a break and that is a tease if i ever heard one.

We will be right back.

? .

This text has been automatically generated. It may not be 100% accurate.


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