Summers on Obama's New Financial RegulationsBy
As head of the President's National Economic Council, Larry Summers has been in the thick of the Obama Administration's efforts to confront the Great Recession and lead the country to recovery. Now he is at the center of the ambitious effort to regulate financial markets more tightly by redistributing power among the Washington agencies that oversee Wall Street. But there are those on the Street who view this latest Obama initiative as the equivalent of a choke chain on financial services. Summers is adamant that the reforms will result in more economic stability and, ultimately, a more enduring prosperity. But first, of course, the legislation must get through Congress.
What impact would the proposed regulatory reforms have on banks and investment banks?
LAWRENCE H. SUMMERS
Institutions aren't going to be able to play one regulator off against another the way they have in the past. Big institutions are going to be regulated on a comprehensive basis. And above all, what this is going to mean is more capital. You know, Archimedes said that if you give someone a long enough lever, they can move the Earth. We've proven in the last couple of years that with enough leverage, people can lose themselves and their clients any amount of money. And if this financial regulatory reform works, we're going to have less leverage and more capital in the system, and that's going to mean more stability and a healthier prosperity with fewer bubbles.How is this different from what the Fed has been doing for 70 years?
If you look at the institutions that got in the most serious trouble, such as Countrywide (BAC) and Washington Mutual, they flipped their charters to escape regulation by the Fed. That's not going to be possible anymore. [The new empowerment of the Fed] will bring the U.S. more in line with international practice, where there is a holistic regulator with overall responsibility for the systemic risk posed by institutions. Our system, where someone's got the trunk and somebody else has the leg of the elephant, hasn't worked so well.Since most of these institutions are global, do you need an overseer in step with other economies?
One of the real problems has been that too much of the energy in regulatory discussions has been around winning a race to the bottom, trying to deregulate faster than other people do so you're able to attract business, rather than trying to work cooperatively internationally to set higher standards and promote stability. And if you look at the international cooperation over the past six months coming out of the G-20 meeting in London, I think you're seeing much more emphasis on collective efforts to raise standards. Ultimately that will mean a healthier financial system for everybody.What about ratings agencies? Will they be regulated?
You always worry about any situation where somebody's paying the person who's evaluating them. I think there are some practices there that are going to be adjusted, and we'll see just how they evolve in the course of the legislative debate.Right now a lot of businesspeople are unnerved about the proposed new taxation on the international profits of American companies. Where does that stand?
I think most people who've looked at the international tax system have seen how much profits are located in jurisdictions where there's a very low tax rate but the economies are small, so there can't be that much economic activity. And that's got to be something that we view with concern and want to take a serious look at. But we very much want to work with others to make sure we have as pro-American a tax system for corporations as we possibly can, and it will be looked at in the context of overall corporate tax reform.Have you been hearing about this from a lot of business owners and CEOs of multinationals?
Oh, sure. We've also heard from many businesses that recognize that some of the things we want to do in cracking down on tax havens are right and important. People feel they're doing the right thing, but they're put at a competitive disadvantage by others who aren't.The Congressional Budget Office predicts that the deficit will hit $1.43 trillion in fiscal 2010. We all know taxes alone won't really put a dent in the deficit. What programs would you recommend cutting?
If you look at the federal budget, the really important issue is not the way it expands during a recession. The really important issue is projections for the budget in the long run, and it all comes down to health care. If we can change the [health-cost] growth rate by even a limited amount—1% or 1 1/2% a year—we can make a huge dent in the federal deficit. So that's probably the most important issue on the spending side of the budget.The buzz is you'd like to be chairman of the Fed when Ben Bernanke's term ends. Do you want that job?
I am very focused on working with the President as head of the National Economic Council, and that is my only focus. We've got a huge agenda before us with the financial regulatory issues we've been discussing, the issues around health care, and the issues around assuring that this recovery is as rapid as possible.