President's Comments On Economy Examined
ROBERT SIEGEL, host:
Now, some reaction to President Obama's speech from Harvard economist, Kenneth Rogoff. Professor Rogoff is a former chief economist for the International Monetary Fund, and he memorably warned a year ago, back in August of 2008, that the worst of the financial crisis was yet to come and that a bloated financial sector needed to shrink. Ken Rogoff, welcome to the program once again.
Professor KENNETH ROGOFF (Professor of Economics, Harvard University): Thank you, Robert.
SIEGEL: First, I wonder if you agree with President Obama's general assessment of the financial landscape right now, that the financial sector is not in a state of grave crisis and no longer in need of the government's support that it needed a year ago?
Prof. ROGOFF: Well, yes and no. It's certainly not in a state of crisis that it was, but the government is supporting it tremendously. And the president spoke of the need for support waning. But the thing is that everybody knows the government will come back and that's going to let these firms continue to borrow at much cheaper interest rates than they otherwise would with people not having to pay for the risk that they're taking.
SIEGEL: But the president spoke specifically as we heard of banks not assuming that the taxpayer will be there to help them out if they fall.
Prof. ROGOFF: It's a very well written speech and he hits the right notes, but it's a little bit like when I tell my children that I'm going to completely cave into them this time, but next time I'm going to be much tougher. I mean, the fact that the government really was so generous to the financial system makes people think that it would be again.
SIEGEL: Now one important prescription of the Obama plan is stronger capital and liquidity requirements. As I understand it, banks would have to have more money on hand and accessible to justify the loans that they make - a good idea?
Prof. ROGOFF: It's a great idea, so Treasury Secretary Geithner had proposed that a while ago and it's a core piece of President Obama's speech. The question is will it be enough. The banks have been allowed to take these huge gambles, particularly problematic is their very short-term borrowing. And they always have to roll it over all the time and any time they can't get money they run into trouble. They ought to have a lot of cash on hand in reserve for that and the system doesn't require it. President Obama is talking about having stricter requirements but will it be enough. I'm very skeptical that they're going to go far enough. I might add that they're talking about having these come into place after the next election. That might not be soon enough.
SIEGEL: The president also wants to see creation of a consumer financial protection agency, a new federal regulatory body that would look out for the consumer. A good idea and is it likely to succeed?
Prof. ROGOFF: Most experts I speak to about on this are pretty skeptical that this is really going to be a useful body, that it's really going to improve things, but politically I think it's important in order to make people feel like they're not being cheated all the time. There were regulators in charge of this before - notably the Federal Reserve, for example, on credit cards. And it's not clear that this will be better, but I think this is more a political element than a central regulatory element.
SIEGEL: Of course, if you ask Secretary Geithner, as I did last week, are the proposals that they're making really enough, he'll say well, judging from the pushback we're getting from the financial sector on Capitol Hill they must be a lot because the banks don't want it.
Prof. ROGOFF: Well, sure, but I mean, they want, you know, less is more for them. They want to make as much money as possible. They want things to be as much the same as possible. His proposals are good. And I'm expressing skepticism that they'll really be tough enough when they're implemented. You say that there are capital requirements. Banks need cash on hand. Well, how much cash? Reserved against what? How much are they going to protect against the short-term lending.
If banks were borrowed say 30 times their cash reserves, their capital, before the crisis and we cut it back to 20, is that really enough? And I might add, there's no clear case that having these giant financial behemoths borrow so much at short term is really so good for the economy and growth.
SIEGEL: On the spectrum of being a libertarian when it comes to the financial sector and believing in very tough regulation, where would you place yourself on that scale?
Prof. ROGOFF: You know, Robert, I'm in a sort of funny position here because I favored seeing more blood so they wouldn't have to regulate so much afterwards, but now that we've been so generous that we've just given them everything, you have to regulate it a lot. We're stuck. So I think we painted ourselves into a corner and, you know, it comes back to this point: President Obama says we won't do it again next time. I mean, my kids have learned better and I think everyone else understands better that we're just not prepared to a let a big financial firm fail.
SIEGEL: Ken Rogoff, thank you very much for talking with us once again.
Prof. ROGOFF: My pleasure, thank you.
SIEGEL: Professor Kenneth Rogoff, economist from Harvard University and former chief economist for the Internal Monetary Fund.
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