By Silla Brush and Ian Swanson - 05/06/09 06:07 PM EDT
In an interview with The Hill, Elizabeth Warren, the Harvard Law School professor and chairwoman of the Congressional Oversight Panel, which monitors the program, lays out her views on the government’s management of TARP and how she thinks the nation’s financial regulations should be overhauled. Warren’s panel is also out Thursday with a report on TARP’s impact for small businesses and families. Warren has strongly supported a new financial products safety commission to regulate financial instruments in a similar way to how consumer products are overseen. Excerpts from the interview follow:
It’s important to remember that the current crisis started with home mortgages and the destabilizing of millions of families across the country. The fact that the issuers could promise fabulous profits that were built largely on deceit not only destabilized the families, but they provided the basis for a whole securitization process and sold up the line. … When we’re talking about systemic risk regulation, everyone is having trouble. … How are we going to measure it? Who is going to measure it? What are we going to use for criteria? What’s going to be included within it? How are we going to look at the links? It’s possible to do far less regulation if products are not introduced in their most dangerous form, if the products are not full of tricks and traps. It’s easier to do at the front end. The need for regulation at the back end is sharply reduced.
Q: So is the focus on systemic risk misplaced?
I think the most powerful way to deal with systemic risk is at the front end. … I think this is really a world in which there has been a real division between physical products — we’ve seen enormous innovation and competition but always against a baseline safety standard. In my view, the products market works and works well. By contrast, the financial products market does not work well. … It’s not the role of government to say someone can’t go to the mall and charge too much or that a credit card company can’t ding them for being late on payments. The point is focused on the tricks and traps and that this should not be about hiding things.
Q: Do you think that in the past couple of months, as the markets went haywire, the discussion in Washington has already become too narrow? Are people on Capitol Hill missing the biggest issues?
I think right now the policymakers are struggling with two deeply intertwined questions. First, what are the right regulations? And second, how to talk about them. I think that’s what’s going on. I think we’re in a moment of transition, that the story and the approach have not yet become clear. There is no one thing that has become the tip on the spear and this is how we’ll get at the question of regulatory reform.
Q: Is it that the problems are too complex?
I think the insiders would like us to believe that the problem is too complex for ordinary folks to grasp. I think that is very, very wrong. I not only think it’s wrong — I think that approach is a political strategy in itself. … I see this as very much an insiders-and-outsiders game.
Q: Is the administration too insiderish?
I’m not there yet. I think every journey starts with a step. They’ve made important first steps in the right direction. That’s how I see it for now.
Q: There has been a fair amount of criticism of your approach on the panel.
Here is the first thing that occurred to me about it. And perhaps there are more nasty articles out there than I know about. The first three I read, or the only three I read, only quote industry insiders, for which I want to pause and say, “I want to make sure I understand this. The financial-services industry is not cozy with the chair of the panel that is supposed to oversee the bailout of the financial-services industry.” And someone thinks that’s a bad thing? My first thought is just to say, well, isn’t this is exactly what we would expect that the financial industry would come back at me, hammer and tongs, and say, “You’re crazy, you’re outrageous, you’re too tough.” Because they would like, I’m sure, a much tamer oversight panel. I sort of regard that as an appropriate dynamic.
Q: Was it a mistake to have sitting members of Congress on the panel?
You’re into politics that is way beyond my expertise.
Q: Has Treasury found the right lines about restrictions on firms receiving TARP funds?
I think Treasury is searching for the right line, as is the entire country. The dispute over executive compensation is one echo of that debate. … There really has been a Treasury I and Treasury II. It’s easy to forget this. Henry Paulson had committed the first $350 billion before Tim Geithner became secretary of the Treasury. That first $350 billion was committed on an almost no-strings-attached basis. The current Treasury Department has put far more restrictions in place.
Q: But the strings were attached after the fact.
If I had been the sole decisionmaker — so I’m not having to think about the politics — I think it would have been a very bad idea for Congress to say, “All right, it’s an emergency, I’m going to start restricting how you spend the money and what kind of constraints.” I don’t think anyone should stand behind a fire and keep directing which way the firefighter should direct the hose. You want flexibility in the hands of the experts on the front line. At the same time, Congress put an oversight panel in place, a group to stand on the outside to ask tough policy questions about the program overall. Every time Treasury bears one way, it is our job to ask why not the other.
Q: Do you think policymakers are missing the biggest issues now?
I don’t think you can answer that question yet. I’m not trying to duck it. I really think it’s not possible to tell yet. In the moment before the point emerges, it appears there is no point. In the moment before the tip on the spear becomes obvious, there is no tip on the spear. … We didn’t wake up on the day after Lehman failed and [say], “I know what went wrong and exactly what we can do about it.” It takes some time to work through the process. At some point you may be able to declare it as bogged down. But not yet. I think it’s just too early.