The Last Word: Sheila C Bair

Writing in the Washington Post, Bair says too many industry leaders, as well as some government officials, are comparing the GFC to 100-year flood. “We didn’t do anything wrong, nobody saw this coming,” is an all too common rationalisation.

“The truth is, some of us did see this coming. We tried to stop the excessive risk-taking that was fueling the housing bubble and turning our financial markets into gambling parlours. But we were impeded by the culture of short-termism that dominates our society. Our financial markets remain too focused on quick profits, and our political process is driven by two-year election cycle and its relentless demands for fundraising.”

During her tenure from June 23, 2006 to July 8, 2011, Bair oversaw the takeover of more than 300 failed banks, from the early failure of Indy Mac Bank to the implementation of reforms designed to ensure that no conglomerate ever again is deemed “too big to fail”.

“Now that I’ve stepped down, I want to sound the alarm again. The common thread running through all the causes of our economic tumult is pervasive and persistent insistence on favouring the short term over the long term, impulse over patience. We overvalue the quick return on investment and unduly discount the long-term consequences of that decision-making.

“Our decades-long infatuation with financing our spending through ever-growing debt, in the private and public sector alike, is the ultimate manifestation of short-term thinking. And that thinking, particularly in business and in government, is actually getting worse, not better, as we look for solutions to put our economy on sounder footing.

“While short-termism on Wall Street and in Washington was huge driver of the most recent financial crisis, we all fall prey to this tendency to some extent. Households have failed to save enough money to carry them through hard times or to achieve long-term goals.

“Business executives squeeze expenses of all types to meet their quarterly earnings targets, even cutting research and development that could create competitive advantage down the road. This market failure leads to under-investment in projects with long payoff periods. ‘Patient capital’ has become almost quaint. And policymakers do everything they can to avoid acknowledging problem or policy mistake, even as it grows more difficult and expensive to fix with each passing day.

“In our routine decision-making, research shows, we increasingly use the part of our brain attuned to greed, fear and instant gratification. This short-termism is reinforced when economic incentives are taken into account. Performance-based compensation, for example, can have disastrous results when it fails to consider long-term consequences.”

Bair says while US government efforts to promote modifications have gradually moved in the right direction, they have remained behind the curve. “We still have not addressed the No. 1 cause of both the crisis and the subpar recovery we are in: stubborn refusal to deal head-on with past-due and underwater mortgages. It’s time for banks and investors to write off uncollectible home equity loans and negotiate new terms with distressed mortgage borrowers that reflect today’s lower property values. It is true that this would force them to recognise billions in mortgage losses – losses they mostly stand to incur anyway over time. But it will eventually be necessary if we are to clear the backlog and end the cycle of defaults, foreclosures and falling home prices that continues to hold back the economic recovery on Main Street.

“Our financial system is still fragile and vulnerable to the same type of destructive behaviour that led to the Great Recession. Unless all of us – households, financial leaders and politicians – are willing to make some short-term sacrifices for longer-term stability, we are at risk of another financial crisis that will be just a

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