Tough Love at TCF

SW: What about the monetary policy promulgated by the Federal Reserve?

BC: [Former Fed Chairman Alan] Greenspan thought we were in a period of deflation. What it really was was a period of huge productivity increases. He took rates down to a 40-year low and kept them there for two years. He created a bubble by putting a huge amount of money into the economy at a time when it didn’t need it. It turbo-charged the increase in home values far beyond what happens in a normal environment [and] contributed hugely to the housing bubble, which was bound to burst. When it did, all this bad lending came to the fore.

SW: Given all the contributing factors, how do we get out of this mess?

BC: Well, this is a time to lower rates, and [policymakers] did. In the last recession, inflation was high—interest rates were 18 percent, which made it very difficult to work it out. Today, we’re not in a period of inflation. So, they have a lot of tools to use and they’ve used them.

I’m not going to be picky about some of the decisions, like the TARP money that went into the banks. People can argue whether it was a good idea or a bad idea. [The financial system] was going to fail if they didn’t do it. It was going to be the Great Depression. It kept the really big banks from going into the tank. If you go back to the 1930s, one of the big mistakes made then was to let the big banks fail. When the regulators let Lehman fail, that really got it going. They never should have done that.

SW: What happened with big banks?

BC: You’ve heard of the concept of too big to fail? What that really means is too big to manage. It is impossible to manage Citigroup. That company is in every country in the world, in every complex business. How in the world could the board and CEO know what the hell was going on? Some of the executives said their bank didn’t own any of the securities that have now proven to be toxic. But shortly thereafter, they book an $8 billion loss. Was [the CEO] lying? It would be better if he was. Rather, he didn’t know.

But what have [regulators] done in this process? They’ve crammed NatCity [National City Bank] into PNC [PNC Financial Services Group]. They’ve crammed Countrywide into Bank of America. They’ve crammed Merrill Lynch into Bank of America—making them bigger, even more complex. That concept of pushing bad banks into good banks may be a flawed concept. The long and short of it is that they are going to have to put more capital into those banks to make up the difference.

SW: Critics say we’ve thrown a lot of money at the banking crisis, but we still haven’t fixed it.

BC: Because it’s bigger than we thought it was. But we’re at the back end. I really believe that.