Moody's Talks - Inside Economics - Bonus Episode: Bair on Balance Sheets

Episode Date: June 14, 2022

Sheila Bair, Member of Banking Advisory Group and former Chair of the U.S. Federal Deposit Insurance Corporation, joins the podcast to discuss the policy response to the Great Recession, concerns about today's U.S. economy, including student debt. Student Loan Debt CalculatorFor more from Sheila Bair follow her @SheilaBair2013Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and this is a special bonus edition of Inside Economics. And to help with this is my two co-host, Chris, Chris DeRides. How's it going? Dr. DeRides? Been all right, hanging in there? I see you're still in the office. You're about the only person in that office. There are three of us here today, I believe. I was there yesterday briefly, and it was, I don't know. It doesn't feel like people are going back. Yesterday was actually a bit of a busy day. I think we were up to six. Oh, okay. Critical mass. Okay. Very good. And Ryan, Ryan Sweet, Director of Real Time Economics, got any good statistics for us, Ryan? What's the top of mind right now? What statistics do we all know? I got one for you. I got like three of them, but I'll give you one. I was thinking about the CPI tomorrow, but I was going to tell you I made a big mistake over the weekend. Oh, what's that? I bought the kids a cotton candy maker.

Oh, no. I didn't know. I thought it was going to be like a treat now. It's like after dinner before bed. They're like, can we have cotton candy? I didn't even know there was such a thing. Oh, yeah. This thing's pretty cool.

But their dentist is going to, you know, not be happy. Yeah. Or sugar prices. Yeah, there you go. There. I'm going to watch the sugar price component of the CPI tomorrow. Ryan has every gadget on the planet, I think. One, one of every gadget.

somebody has two of some guys. That's true. I've got a couple, a couple of everything. Yeah. Right. So what are your numbers? Oh, yeah. Oh, did you notice natural gas prices are approaching $10 for a million BTU?

It's crazy. Yeah, that's crazy. That's more than double what it was a year ago. Yeah. Very, very, I was just giving testimony to the PA, the Pennsylvania State House. Because I'm a Pennsylvania resident. And I was the subject of a lot of that discussion. Yeah, very high out gas prices.

Anyway, that's not the topic at hand. This is a special bonus edition. It's special because we have Sheila Bear. Sheila, hi. How are you? Hi, Mark. Nice to be here. It's so good to have you.

It's been, you know, our points of contact, we've had many points of contact over the years. Yeah. Somehow our paths are intertwined in some way. It's right. You know, going all the way. back to the FDIC. That's right. Did you know, Sheila?

I don't know if you know that, but you were my biggest client at one point. FDIC was my biggest client. I'm not surprised. We were a lot of people's biggest client. Oh, well, okay. Yeah. I thought I was special. You know, I just, oh, yeah, we had, I think we had like a, I can't remember the size of a

consulting budget. Oh, my goodness. But you were, thank you, Mark. You were, you know, your forecast were good and helped. You know, I think we were, we've been. We had a guy named Rich Brown, who I think you probably remember who passed away, unfortunately. But anyway, he was, yeah, we were early in terms of predicting there were going to be problems in the housing market and they need to proactively do something. And you were certainly helpful in that. So, yeah, it was a good partnership.

Yeah, I mean, it really, because you were regionally focused, as you should be, your regular, the FTC's regulating the banking system. And, you know, particularly if you go back 30 years ago, it was the footprints were. very regionally focused. Right. And that was our claim to fame, you know, we did a lot of regional economy analysis. That's how we got to know you very well. But Sheila, I mean, I mentioned the FDIC,

but you have a very storied, you know, kind of career. Can I just give us a sense of the expanse of what you, first of all, how did you, I guess my knowledge of you really began when you became at FDIC, but you had done lots of things before that. Can you just give a general sense of things? things? Yeah, sure. So I'm a Kansas Republican, grew up in Kansas, a very populist, kind of a, you know, William L.M. White philosophy around government. And I, my first big job was with Bob Dole, actually, who was on the Senate Judiciary Committee back when Joe Biden was the ranking member, Strom Thurman was at the time,

that was in the early 1980s, got to know Senator Biden a bit, worked on the voting rights. I was a civil rights lawyer, actually, back then. That's where I started my career. And we worked on the Voting Rights Act extension successfully. Dole and Biden forged a compromise. And it was an amazing experience. So I stayed with Dole for six or seven years, worked on his 88 presidential campaign. And then segued into financial services after that. It was a big change for me.

I traditionally had been in more constitutional law, immigration, all the judiciary issues. But it was a good transition. And so I, you know, I was a senior executive of the New York Stock Exchange. I was commissioner and acting chair of the Commodity Futures Trading Commission. I was the Assistant Secretary for Financial Institutions at Treasury. That was my first for a into banking in the early 2000s. Had some small children found a government career in D.C. was not conducive to

raising small children. So we fled to the University of Amherst for four years where I taught. And then I came back in 2006 to chair the FDIC, which is where we met. So, yeah, I've had a lot of government experience, political experience, in financial market, you know, with securities at the New York Stock Exchange and derivatives with the CFDC and then, of course, finally with banking at Treasury and then at the FDIC. So it's a, I think that helped me during the crisis because I had a sense of, you know, I wasn't completely bank-centric.

I had a sense of what was going on in derivatives and securities. And clearly there was a, you know, with OTC derivatives playing such a big role. And then, you know, the problems you were having at the mortgage securization market and lack of disclosures there. It was, they were, they were helpful insights to have as we navigated that difficult space. Right. It was a very difficult time, very difficult time. Right.

And you've had a couple of other jobs since FDIC. I have. So, yeah. So I went into, I worked at the Pew Charitable Trust for several years. We set up something called the Systemic Risk Council, which still continues. I serve as a chair emeritus and senior. advisor there and Erki Likinen and Simon Johnson currently chair. It's a great group of mainly former regulators, but also industry people, academics.

And we try to keep an eye on system stability and try to advocate for measures to promote system stability. And then I was a college president for a few years where I became very involved in student debt issue and very proud of some of the initiatives we pioneered. It was at Washington College. I think Ryan went to Ryan. Washington College. Oh my gosh, really?

Play baseball right. I did. I went to Washington college. That is very, oh, what is small world? Are you from Maryland? Are you from the area originally or how did you end up at Washington College? Baseball. So I grew up in South Jersey and a guy on my team went to Washington College and he's like,

you need to come visit this place. And I fell in love with it as soon as I stepped foot on campus. It's a beautiful campus. It really is pretty. And a story in history, too. really was George Washington's school. He, it was the first, it was the first, actually, it is the oldest, I believe, chartered institution under the United States. So Harvard under the Brits got chartered. We were next. So we were the oldest and George Washington was actually on the board.

We benefited from his personal philanthropy. We've got a wonderful center for the American experience that is all about American history. And yes, it is a special. place. I'm glad. Nice to, nice to hear it alone speak well of it because it is. It is great school. It really is. Anyway, we had, we initiate a lot of affordability initiatives there that I'm very proud of. And after that, I decided to do more of a portfolio approach, have a little more time with my, with my family, with my husband, to travel. So I've been doing corporate boards and advisory work since then, including with the P.T. Peterson Foundation on student debt. Got it. And we'll come back to that for sure. Okay. Great. Absolutely.

I said before we went on that, I was going to tease you a little bit. So here it is. I was, you know, reading your bio, just in preparation for this, a Wikipedia page. And it says Forbes said you were the second most powerful woman in the world twice. Right. So why not the most powerful world? Well, I wanted to know that too. Angola Merkel or beat me out.

Oh, Angloom Merkel. And I say, you know, some heavy competition. there. Yeah. But the sad thing was once the crisis subsided, I dropped to number 14 and I was behind Lady Gaga and I was quite upset about that. That is upsetting. And then when I left the FDIC, I dropped off, but I was at the top of the list of people had dropped off. So there you go. Yeah, but it was, that was a hitting. I think it was more about the agency than me, but it was nice accolade because we were, I'm proud of what the FDIC did during the FDIC did during the crisis. It was it was stabilizing. It was reassuring and I was very proud of the job we did. Absolutely critical I think. And what a

wonderful career. I mean, just an amazing career. The one thing I wanted to, I want to talk a little bit about the past, the financial crisis and the role there and what FDIC did. And then use that as a basis for talking about now, you know, because there's a lot of concern out there about recession risks. And generally before recessions, you have these imbalances in the financial system or the economy. And I want to talk a little bit about that. And in that context, I do want to bring in the work you're now doing with the Pew, the Pew Foundation around student loan debt. And we've been, Chris does a lot of work in the student loan area. There's a lot to talk about there, you know, with regard to current policy in terms of forbearance and debt forgiveness and that kind of thing.

Right. curious what you think about all those things. But first, first up, the financial crisis, I think I might have said this to you before. I can't remember your answer. I want to try it again and see how you respond. In my view, in my humble view, of all of the policy actions taken during that period, 2008, 2009, particularly, you know, after Fannie and Freddie were taken over by the government, Lehman failed. It was a chaos. It was just very chaotic, obviously. And there were a lot of policy responses trying to quell the crisis, you know, everything from TARP to, you know, all kinds of bailouts and everything else.

But the one thing that I think doesn't get enough credit that really made a huge difference was when you at the FDIC guaranteed bank debt. You said, look to creditors out there, money good. If you buy a bond issued by a bank, and of course, banks issue bonds to raise the cash they need to make loans and extend credit, keep the economy moving. If you buy that bond, it's money good that you'll get your money back. And as soon as that happened, as I recall, I think literally to the second when it was announced, you could see LIBOR TED spreads come in.

Ted spread being the difference between LIBOR, the rate banks charge each other and the risk-free short-term treasury yield. And if that gaps out, that means people are panicked and banks need to charge each there are a lot of interest to compensate for the risk. But when that comes in, that's an indication that people are feeling calmer. And it maxed out, like, you know, right before the announcement at the all-time high, and it came in very rapidly. Do you, does that resonate with you?

Does that action, is that in the top of the list of things that you think really played a key role in quelling the financial crisis? Yeah. So I, actually, I wrote a book, Well, By the Horns, by memoirs, my memoir of the financial crisis and I spent quite a bit of time on that. That was a, we were originally asked. I'll never forget it. So, Hey, Paulson said, you need to come to my office and we couldn't find out what the meeting was about. And I kind of walked in and I had, I smelled an ambush. So he was he was sitting there office of Ben Bernanke and there on the phone was Tim Geithner. And I think,

you know, kind of some of our different perspectives are well known at this point. But anyway, they basically had a little script for me, a little press release. They wanted me to stand up there and say that we were going to backstop all bank debt, not just bank debt. I'm insured banks, but holding company debt. Okay. So this is not, this is beyond insured depositories and that the Fed and the Treasury would be right behind me. So I said, well, that's, that's interesting.

So I took it, I took it back. I talked with my team. I talked with my board. And my main question was, why, why do we need to guarantee all debt? The problem is banks couldn't roll their debt. They were heavily reliant on short-term financing, you know, overnight financing a lot of it. It couldn't rule their debt. And so I said, well, let's, we'll guarantee newly issued debt.

We can do that. The stuff that's already out there, investors are still going to be at risk. And, but we should also charge for it because this is a risk for us. We're using the deposit insurance fund basically to backstop debt a very large financial institutions, you know, including at a level where we're not directly backing the depository. which is our charter and mandate. So we took that back. And after some towing and froing,

that was the program we put in place. And it was successful. And I think you're right because, you know, we terminated that program pretty promptly, whereas the Fed facilities continued on for many years. And I think that's a mistake because you should look in times of true crisis, looking at temporary debt guarantees, I think is a better way.

does not increase money supply. It's easier to put on and take back off, which was clearly the experience. And it was immediately stabilizing, as you point out. So I do think it was successful. I don't like bailouts at all, but if you have to do them, I think going back to that model, suppose this heavy reliance on these fed facilities

that end up becoming standing facilities, needs this to have more and more, with best of intentions, but more and more fed intervention and market functioning. I think that's an unfortunate trend and we saw it again during the crisis so the pandemic crisis so yes thank you for recognizing that I would also say though I think on a macro level probably was one of the more significant things but at a household level I am more proud of what we did for insured depositors we we

had to put things look when I came to the FDIC the receivership function had really been shrunk I mean this is the golden age of banking you know everything was they knew risk they understood risk. We're going to have bank figures anymore. And really that component of the FDIC had been downsized. And we started rebuilding it when I got there. But we also just used a lot of purchase consumption transactions. In other words, we sold, but the smaller banks, we sold them to other smaller banks. And that was so much better to ensure seamless access, continuous access, not just to people's deposits, but also all their other banking relationships. There were no disruptions because of that strategy, which we used overwhelmingly.

And so that took a lot of work. I think we made it look easy, but that took a lot of work. But it was really, you saw, you know, there were in, there were no bank runs. Money was coming into banks. And I think a lot of that was because at the Main Street level, people understood we were there and we were taking care of them. Yeah. The U.S. Treasury, you were behind, sitting behind the bank deposits and people were confident. Exactly.

I want to try a couple of other sort of conventional wisdoms. They're Zandi conventional wisdoms of the crisis, just to get your take on it. Another one is that, you know, the thinking out there is that the crisis really got going with the Lehman's failure when the decision was made by Secretary Paulson that there's no bailout here. The creditors of Lehman are on their own. And, of course, you know, things kind of fell apart after that. But in my thinking, the beginning of the end wasn't the real catalyst for this part of the crisis where things completely went off the rails, wasn't Lehman. It was a takeover of Fannie Mae and Freddie Mac one week before. Because literally it was one week before, I believe a Saturday the week before, Fannie and Freddie were put into conservatorship.

And I think that kind of rocked creditors thinking that the investors in financial institutions. they thought Fannie and Freddie was an extension of the U.S. government, and there was no way that the government would back away from that commitment, and they did. And that just completely eviscerated sentiment and confidence. And then, of course, Lehman got caught up in the tsunami that followed that. What do you think of that narrative or that kind of perspective? Yeah, it's a good question. There were so many things happening at once. It's hard to know what the single factor was what was on investors mind and the market's mind and reacting to that. Again, clearly, there's a lot of bank exposure, especially, you know,

banks that were exposed to Fannie and Freddie when that happened and that, we had to get busy to deal with that. So I do think it was jarring. You're right. Lehman was the one that got the big headline. But Bany and Freddie, in terms of their role in the economy and their size, was way more significant than layman ever thought about being i mean i said you know layman was kind of a mid-tier institution that i thought if you for investment bank was not i don't think anybody ever thought it was particularly well run did you i know no no remember that a crazy structure you know yeah yeah exactly

there was a lot of opacity and yeah you know they were taken down risk and so uh yeah fanny and fanny and freddie was much more because people thought they were rock solid they were more like government utilities and, and, but they were clearly taking some risk to, ironically, that the catalyst for that was the market losses they were taking on their, their private MBS exposures, not on their own loan book, which was, was not so not nearly as bad as what you saw on the private label securitizations. But yeah, you're right. And it's, there's not been much scrutiny of that. And it's sad, I think that they're still in conservatorship. I, that, that shouldn't happen. nobody should be in a conservative with 14 years now or whatever.

I mean, that's just, it's not, it's not what the law was set up to do. It's not conservator trips are equipped to do. And I know the problem is it just keeps being everybody's last priority. To some extent, Fannie and Freddie are victims of their own success because they're kind of keeping things going anyway, even in conservatorship with all the challenges that provides. And so, you know, if it ain't broke, don't fix it. But it really, they need to get out of conservorship. There's just no doubt that.

Well, that's the last big thing, right? out of the crisis. I don't think there's anything left. That's the last unresolved. That's right. That's exactly right. Yeah. Chris and I had a bet like soon, I don't know, back 10 years ago about would

Fannie and Freddie ever get out of conservatorship within, what was it Chris? And I was a 10 year bet. 10 year bet. And I said yes and he said no. And of course I had to pay him the buck. I'm still waiting, by the way. It was a metaphorical book. Yeah.

I mean, you would never see that at the FDIC, unless, you know, there might be a shell of something that would be the state of in conservatorship for a long time. You would never see, you know, operating companies stay in conservatorship that long. I mean, they lose their edge. They lose their agility. You've got all these constraints. You lose the market discipline. There's just so many reasons why this is not a helly thing. And like I said, I think we've been lucky that they've been able to function as well as they have in conservatorship.

I mean, you know, you look at Title II of Dodd-Frank, which gave the FDIC, new authorities to put systemic institutions into a bridge, essentially, conservorship. And that's got a three-year limit on it, which really is the outside of, you know, how long you want to keep financial institutions under government stewardship. So I do think it's a problem that is eventually going to become more obvious that it's a problem. Like I said, they're being good sports and continuing to do a good job, even though they can continue to operate in conservatorship without much control of their own destiny. Well, I think you said it, you know, if the view is that ain't broke, you know, I just don't see a change.

It's pretty hard to. Yeah, it's hard to see it. No, I think that's right. And at some point it's going to, I think there are going to be issues. And then, you know, because operationally, they're, well, they need to build capital. And that that sweep was clearly a mistake. And so they're finally accumulating capital now and getting more stable balance sheets. But operationally, too, there's a lot of, you know, with credit risk, it's less of a concern because they've still got the government backstop.

That's, I guess, a benefit of being conservatorship. But operationally, you know, there's a lot of risk there. And you want top talent. Given their imprint, you want top talent, especially on the technology, so. Well, I'd love to have you back this talk about fainting, Freddie, because it feels like we could have a really good conversation. slash debate, disagreement. Yeah. We got a lot, we got a lot of ground to cover here. Okay. All right. So I digress. Sorry. Yeah. No, no, no. That's excellent. I had another kind of Zandi conventionalism, but I think we should push on to one other thing in the wake of the

financial crisis, Dodd-Frank. Obviously, that was a major reform legislation, I think passed in 2011. And I guess this is a zandi conventionalism. I view it as a success. I mean, there's a lot of moving parts there and not all parts worked as well as the other. But at the end of the day, it feels like it got the system to a much higher level of capitalization, liquidity, much better risk management. You can be very critical of the stress testing process. But at the end of the day, that feels like that's been a therapeutic process, at least from my perspective. How do you feel about Dodd-Frank? Do you view it as fondly as I just articulated it?

Well, I was very involved with it. And yeah, I think, you know, we pushed hard on titles to give us broader, you know, authority to take over entire institutions. We only had a jurisdiction over the insured depository piece during the crisis, which was another impediment. It was, our toolkit wasn't as adequate as it should be. So I think that was good. We pushed for the Financial Stability Oversight Council. obviously, ironically, Dodd-Frank, except for the Collins Amendment, Dodd-Frank just really addressed capital, as an extolling the regulators to do the stress tests and et cetera, but it's still, there's a lot of discretion. But I mean, the regulators got religion on it.

I still think, I think the banks are still could use some more capital. I got to be honest with you. I think, well, I mean, I think in normal times, they're fine. And I think in mild dips, they're going to be fine. I think during the pandemic, if the pit hadn't stepped in,

especially with the corporate debt backstop, I think you've seen a lot of banks in trouble again. I mean, they like to brag about, oh, see how well capitalized we were. We worked with fine. They did do fine. Good for them. I'll give them that.

But I don't think that would have been the case if that hadn't stopped them with really massive liquidity support. So we need to be honest about that. And if we're just going to accept a paradigm that to be banks, we're going to accept these very large banks and accept that they're, to be profitable, they have to operate.

operate the level of leverage that is going to be unstable and in deep times of economic stress and we're going to bail them out. I think that's what we've got now. Let's just say it. That's what we're doing. But I don't think, I think we overplay this. Oh, they're so well capitalized. If Mother Fed hadn't come in, I think we would have seen a very different situation. And, you know, maybe that's okay. But I do think that we, the capitalization of the banking industry is, is sometimes overoptic people are overly optimistic in terms of how it's described. I also think, you know, on a countercyclical capital buffers, boy, this year, I don't know if they're going to do it or not, but if they're going to invoke a catastrophic local capital buffer,

this would be the year to do it. Profitability is still strong. Recession risk are high. Do it now. Build in a little extra cushion before, you know, before the economy hits the skids, which it made very well the next year or two. One interesting thing in support of the perspective you just articulated that I have been surprised by is that despite the dramatic increase in capitalization, if you just look at, you know, tier one capital in basic, you know, measures of capitalization, it's definitely way up from where it was. Oh, God, yeah.

But despite that, return on equity, return on assets is pretty good. I mean, not bad. Yeah. Well, for the first of all, you were starting from a very low. baseline. See this increase. So let's note that. But yeah, all this belly aching about bank proper requirements is like, oh my God. And they become globally dominant. I mean, the European banks are on the skids. They just, what is your problem? I mean, but they're still, they're relentless. Oh, no, relentless. They're, you know, they want to take treasuries out of the denominator and reserve

accounts out of the denominator. And, you know, they're just, they're just relentless. More leverage, more leverage. They won't, they won't stop even though it, to your point, it has served their interest, they are still very profitable and globally so much more competitive than they were before. Yeah, I mean, I was looking at ROA, return on assets. And the ROA for the system, this is FDIC data, today is as high as it was in the teeth of the housing bubble prior to the financial crisis. And of course, that was all fictitious profits. That was stuff. Yeah. And this, we still have fairly low interest rates. The centuries, rephrase, their spreads, or, you know, their net interest margins are going to go up.

You know, unless it's a recession, then we'll see what the credit losses look like. Yeah. Well, you know, the economists are saying Medigliani Miller works. You know, that's what it seems to say. Yeah, yeah, yeah, yeah. I won't go into that. Did you, you guys studied Medigliani Miller, right? Oh, yes.

You young guys. You studied that. Yeah, yeah, yeah. Actually, I think they wrote that seminal paper when they won the Nobel Prize in 1959. That's the year I was born. Not long ago, yeah. Well, the only thing of the stewards of that analysis is too big to fail, right? So if you can't, I mean, if there was no, there was no perception of government backstop,

as I said, there still is, that would be a more perfect theory. But yeah, yeah, at some level, I think it does prove the point. Yeah. Anyway, well, let's roll forward to the current time. And let me ask you this broadly. And let me, let me preface it by saying that you, and I think, I mentioned this earlier, that recessions that we've experienced here in the U.S. since World War II have typically had some significant, what I would call imbalance in the economy, something wrong

deep in the balance sheet of the economy, either in the financial system or the American household or American corporations or state and local government or federal government. Somebody's done something really untoward kind of fault lying down the balance sheet. And it's not a problem if everything sticks to script, but if you get into a rising rate environment like the war and one now or the economy starts to weaken, it exposes that fault line, that fault line shakes, and that's what is the thing that sends you, you know, down under. So with that is context. First, does that feel like a good characterization of the dynamics here? And second, can you, and this is really hard. And, you know, I can't do it, but if you can, if anyone can do it, you can. Is there something out there

in the balance sheet of the economy, the financial system, households, corporates that make you nervous, worried, kind of on the radar screen, top of mind? Yeah. So I'm actually, look, we need to get inflation under control. And the economy's going to slow down to do that. But I'm optimistic that this time around, it's really, you know, it's going to be wealthier people if they take the head. because the household budgets are balance sheets are still in pretty good shape. Consumer spending is not so heavily driven by borrowing, especially mortgage borrowing and, you know, the home equity revise that we saw prior to the crisis.

So in terms of hitting consumer spending and consumer wealth, I'm more optimistic that this will be really hitting, and it is already, hitting financial markets, hitting real estate markets, heating community markets, with wealthy people tend to be exposed to those and wealthier institutions. At the household level, I'm hoping that it's going to be a pretty tempered response impact,

excuse me, at the household level. So the things that I worry about in terms, but we may go into recession, or we just, you know, a stagulation environment, you know, I do worry about corporate debt. It's at all-time highs. Was it 12 trillion now or something? I mean, that's just non-final financial institution debt.

I think about 70% of it is fixed. That's good. But, you know, there's still a lot out there that floats. And then the stuff that needs to be refied is going to be at higher rates. And so a lot of it's been issued by non-investment-grade companies. So as financing costs go up for the corporate sector, can they handle it? Even if they do handle it, will they compensate for the higher financing cost with, you know, reduce, reduce, you know, try to cut expenses through labor force reductions,

you know, to maintain their margins and their investor distributions, their shoulder distributions. So I do worry about that hitting people at the main street level. And there may be corporate failures, too. I don't know. We'll see how high the financing costs go. But if you're in a state inflation environment where demand is going down, demand for the price going down, the financing costs are still going up, that can be challenging for a lot of them. the banking sector to our earlier point, yes, they're much better capitalized. I don't think we have a

good handle on the largest banks, especially those with prime brokerage operations. They're, non-banking clients and what those market exposures look like. Obviously, there's a lot of market volatility right now. We've seen a few naked people swimming already to coin. I think it was where our, you know, a Warren Buffett said, you don't know. You know, who's so naked until the I go down, so we've seen a couple naked buddies already. So, you know, I don't know. And this is something F SOC and Janet Yon and focused on the non-bank, you know, and back to Dodd-Frank.

And actually, Doug Frank gave regulators some authority to do with the non-bank sector. And it's really not done much with that. So, but I think that's really what's going on in the unregulated sector, where there's not a lot of transparency and more importantly interface of that sector with the regulated sector, which we have to keep stable and operating. So those are my two worries. Okay. So just to paraphrase to make it sure I got it right, kind of on the list is corporate leverage or the increase in debt among non-financial corps.

Non-banks, the non-banks. And when I think about non-banks, it's kind of fintechy, maybe non-bank mortgage, private equity. Those guys, yeah. All the above, the kind of malange. of folks that aren't regulated. They don't have insured deposits. And they use a lot of leverage. They use a lot of leverage.

It's less transparent, more opaque. You're not really sure. No stress testing that you know, that kind of. No, no, that's right. The, I want to talk about two things you did mention. One is, is mortgages. And the second one is student loans. And I know you're doing a lot of work there.

Where would you like to go first? Mortgages or student loans? Well, let's do mortgages. so I want to spend more time on a student. Two loans. Okay, sure. Absolutely. So how do you feel about?

So I think we're in pretty good shape there. Pretty good shape. I think, yeah, I don't, well, at least for Fannie and Freddie, the credit quality is so, is dramatically, you know, stronger credit scores, you know, a stronger debt to income ratio, stronger, a lot of equity, a lot of up and angry. We have a lot of that's through home price appreciation that may correct. And you've done some good research on that. But even that, I mean, FHA is maybe another.

situation. Again, that's on the government's time. You're not going to see those losses go back into the private sector. Same way as student debt. Going to have losses there, continued losses. But again, that's on the government's balance sheet. It's not in the private sector. So in terms of precipitating an economic or financial crisis, I don't see either of them triggering that. Actually, for home prices, my big worry is not so much crisis risk or whatever. I think, look, I want home prices to correct. about you, but I think a little, taking some here out of that bubble. Sheila, not my home. Not my home, please. Chris's home, no problem. But not my home. Look, even people who already own their home, so they're going to be there for a while.

What's the impact? Their taxes are going up, right? They might have a 30-year fixed rate mortgages, but now they've got a bigger tax bill. They're not going to monetize on their house for a long time. And people who want to buy houses, it's becoming nigh on impossible. So at least the starter home, the modestly priced home segment, boy, I would really like to see more supply come in, bring those prices down. And we don't have a lot of underwater borrowers. So it's not, you know, I don't think you're going to some mild correction there or at least a sustainable, gradual correction, I think would be actually hugely beneficial. But no, I don't see a crisis brewing in residential mortgage markets at all. CRE may be another thing with bank exposure there.

that may be a little bit of a risk with the banking sector. But, and student debt is, you know, there's massive amount. We've got, what, 1.75 trillion now, but 1.6 of that is, is that one point seven. Okay. Yeah, including private, yeah. Yeah. Yeah.

I think it's about 1.6 for government. So, yeah, it's a lot. And, you know, there are a lot of borrowers who are unable to make their payments when they graduate. You know, we don't really, it's hard to know what the current, we've had a payment suspension for over two years now. So we don't really know what's going to happen when payments have to resume again. But my guess is it's going to be very, very difficult for a lot of borrowers to start making

their payments, which is why the Biden administration really needs to decide what are they going to do on debt cancellation and then have a definitive time for people to start up payments again and add some preparation time. but to start up payments again without clarifying whether to what extent you're going to forgive debt, people are going to say, well, why should I start paying if you're going to cancel it two months for now, right? So they need to sequence it. They need to, what are you going to do, a debt cancellation, and then get the payments restarted again. Rich Cordray is over there doing some great work trying.

There's something, so the student debt, the automatic default is a 10-year repayment plan. And that's best for most people because you know, you don't want your debt payments to go on forever. a 10-year amortized loan. Again, if you keep your borrowing within affordable levels, and that's really what the Peterson Foundation initiative is about, that's fine. But if you've got trouble, there's something called income-driven repayment,

which basically is you pay a percentage, it's based on the percentage of your income, not just a fixed, you know, tenure-amortized loan. But there's some downsides to it, too, which is, is that if your payment doesn't cover your interest, you're going to have, you know, you're going to have negative amortization,

your interest is going to accumulate. and a lot of the outstanding debt now, it comes from interest accumulation on loans that are not performing or are not, the payments aren't sufficient to cover the interest. Plus, most of them go out 20, 25 years. So, going to be paying for a long time. And even at the end, you get whatever's left is forgiven. There's a tax bill that goes with that. Congress has never really fixed that either. So there's a lot of, so the idea of income-driven repayment is a good idea.

there are a lot of problems administratively with the design that makes it easy for people to move into it. It's too complex. Rich Cordray has been trying to, and there are multiple plans. So Rich Cordray has been trying to simplify it and put everything into a single repayment plan and then better incentivize the loan servicers to put them in because there's too much paperwork involved. It's expensive to get kids into IDR's income-driven repayment. So the default is just kind of put them in forbearance where, you know, their debt is, keeps getting, they're not paying, but their debt just keeps getting bigger and bigger and bigger.

So there's a lot of issues that Biden folks need to address, which I think they're very aware of. But really, they need to provide clarity on cancellation and repayment. And then most, they should start repaying. I mean, look, I have compassion for student borrowers, absolutely. But most, and there have been rip-off schools and there have been, there's been marketing of debt to kids that's just not been appropriate. overall, most borrowers have gotten good degrees that have enhanced their income potential. They can't afford to pay back either through the tenure repayment plan or the IDR. And they should because I think, you know, debt is a serious thing.

And we're teaching kids all the wrong lessons with this kind of mess we've got for student loans right now. And this, I'm speaking in a personal capacity here. But it's just, it's not, it's so well intention and so not working. way it should. And this idea, maybe you'll have to pay it, maybe you won't. It really, young people need to take student debt, any kind of debt seriously, including student debt. And that's going to be their first experience with debt. It's a financial obligation. It's going to put a burden on your future for many years. What you have to pay on your student payments is money

you're not going to be able to spend on vacations or dinners out or whatever. They need to understand that. And so many don't, I mean, Beth Acres, who's a as an economist, she said, E and I did a survey a few years ago of first year of students after their first year to find out what they thought about debt. And a third of them didn't even know they had debt. I mean, this is like, you know, there is such a crying need for transparency around this, what student debt is, what it means, what they're borrowing, what's going to cost them when they graduate.

I mean, and that's really what the Peterson Foundation is trying to do. We're not getting, they do not, I do, they do, they do not get into the policy debates or anything like that. That's not the kind of foundation they are. They just want to empower young people, provide more transparency, help them, you know, sort through a process is now too complicated. Sure, let me provide a little context. I don't care about the certain thing. Yeah, yeah, yeah, yeah, yeah, no, I can see. This is a big deal.

There's a lot to unpack there. You talked a little bit about, you know, the fact that the, and this is for the listener out there who's not as well versed in all. of this. Right. Right. The first thing is, you know, obviously since the pandemic, there's been a moratorium on student loan payments. The president Trump first and now President Biden under executive order has continued to extend that forbearance. That comes up in August, I believe, is the next.

Yeah, it's been a moving time from the most recent extensions up to August. Right. And I think on that issue, Chris has actually done a lot of work here. Correct me if I'm wrong, Chris, but if people start repaying, let's put the debt forgiveness as first side for a second. And they have to begin paying again on August. The macro economic consequence of that is small. Is that, do I have that right?

That's right, because most of the debt forgiveness. Well, you know, a lot depends on how this thing is actually structured. We're talking about $10,000 of debt forgiveness. Is that for everyone? Is that just for folks with less than $10,000 worth of debt? Right. To Sheila's point, there are plenty of people who have large debt amounts, but have the income because of their education to pay,

it's really the population that's at risk is that lower balance population that didn't complete their degree. So if you had something that was very targeted towards them, perhaps you actually would have a little bit more of a net impact on the economy versus the broader debt forgiveness. But yeah, as it's been discussed, a blanket $10,000 debt forgiveness would actually have a pretty limited impact on macroeconomic activity.

Right, right. And then on the debt forgiveness, so this is a, you know, a debate that's been raging for quite some time, but it's taken on added life under the Biden administration. And of course, Biden during the campaign, and I think his heart is in the income repayment plan

that Sheila, you talked about. He put forward, I remember evaluating it and writing a paper about his income repayment plan. And it's basically kind of juicing that up. And it's very targeted, meaning, you know, if you have to spend more than 10% of your income on student loan debt, then we'll cut you a break. And if you're still paying on that debt 10 years later, it's more than likely you're one of those folks. Chris just mentioned, you know, you didn't graduate or you got a degree that was not going to give you the income you need.

So, and if you work for public in government or for public service, and yeah, we'll give you some debt forgiveness. Yeah. Yeah, it's 10 years for public service. It's more like 2025 for if you're not. Yeah, exactly. Yeah. So that feels more right. But now they're talking about, and we, of course, we don't know what they have in

mind because we're all waiting to hear. And I think they will sequence it. I'd be pretty shocked that they don't sequence it. Yeah, I would assume so. Yeah, right? I mean, it doesn't make sense. But I, but some of the numbers here are pretty big, you know, that, you know, you're hearing.

And, and, it sounds like. Like that doesn't, that's not the direction you would go, Sheila. And that's, Chris, I don't think that's the direction you would go either, right? Yeah. Okay. Yeah, I'm all for, I have publicly adores 10,000 of debt cancellation. You know, the Center for Responsible Lending came out with that recommendation a few years ago. I used to be on their board.

I think they did some really good analysis. It's the most, of all the different options, it is the most progressive. Sure, if you do it for everybody, yeah, there's a reason, you know, very wealthy people are going to get $10,000 of debt forgiven. but proportionally, it helps lower income kids, kids of color, first-gen, kids who went to a school, didn't get a good degree, kids that went to a poor quality school, didn't get a good job. Those are, I think, about half of the students in default would have their debt wiped out with $10,000. So it's well targeted. And, you know, I'd be all for if they wanted to further target it to kids who didn't graduate with a degree or kids that are already in the fault.

I mean, that that borrows very into fold. But they don't, and they don't, they don't, they don't understand what debt is. They don't understand what they're getting into. They find out they're not well suited for college and then they've got this debt. And it's not. So I have sympathy for them, especially the lower income first gens who are not going to have the families at home to help them, you know, navigate this because they didn't go to college either.

So I have compassion for them and I think we should try to help them. I know it's politically unpopular. I do think, too, that if you target it to that population, especially just the ones that didn't graduate or already in distress, you know, if you read that the language that gives the president authority, arguably executive power to do get cancellation, it's clearly intended to, for like lung workouts, right? So like any private borrower, do you get a distressed borrower?

Yeah, you write some of it off. I mean, that's really what is what was designed for. And I think if you targeted to the more distressed population, they'd have a better case to defend in court as well. But I'd be fine with that. But they just need to make a decision at this point so we can get on with it. Yeah, you're making a really good point just to reiterate that the president is doing this under executive order, but it doesn't mean it's not going to be challenged in the court.

It's right. Depending on what he does actually. How broad it is. Yeah, we'll determine whether this actually sticks or not. I agree. Exactly right. Yeah, very important. Well, this all brings us to the work you're now doing with the Peterson Foundation.

And this is work where we've been collaborating with you. Yeah, yes. Yeah, it's been really something we've been working on for the last couple of years. And it's now coming to fruition. And this goes to your point that kids don't really understand what they're getting into when they take on a student loan. And this tool that you've developed is to help students kind of figure. that out and determine how much debt they can actually take on from finitium. Did you want to explain that tool?

Yeah. Yeah. That was a nice explanation of it. So it's really focused. You look at the student debt tools that are out there now. They're more, again, they're focused on maximizing how much you can borrow. This tool is unique. It's really about, you know, how much can you afford based on some key metrics?

So there are only four inputs you need, where you think you want to go to school, what you think you want to major in. When you want to start school? Because it depends, you know, what the economy's like once you graduate after four years. And Louisiana analytics has been so helpful to us in modeling that. And then where do you think you're going to live? Because that's going to definitely drive what your expenses are, what your living expenses are. So you put in those four inputs.

That's all you need to put in. You don't need all your family financial information. I mean, some of these tools are so invasive, you know, asking for this and that. It's really, what is in the young person's head in terms of their aspirations, school, major, where they want to live and when they want to start. And you can put in as many as you want. And it will give you a number, an aggregate number, the total amount for undergraduate degrees,

a total amount you can borrow and still have an affordable payment once you graduate and it'll walk you through. So we define affordability to have at least after you pay out for all of your essential living expenses, you have at least $150 a month left. And we're transparent about that. That was a judgment call. We worked with your folks to figure out, you know,

how much to be affordable, how much, you know, spending money, extra, you know, spending money to tab and we settle on 150, but the tool will allow you do more or less, if you want to borrow a lesser amount or a greater amount. So that's really what it is. And it's just so simple to use. And we tested it with a lot of young people before we're just launching today, actually. And it got a tremendously favorable response because it's really easy to use. It's fun to use. It's not invasive. We're not. selling anybody's information. We're not asking for information about you. You're not selling your information again like so many of these other student debt tools used. So it's really just to

help young people navigate this very important first decision they're going to be making about borrowing. And we're really excited about. We really appreciate the partnership with you. I've been playing with it. And it is really cool and very slick and quick. Really you get an answer. Yes. Yes. Yes. Exactly. Like Ryan's models, you know, you click solve and it takes a minute later because he's doing 10 gazillion calculations. This gives you an answer. And I plugged in economic. Oh, the other cool thing is lots of majors.

You know, it's very detailed, you know. Yes, it is. Yeah. It's not, you know, broad strokes here. It's like very specific. So I put in economics, you know, University of Pennsylvania, because that's my alma mater. And I said, okay, graduate, you know, I dreamed a little and said, okay, I'm going to started in 2023.

And it came back and it said I could borrow, you know, given my income prospects, you know, because I get an economics major from the University of Pennsylvania, $48,000, $47,350 to be precise. And I go, well, that's good, economics must have a good, good income. So where are we going to live? Where are we going to live? Oh, I'm sorry, Philadelphia. I'm not moving.

This is where I was, my kids say I've been sheltering in place all my life. I'm not moving. So, yeah, yeah, Philly. That's a great point. That's a really good point because it asks you, where are you going to live? Because the cost of the living. Yeah, it's going to change. Yeah.

It's quite a bit. Yeah. So I thought I go, 50,000 is a lot of money. Yeah. But then I thought. That's the annual tuition. That's what I was going to say. I mean, what's the annual tuition.

Yeah. Yeah. So, yeah. So, but again, you've got, you've got a number. It can help guide your decision making. Absolutely. When you get your, when you get your, quote, unquote, financial aid offer from University of Pennsylvania, that's where you end up going. You can gauge that, which are likely, you know,

for your cost will be against that, that dollar amount. And I've got to empower a lot of students and their families to know. And, you know, you can, I will say it's a little secret as a former college president. Families should know they can negotiate that. That headline number and tuition number is not necessarily the number you have to pay. I'm sure Ryan did that when he was at Washington college. He's a negotiator. That's right. But you can, you know, you can go back the financial aid office and say, look, sorry, we don't want to borrow more than, you know, 12,000 a year. And so what can you do for him? And they might have scholarships, they might provide a discount. So or, or if they won't do it, then you might want to look at a lower cost

school, Russian college. So, you know, I thought the really cool thing is because, you know, a lot of kids don't know exactly what major, right? But this allows them to kind of get as, that's a, that should be a criterion in people's thinking. It's not like, well, they need to. Well, that's the other thing. It's educational and sensitive. It gets some things. thinking about these choices are important in terms of what their financial situation is going to be once they graduate. Because again, it's from an educational perspective, it's really, really valuable as well. And by the way, you got to graduate. You just got to graduate. Yes. Yes. It cannot be emphasized too much. The worst thing is to have a debt and no degrees.

You've got that debt load and you don't have the enhanced income from a college degree. So that is, yes, that is the most important thing. And also to try to finish in four years, you take it to five. You know, even just one more year can really add to your deadline. I did want to say that this is obviously a passion of yours because I can see, if you're on YouTube and watching, you can see behind Sheila are a couple of books you've written. You want to just tell us about the books? I have. Well, yes.

So I have a series of books, kids books called Money Teals. There's six of the series all together. Oh, I didn't know that. Okay. Yeah. So, well, I put this one up, Billy the Bar and Lufit and Boobie because it's about, I want kids. kids to learn what debt is in grade school. I want kids to learn the risk of unaffordable debt and the burdens that can place on you in grade school. So that is a fun book about

takes place on the Galapagos, about little little bluefin-a-movie gets into big trouble with the buy now pay later scheme, actually, which is borrowing. By the way, it is. So, and this is a rock, rock and the savings stock. Actually, this is my first book. This is sold very, very well. And it's just about compound interest and the importance of savings. And again, starting in an early age, just a little bit every year, how you can really build significant wealth just through a regular savings plan and the power of compounding. So yeah, those are, so those are two. Thanks for the opportunity to plug them. But no, no, no, but here's the thing. If you, if, here's the question. Did you illustrate those books? Oh, God, no. Oh, okay. If I, if you had to illustrate those books.

No, Amy Sching did this one and very God did this one. My publisher is out. Robert Whitman, and they arranged for the illustrator. I wish I could draw like that. Yeah, but the illustrations are fabulous. You should know. If you said yes, I illustrated, then I'd say you are the most powerful woman in the line. I mean, geez, Louise, what can't you do? Yeah.

I wish I could. Well, you're, I want to take away the cotton candy machine and I'm going to get these books. Exactly. We're going to get our nightly reading now. Yeah. Yeah, exactly. Well, Sheila, it's really been a pleasure to have you. you, you know, this is not an exaggeration, and I'm not sucking up, but you are a national

treasurer. I'm not kidding. Oh, you're sweet. I am not kidding. You have devoted your life to, you know, the city of American people and with a very productive end. So thank you for all that you've done. Well, let me return the favor, Mark, because you've been a long-time advisor to people

in government and your, you know, your objectivity and the quality of economic analysis and And thinking has always been, it helps me in a lot of people in government. Oh, you're kind. But as you can see, all I'm doing is having fun. So that's, this was fun. This was fun. It really was. Well, thank you.

And I can't wait till our paths across again. Yes, in person. That would be good. That would be wonderful. Take care now. Okay. Bye, bye. Bye-bye.

Bye-bye.