Sheila Bair is worried that the current economic and health crisis will turn into a financial calamity.
Bair, who was a key player in the federal government's response to the financial crisis a decade ago, sees plenty of danger signs of another such calamity, much of it in the form of corporate debt and the collateralized loan obligations that debt gets sliced and diced and reassembled into. She also worries that the big banks are pushing hard to loosen capital requirements right now — and regulators are accommodating them.
Bair, who saw what happened when the big banks had a similarly free hand before the last financial crisis, thinks such changes are both bad and unnecessary. Research shows that well-capitalized banks not only are better for financial stability, they do a better job of continuing to offer credit through economic downturns such as the one the US is going through now, she said.
"You could do that trade all day long," she said. "I'm not saying it would go to that extreme," she continued, "but I think that's going be the tendency now." The Fed can't prop up that market forever, Bair said. If the economy continues to falter, the institution risks impeding structural changes that need to take place and keeping in business companies that are essentially zombies and have no real chance of making a comeback.
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