By Neil Irwin
Washington Post Staff Writer
Thursday, September 27, 2007
The Clinton administration, it seems, might not have handled the mortgage crisis all that differently from its successors in the Bush administration.
That's the conclusion one could draw from a panel yesterday where former Clinton Treasury secretaries Robert E. Rubin and Lawrence H. Summers, among others, discussed their thinking on the turmoil in credit markets and the government's response. While there were some subtle disagreements between the Clinton-era leaders and Treasury Undersecretary Robert K. Steel, who was also on the panel, anyone expecting a clash of ideologies at the Brookings Institution symposium left disappointed.
The conversation instead took on the tone of a late-night bull session among buddies who happen to be obsessed with economic policy.
"Larry, if you were the policy god, what would you do differently?" the moderator asked Summers.
"I thought he was," Steel quipped.
Instead of bemoaning the fate of people who lose their homes as adjustable-rate mortgages reset, Summers emphasized the risk of doing too much to help people who have made bad decisions.
"There are some people who in almost no credible scenario are going to be able to continue to make payments," he said, saying that the key is to distinguish between those people and others who might be able to refinance into a mortgage they can afford.
He invoked the failure of Japanese banks to deal firmly with bad loans in the early 1990s, which led to a decade-long recession. "I think there is a real danger we will lurch into a Japanese-style solution . . . and not inflict any distress in order to maintain confidence."
The current and former policymakers seemed to agree about how things got to this point. "What we've seen is a collapse of a pretty traditional bubble," said Roger Altman, who was a deputy Treasury secretary in the Clinton years. "How did we get here? We got here because this is how markets typically operate."
It doesn't make sense to enact special regulation on hedge funds, Rubin argued, which is also the Bush administration's stance. Rubin advocated tighter limits on how much people can borrow against investments, called margin requirements. "Capital and margin requirements around financial engineering should be significantly enhanced in order to reduce risk exposure," Rubin said. "However, specific private-equity and hedge fund regulations seem to me to be unlikely to be productive."
It could make sense to ease restrictions on government-sponsored mortgage companies Fannie Mae and Freddie Mac to make funding available to home buyers in the short run, Summers said, but he added that the companies should likely face a tighter rein later.
That approach resembles what the Bush administration is pushing for, Steel said. "I can dust off congressional testimony that your subordinates were giving 10 years ago and deliver it today," he said.
The Clinton crowd was more critical when the subject turned to regulating credit rating agencies.
"Enron was to accounting firms as subprime is to rating agencies," Summers said. "I am very skeptical of market-based regulation here. When a plane crashes, the airline's stock price will go down. But we do not view that as a sufficient substitute for air safety regulation."
Could the crisis have been avoided?
"Lots of people saw it coming, but most people didn't necessarily act on what they saw coming," said Eric Mindich, a hedge fund executive who was on the panel. "I am a big believer in Noah's law, which says that you get rewarded not for predicting rain, but for building arks."
"There's a middle group, which is forming a committee to talk about building an ark, which, in the 202 area code, we like to take credit for," Summers said.
"I think Larry makes a lot of," said Rubin, before catching himself, "well, possibly some number of reasonably plausible points."
"I manage to make myself heard somehow," Summers said.