"A transcript of The Journal’s interview with President Obama, which touches on financial-regulatory reform, the power of free markets, health care and Bernanke’s future at the Fed.
* * *
THE PRESIDENT: All right, fire away.
Question: Thank you for doing this, very much. You know, in our world, the world of The Wall Street Journal, a big event this week — financial regulatory reform. Let me get you to talk a little bit about the philosophical backdrop. Obviously a lot of things went wrong in the markets in the last year. Where do you think they failed?
THE PRESIDENT: Well, I think that there are some immediate and obvious culprits. We had a regulatory system that was outdated that did not encompass the non-bank sector. We had a securitization market that had separated borrowers and lenders and investors in ways that allowed everybody to take risks, with nobody feeling accountable or feeling their money was at stake. We had I think banks who were incented to boost their profits with some of these same risky financial instruments, and you didn’t have the kind of systemic oversight that would anticipate the enormous failures that could arise if any link in the chain broke. So that set of regulatory problems is what we are looking to solve in the proposals I’ll put forward tomorrow.
You then have, though, just to finish up, I think you’ve got a broader structural problem in our economy in which our last two recoveries had been based on bubbles, and a massively overleveraged consumer, a massively overleveraged corporate sector, and a financial system that didn’t have much restraint.
And so the question for us is how do we create the foundation for a more sustainable model of economic growth, one that doesn’t impinge on the dynamism of the free market, the innovative products that are critical and the entrepreneurship that creates jobs, but also recognizes that the levels of debt and a model that’s premised on an endless supply of foreign dollars is not one that is going to be sustainable over the long term.
And then just to wrap it up then, that’s why, in addition to financial regulation, we think that health care reform, creating a clean energy economy, ramping up our education system, our investment in science and technology and infrastructure — why all those things are so important, because if we get the fundamentals right, then the market will work its magic, but we won’t have sort of house-of-cards economy that crashed over the last year.
Question: One of the things that you’re going to do this week that hasn’t gotten as much attention is try to directly regulate the consumer part of the financial system. Now, one could argue that consumers benefited a lot from financial innovation over the last generation, that a lot of people are in houses, a lot of people moved ahead in the economy in the environment that existed, and that maybe consumers ought to look out for themselves. You are going to go in a direction of trying to regulate the way consumers are treated in the financial marketplace. What are you thinking there? Is there a danger of going too far? Why do consumers need that kind of help?
THE PRESIDENT: Well, I think there would be a danger in going too far if, for example, we were restricting the ability of consumers to borrow, or setting very stringent caps on interest rates or — there are a whole range of steps that are out there that in fact some people advocate for. That’s not what we were recommending.
What we are saying is, number one, that we should have some common-sense protections around transparency, around full disclosure. Whether we’re talking about the mortgage market, credit cards, annuities — on a whole host of these financial instruments, in fact, people didn’t know what they were getting themselves into. And making sure that they are properly informed is I think the most market-friendly of regulatory approaches that still empowers consumers to make choices but ensures that they know what choices they’re making.
We also think that it’s important to have some consolidation of the regulatory agency responsible for consumer protection. And so, as I think has already has been shared with you, we’re putting together a consumer financial protection agency that will pull — that will ensure that one agency is responsible for protecting consumers, as opposed to having a lot of divided attention between consumers, investors against the soundness of financial institutions, et cetera.
We think that if we — if you look at what we’ve already done on credit cards, what we’ve already done in terms of mortgage lending reform, if you look at the proposals that we have for ensuring that consumers know the kinds of financial instruments and investments that they’re making, that that ultimately will strengthen our financial markets, because one of the strengths of the U.S. financial markets has always been that, at least relative to other parts of the world, this has been the place where consumers and investors had the most confidence, that they had the most information, that they were the least likely to fall prey to Ponzi schemes and various other frauds. And the more that we can shore up that confidence, the more likely investors are going to continue to put money into our markets and consumers are going to be able to borrow from our markets.
Question: Are you saying that reality changed over the last generation?
THE PRESIDENT: Well, I think that the world has gotten more complicated. If suddenly you can, as a 20-year-old college student, sign for up for five different credit cards, if you find yourself able on a $30,000-a-year income to buy a $400,000 house with no money down, then you are much more vulnerable to the inducements that are out there than a generation ago.
Now, I know that some people would argue, well, people have to suffer the consequences when they make these bad decisions. The problem is, is that when you start seeing the entire housing market collapse because of foreclosures, or banks and other financial institutions requiring extraordinary support from taxpayers because they’ve greatly overextended themselves, this is not just a problem for one individual consumer; this is a problem for the economy as a whole.
And if we’ve done a better job giving people good information, I think they’ll make good decisions. But right now we don’t have the regulatory mechanisms in place. And the proof is what happened over the last several years.
Question: Does all that say to you that capitalism failed here somehow? The system needs to be changed, that there has to be some kind of a hybrid — capitalism and something else?
THE PRESIDENT: I am a firm believer in the power of the free market to allocate capital and produce goods and services, and ultimately wealth. I think the system is unsurpassed. But I think we’ve understood at least since the 1930s, when we put in place things like deposit insurance, that a sensible regulatory structure can ensure that the benefits of the free market are obtained without the risks of the system falling in on itself. And we just want to update that for a new environment in which you have things like credit default swaps.
Question: On a broader scale — you mentioned health care before. There’s a lot of — one of the things people wonder about most on the part of your approach, and clearly people who read my publication wonder, what is your view about what the government’s role in the economy really ought to be? When you step back from all of this, what’s the unifying theme? What’s government’s role? Does it steer? Does it push? Does it guide? Does it run? What’s the government’s role in the economy in the environment that you’ve just described?
THE PRESIDENT: I think the irony — and you wouldn’t know this from reading your publication’s editorial page — (laughter) — is that I actually would like to see a relatively light touch when it comes to the government. I think what I described in terms of financial regulation is typical, and that is set up so the rules of the road; ensure transparency and openness; guard against huge, systemic risks that will lead us potentially into — lead government potentially having to step in to avoid a depression; and then let entrepreneurs and individual businesses compete and do what they do.
And so it’s puzzling to me sometimes to hear the standard conservative critique of what we’re doing, when essentially every step we’re taking really involves cleaning up the mess that we found when we arrived here at 1600 Pennsylvania Avenue.
Let’s take autos as an example. Other than basic issues like consumer safety — seatbelts, airbags, which save a lot of lives — and consumer protections — lemon laws and making sure that people know what they’re buying — the only real regulatory approach that I’ve been interested in is raising fuel efficiency standards so that we can wean ourselves off dependence on foreign oil. Beyond that, the last thing that I want is to be running a car company, or to be having to make decisions about what the auto market of the future is going to look like.
The reason we stepped in was because when we arrived $10 billion had already been provided to the auto companies with essentially no strings attached. And we then had essentially three choices: We could continue on the path of giving more taxpayer money to the auto companies without asking them to change at all. We could let them go into liquidation in the midst of the worst recession since the Great Depression, which I don’t think anybody would argue would have a salutary effect on the economy. Or we could say we will provide you some short-term help, but take a pretty tough approach in terms of showing us a plan — a restructuring plan that will allow you to stand on your own two feet. And we chose option number three.
Now, if somebody can tell me what other options were available I’d be interested, because I spent a lot of time talking to a lot of experts about that.
And so, on a whole host of — what do we got, five minutes — on a whole host of these issues, we want to do the minimum possible to assure that every stakeholder in the marketplace — consumers, workers, investors, entrepreneurs — have a clear set of rules of the road, they know what they’re getting themselves into, they’re making decisions based on the pursuit of profits, but that we are not setting up so few rules that you have the kind of situation that we saw last year where we really were on the verge of a financial meltdown.
I’ll use one more example because I think this is salient, and that’s the whole issue of executive compensation. I don’t think I’m alone in believing that the incentive structure in many companies has not been to reward high performance; that you had huge compensation packages for people who ran their companies into the ground, and that there was very little oversight from either shareholders or compensation committees on the board.
We also had a situation in which, as a consequence of some of these huge incentive packages, financial firms in particular were taking some exorbitant risks to feed the short-term bottom line that weakened the system as a whole.
Now, the only place where we’ve sort of stepped in in a significant way on this issue has been if you’re getting a whole bunch of taxpayer money, because, I think as the reaction to AIG indicated, the average taxpayer who is maybe pulling down $60,000-$70,000 a year is not going to have a lot of patience for seeing their taxpayer dollars bailing out firms that are then giving out multimillion-dollar bonuses.
Question: As you discovered fairly quickly.
THE PRESIDENT: Absolutely. So on that front, I think extraordinary assistance to these firms to keep them afloat justifies some extraordinary accountability measures in terms of how executive compensation proceeds.
But beyond those specific terms, all we’ve said is just make sure that shareholders know what your compensation packages are, and make sure that your compensation committees are actually independent, as opposed to an incestuous situation in which everybody is getting rewarded.
Now, I think it’s hard to argue that that is somehow the heavy hand of government in the marketplace. It’s just saying that if the operative theory is that shareholders are going to be able to hold management accountable, and that management isn’t operating in a way that is contrary to shareholder interest and is in fact self-interested, that for us to create that — to strengthen that link so that shareholders actually know what’s going on is a pretty reasonable request.
Question: Two quick questions on this, and then I’ll let you go. Ben Bernanke — you’ve obviously seen a lot of him.
THE PRESIDENT: Yes.
Question: Inclined to reappoint him?
THE PRESIDENT: I think that Ben Bernanke has handled his position extraordinarily well under extraordinarily difficult circumstances, but I’m not going to make news on that right now.
Question: Okay. If you had your druthers, in the long run what would the top tax rate for the very richest Americans settle at?
THE PRESIDENT: Well, I think instinctively that the tax rates that existed for the top — for the very wealthiest Americans under Bill Clinton struck the right balance. I think that we’re always talking marginal tax rates, and I do think that what’s happened in terms of our tax code has been that it’s been so fraught with loopholes, we’ve got so many deductions and exemptions and credits and this and that and the other, that in some cases, on paper, things look very high, but as a practical matter they’re pretty low.
I do think that tackling tax reform, both on the individual side and on the corporate side at some point — akin to what was done in 1986, where you clear out some of the underbrush and you make sure that the base is broad, but everybody knows what it is that they’re paying and there aren’t a whole bunch of loopholes; there is serious enforcement and predictability — that kind of reform could end up generating the revenues that we need to run the basics of our government while actually in some cases lowering some rates. But that requires that everybody buy into a simpler, fairer system.
The one thing that I think is very important to understand is that there’s no free lunch, and sometimes politicians have been pretty irresponsible in saying you can have a prescription drug plan, you can have two wars, we can do a whole bunch of things, but we’re going to cut your taxes at the same time. And at some point something has to give."