In preparation for President Obama’s speech on regulatory reform on Monday — the one-year anniversary of the collapse of Lehman Bros. — Dr. Larry Summers, the chair of President Obama’s National Economic Council, today briefed reporters on the state of the economy and the administration’s policies.
“As the president has said and (Treasury Secretary) Tim Geithner and I have said many times, these problems were not made in a week or a month or a year; they will not be fixed in a week or a month or a year,” Summers said. “The level of unemployment is unacceptably high and will on all forecasts remain unacceptably high for a number of, for a number of years.”
Summers said that while there has been substantial normalization in the economy, financial conditions in commercial real estate continue to struggle, and “the availability of capital to small businesses remain very tight and credit is in short supply.”
In news that the financial markets will no doubt find interesting, Summers said that the Obama administration officials have no interest in “prematurely withdrawing public support for credit flow” — tax dollars to encourage financial institution loans to citizens and businesses. The former Treasury Secretary for President Bill Clinton argued withdrawing support too quickly would repeat mistakes made by Japan during its fabled “Lost Decade” and the U.S. in 1937 and 1938.
There remains much work to be done, Summers said.
“Any institution too large and interconnected” to break down without causing serious economic hardship to the nation needs to be regulated, he said, adding that the same is true with any market too larger and interconnected to fail, such as derivatives.
“We will not be failsafe until it’s safe for failure,” he said.
Summers argued that it makes no sense for financial sectors to be able to pick which government agency regulates them.
“Stability is not attainable if institutions can choose their regulators,” he said, explaining that the president continues to believe what President Obama outlined in June, that it makes sense for the Federal Reserve to supervise all large, inter-connected financial firms that could pose a systemic risk to the overall system, institutions that would be subject to stricter capital requirements.
Has Wall Street learned its lesson?
Paraphrasing former President Reagan, Summers said his motto is “trust but verify – and regulate.”
He said one of the reasons greater regulation is needed is because the “imprudent put enormous pressure on the prudent” — that bad actors in the financial sector are able to generate wealth by behaving inappropriately which cause “pressure that makes it impossible for the prudent to function properly.”
But some analysts have criticized the administration’s reform proposals as weak and watered down.
“The proposals that they’re considering are very weak,” Simon Johnson, a professor at MIT and senior fellow at the Peterson Institute, told ABC News’ Matt Jaffe earlier today. “There’s nothing in the administration’s proposed legislation before Congress to which the industry objects except for the consumer protection agency.”
“The reform process to fix the underlying problems has only just begun,” Peterson said. “It’s not an impossible task. It will take a long time and a lot of effort, but this administration is not focused on that. Hopefully they’ll change their mind soon and we can really get down to business, but in this political cycle it’s not happening.”
The administration’s financial regulatory reform proposals have also taken a back seat to healthcare reform, causing even more doubts about the administration’s – and the Hill’s – drive to change to system.
Summers said that rumors that the administration was seeking to “interfere with Main Street retailers” are untrue. “That argument is to the financial debate what ‘death panels’ is to the debate over health insurance.”
Summers said that the Obama administration was doing everything it could to revitalize the economy, and was doing it well.
“We have moved back from the brink of financial catastrophe,” he said. He argued that never before in history has “as profound an economic crisis been addressed so forcefully and so quickly.”
But the administration would keep working hard, he said “as long as the unemployment rate is in the 9’s” with millions of foreclosures and tens of millions of people with negative equity in their homes.
The President is not just interested in responding to crises, Summers said, but trying to build a more stable foundation, which includes investments in education, energy. This new foundation includes the regulatory reforms the president will discuss on Monday; this last year was “not the first time,” he said that financial crises disrupted millions of American lives, he said, mentioning the 1987 Wall Street crash, the Savings and Loan scandal, the bursting of the internet bubble, and others.
Earlier today, White House press secretary Robert Gibbs previewed the president’s speech, which will be delivered shortly after noon in Federal Hall.
Gibbs said that the speech will not introduce new policies.
“We’ve outlined a financial plan and are working with Congress to implement it,” he said. “I think we want to demonstrate again why it’s so important, why we need to move forward and why we can’t wait.”
President Obama has forced on ensuring “that we get our stability right, that businesses have access to stable capital and credit they need. And we’ve seen great progress on that, pulling financial insecurity back from the brink of another recession. The speech on Monday will focus on the need to take the next series of steps on financial regulatory reform to insure that what happened a year ago – there are significant safeguards.”