This is Bloomberg Business Week with Carol Masser and Jason Kelly on Bloomberg Radio. Michael P. Vavar He is executive director of the Milkin Institute's Center for Financial mark It's former SEC Commissioner. He served as a senior economist at the President's Council of Economic Advisors in both the George W. Bush and Barack Obama administrations, so during the financial crisis and also in its immediate aftermon math. He joins us on this Thursday on the phone from Washington. Michaels so
nice to have you here. I feel like I have a million questions. UM. I think so often when we talk about some of the programs that are being um put together out of Congress and the President to help this crisis and the stimulus programs, we make the comparison to the financial crisis. Is that a fair comparison? Yeah, in some ways, there's some similarities and in many ways their differences. If you think back to the to the global financial crisis two thousand and eight two tho nine,
it really started in the financial sector. What we had was we had banks that were under capitalized, they had too much leverage. Most of it was hidden. It was off balance sheet. Remember, we had special investment vehicles sieves. We had over the counter derivative that regulators had no
insight into what were the exposures or the counterparties. And we had a crisis to begin in the financial sector, and then that's filled over to the real economy, and then that we had the subsequent recession, the current crisis. Obviously we start with the health crisis UM in the government response in many ways, particularly with UM, things like you know, lockdowns and quarantines and stay at home orders
and closing of non essential businesses. UM. What that's doing is that's creating the spill over into the real economy. And by all accounts, the financial sector UM is in very good shape this time. In fact, if you look at what the government is doing, you know, the last time,
during global financial crisis, the banks were the problem. If you look at many of the ways the channels through which the government is trying to get money out to individuals and small businesses, banks are now part of the solution. So UH, in that way, it's very different. UH. Some of the similarities are that when you're in it, it's very scary UM, and when you're in it you see big scary numbers like you know, the unemployment numbers that
came out today. Um. And it's also similar in the fact that we're gonna get through this and it's just a matter of time and on the back end of this will recover and it's just a matter of of of of fighting the fire with the with the right tools. And so, Mike, given all of that, what's the advice you would give people who are on the front lines right now? And I bet you are giving them advice.
What are you telling them? Yeah, So there's different uh folks that we're that we're talking to with the Milk and Institute. We're engaging with members of the administration, with Congress, with the regulators to try to be as helpful as we can. UM. You know, my message to UM the government officials is, UM, you know, do whatever you can to keep them markets open. UM. You know, it's been a lot of volatility in the markets recently, but by
all accounts, the financial markets have held up well. UM. They're providing necessary liquidity for investors who want to sell their providing opportunities for investments who uh for for people who view investment opportunities. UM, they're producing prices that that that give information to investors but also to policymakers to think through what are the next steps in terms of UM,
what type of assistance they want to do? They want to give targeted to specific industries or specific companies, and so they're working. Is they're working well? I want to ask you specifically though about the financial sector. UM. Yesterday the Fed is going to it came out and said it's gonna let Wall Street banks take on more leverage so they can absorb UM what's really a severe lack of liquidity for treasuries and a surge in customer deposits
because of the coronavirus pandemic. So basically they're relaxing a key limit on the level of debt Wall Street contain take on. Now, this fundamental leverage ratio was part of the response in the two thousand Are coming out of the two thousand eight crisis? Are we potentially though stepping back rolling back some of those backstops that we put in place after the financial crisis that could get us
into trouble? Mike, Um, we could end up there. But the particular thing that the Fed did on Wednesday is not troubling in any way. UM. The FED has a sort of two sets of capital requirements. One is a risk based set of capital requirements, which requires you to have a hold a certain amount of capital, or the opposite of that is limits the amount of leverage that you can have given the risky nous of the assets
on the asset side of your balance sheet. So it takes into account if risk your ass risk for risk your assets UM, you need to fund it with more, with more equity capital and less debt, less risky assets,
you don't have to worry about that. The key restraint that they lessened on on Wednesday with something called the supplemental leverage ratio, and that's the second type of backstop that they have, which is the leverage ratio is just a simple ratio that takes into account the amount of leverage or or the converse is the amount of capital that you have to have UM without taking into account the riskiness of the assets. It's just a simple leverage ratio.
And what they did was they relaxed that a little bit and moved more towards the risk based where they said they're not going to count UM treasuries or assets held in reserves at any of the federal reserve banks. Those are completely riskless and so the fact that they pulled back on those um is it does doesn't give
me UM any pause at all. What it what it's going to do is allow the banks to increase the size of their balance sheet and in effect do more lending UM and not take into account they have these these riskless assets. If I can squeeze in really just thirty seconds, you've gotta be quick. Do you think that there's any point amid the volatility that we should think about shutting down the markets, and you do have to
be quick if you could, Yeah, sure, absolutely not. The markets are functioning as they showed a few weeks ago. We had some of the market circuit breakers trip UM. That's a measure of the success of some of the structures that are in place, not a measure of of of things that we should be worrying about. UM. Of course, the regulator is going to look at calibrating those to make sure that we have those correctly. But in terms
of incorporated fundamental all abilities to market, the working perfectly. Well. Let's continue our conversation with Michael Pepavar. He is executive director for the Milican Institute Center for Financial Markets, former SEC chair, former staffer on the White House Economic Council, joining us on the phone from Virginia. Uh So, Michael, I wanna bring up a topic with you that's been very friend of mine with us. Uh. We spoke earlier
in the week with Robert Reich. He was talking about the program, the fiscal stimulus program, as it relates to getting money to corporations. And this will come as no surprise to you. Not a big fan of corporate bailouts, Robert Reich. Uh isn't, But I do want your take on what is the best way to get money pumped back into this economy. Yeah, I'm not a fan of
corporate bailouts either. Um. As you mentioned, that was at the White House during the global financial crisis, and you know, unfortunately, you know, we had the bank bailout the bank UM. And the reason, the main reason for that is because banks did not up until Dot Frank did not have a really good way to go through bankruptcy and go through a restructuring Chapter eleven type bankruptcy UM and so failure was not an option. So, UM it was. I found it abhorrant, but we had to end up doing it.
I'm not a fan of corporate bailouts at all. So so what's the alternative, And that's to to get checked in the hands of individuals as quick as possible. And so I think that has um the potential to be the biggest impact UM and to have the left the least amount of political blowback on the back end of this is to get as many as much money and checked into people who need it UM as quick as possible. And so let's continue down that thread, because you know, how do you best do that? Is it checks? Is
it unemployment insurance? I mean that seems and an extension there, Well, what are the best mechanisms to to really get that money and how do you essentially do it in such a way that there's not a lot of red tape and people actually get the money. So right now, UM, the government has taken the correct approach, which is UM to the answer your question, which way do you do it? The answers, yes, you do all of those right now,
and then you adjust on the fly. Right, you worry about things like UM, people going on unemployment insurance because they can make more money than than you know by not working than by working we can make those adjustments in real time. Um. Those are second order of facts. Those are second order type of of considerations. But right now you want to get that money. You want to do everything you can right now, um, and then dynamically adjust for that. I mean, we saw the number of
the unemployment numbers, UM, this this morning. We're the big scary number, right and it's going to continue to be bad. So okay, naive question of the day, perhaps of the year, perhaps of the decade. So why does it keep happening that we get corporate ball outs? I mean, um, Bob Rice, of course, you know, talks about how it's the companies that have the d pockets that do the lobbying to make sure that they're heard in Washington. Is it just is it just that? And what a shame? And how
do we change the system. Well, if you look at this time, what what Congress and the administration are trying to do is avoid that happening and and and try to get as much assistance to not only individuals but small businesses, main street businesses. Right, you have the the paycheck program, the paycheck Protection program that the SBA and Tragedy are trying to do for small businesses. The FED has announced that they're going to stand up a new facility.
You know, they've basically rea stood up some of their old facilities that they rolled out during the financial crisis, and the announced they're going to do another one specifically for main street businesses. So my hope is that we don't end up with UM. You know, the biggest corporations get the biggest bailoff because they have they spend the
most amount of lobbying money. But there is still five billion that's going to hard hit industries, and that includes you know, whether it's the airlines and so on and so forth. Do you think something like that is the right thing to do to help out UM. I mean, it's it remains to be seen. We have to I mean, we have to use that money judiciously to try to
figure things out. I mean, obviously what we care most about is UM the employees who work for those companies, right, So we can talk all the numbers we want UM, but it really comes down to individuals. And so what you want to do is put the employees first, UM and think about them, and then at the back of the line you want to make considerations of creditors and and shareholders, right, because the last thing we want to
do is bail out shareholders. And what we saw in the last crisis is that also creditors sending to get bail out sailed out too. So UM, you know, we want to make sure that we're taking into account UM the employees first. All right, I'm gonna master you with a thirty second question here, Michael, to round it out. UH, next set of stimulus. What's the single most important thing we need to do. UM, There's there's a couple of
things out there. I would say the number one is UM to look at state and local government right now. They're going to be hit very hard. They were hit very hard during the global financial prices. They were sort of like the second wave of things that came in, and I expect that they're going to be a they a lot of them haven't recovered since the global financial prices, and so they're in they're in bad shape right now.
So I think getting UM money to those so they can we can pay our you know, our firefighters and our our police officers and our teachers and the like is important. All Right, We're gonna leave it there. We hope you will come back and spend some time with this such great conversation, we really appreciate it. Michael Pivovar is executive director for the Milk And Institute Center for Financial Markets. Agree. We know, well, there's some smart folks
who work in that group. For sure, love the milk And Institute, and I love what he had to say about states. Joe Wisenthal of Bloomberg wrote about that you sometimes need to think about the state does emerging economies that they all, you know, have different things they benefit from or lose from, and so we need to kind of think about that and in providing assistance for them. So really smart point.