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For more on well to Expect, We are joined by Sheila Bher. She's the former chair of the FDA c of course, especially during the financial crisis, of course, the senior fellow at the Center for Financial Stability. And you think a lot about Dudley's comments here was really rooted in the worry about a recession if you did not see a rate cut soon enough. Do you share those concerns?
No, I think the Feds handling it right. It sounds like they're going to stand cat next week.
They should.
A lot of this is just reverting to pre pandemic norms, So you know, I think we don't. We want to keep our heads here in unduly panic. And I do think not certainly with mister Dudley, who I have a lot of respect for him, worked within a lot during
the Great Financial Crisis. But I do think a lot of this Wall Street clamoring for rate reductions, it's really more they're saying is for main street I get those credit card rates down, But it's really for them because that will boost their asset valuations, maybe generating some refinancing income help.
There get distress burrows help them.
I mean it really, it will be a clear booth to Wall Street when rates start to go down again. But it's not clear it is for main Street what main Street is hurting. Those credit card balances are high because of inflation, because it's more expensive to live these days, and that hits everybody, not just farmworths.
So I think if it is handling this right.
Well, Sheila, that's so interesting to hear you say that, because the point has been made again and again that the medicine is worth worse than the illness. At this point, you're taking the opposite view here that actually, no, inflation is the main thing that consumers are suffering from right now. It's not necessarily those higher interest rates.
No, I don't think it is.
And you know, look race or not high historical standards. These are kind of normal interest rates, and there are benefits from higher rates. You get more discipline capital allocation, You reduce incentives to lever up, and that's.
Painful because we had a lot of leverage build.
Up during the long protracted era of surp and so people are having to deal with that now.
But higher rates are actually productive for the economy.
Low rates for productivity, there are a number of academic studies that show that so their economic benefits to it. And yeah, but I also think any kind of incremental reductions and rates and I think at some point that fat can nage them down a bit. But how much that's going to flow down to help main street is a question for me. And I think the real problem is we've had some real wage booth, thank goodness, but
things are more expensive. We need to focus on real wage growth as a way to empower consumers, just not more debt, whether it's twenty five basis points less or what have you. And housing mortgage rate, which is the other area that Wall Street targets.
You know, that is a supply problem.
Lower rates, fine, you're going to juice demand, it is still supply constrained. You're just going to get a home is going up more So that doesn't help a mainStreet either.
So I think we need to look at the root causes and stop you know, saying that monetary calls he has a solution to all these problems.
I mean, higher rates should also encourage more savings. Right, theoretically, you've got a rainy day fund, you get in five and a half percent on your CD or whatnot, Sheila. I wonder though about your confidence in the Federal Reserves independence. Some people running for office right now may want to weigh on the FED more heavily than others. Are you concerned about FED independence?
Well, I am.
I mean mister Trump clearly is not very respectful of itaid, he's already you know, pressuring them to he doesn't want them to lower now if he wants them to lower when he becomes president.
If he becomes president. So yeah, but I have a lot of confidence in the time.
Said, I've not always agreed with them, but I have never questioned that they have political motivations behind the decisions they're making on monetary policies. So I do you know it's going to be all about the leadership. But if mister Trump comes in, there are strong status for productions against FIT independence. I think if he tries to assault that independence, there could be a significant local barrier to doing that. And if it's Kamala Harris, and if she wins as kind of an unknown mister.
Biden has respect to their independence, I hope she would continue to do the same.
I want to switch gears here and talk to you about an opinion article that was written in Political this week, and it's entitled why is the government encouraging a tax payer bailout? The idea here is that mortgage origination and servicing has really moved out of the banking system. This is the system here, of course, at the federal regulators really oversee and out of the purview for the most
part from these regulators. Just this week, one of the companies named mister Cooper became even more powerful by buying a set of assets from New York Community Bank, arguably unbattled a little bit at this point in time. How do you feel about this move from the banks to the non banks and the move by regulators to really try to backstop this system.
Yeah, well, I think it's unfortunate.
You know, it bears repeating over and over again that the majority of these toxic subprime loans that cause so much heartache for families and so much disruption in our markets, the majority were originated by non bank lenders. So the irony that they go from about what I think thirty four percent two thirds of mortgage originations now is supremely ironic.
And the servicing has moved too, is about four percent. During the crisis. Now it's well over half.
So this is a problem with bank regulation when you just clamp down on the banks and capital quirements on mortgage servicing rights I think are part of the reasons why the.
Servicing have also moved to the non banks.
But you just force this activity into less regulated sectors and then to have an answer, Okay, we're going to clamp down to the banks, we're going to push this and not to say we didn't need more capital. We did, of course, but you can't do that in isolation without paying attention to kind of risks are being created when it moves out of the banks.
So this is a problem.
They need more prudential supervision. They don't need bailouts. And there are plenty of tools now. I used to be the chair of the Fanning Made Board. Fanny Freddy Jinny can set standards. They do, set standards of financial and integrity. Their businesses are at risked these mortgage servicers get into problems. They could strengthen those requirements. FAHFA could help them with that, and so I think there are current tools.
It would be great if Congress.
Provided more regulatory direct regulatory authority over them.
But pending that.
I think the tools are there now, and that's where the focus should be, not on creating bail out funds. I mean, that's just you know, if they if the FED thinks or Fstock thinks mister Cooper's is systemic, you know, there's a process called Title one designations. They can designate mister Cooper's as a Title one systemic entity, put it under the FED supervision supervisor regime, make them have a
resolution plan, increase circapital requirements. Those tools are there if they really think these services are systemic.
I think this is an important conversation because you know, I did ask at one point even JD. Vans if the private equity community and the private credit community and the non banking community at large needs more regulation, and he even he agreed, for example, that there should be more. So, you know, there's another story in the Financial Times about how private equity has been tangled in a web of
bank debt. Bloomberg reported this morning that there are banks looking to restructure one of those debts, for example Bright Speed, they might be stuck with losses on their books. Is there a deeper connection than meets the eye between the private community, non banks and the banking system that regular are not privy to.
Yeah, I think there absolutely is that there's a there's a real lack of transparency around what the exposures are on these private funds.
My gut tells me they use leverage on leverage, you know, the.
Conventional wisdom is they rely much more on equity financing, are less leverate than banks. I don't think that's the case. And here again banks have tremendous lending exposure to them. Is a lot of the you know, the lending and other financial services that moved out of banks driven by capital, the capital regime and the lack of these capital requirements in the non banks. This this business has gone out, but the banks are still lending to the private.
Funds that are now doing this.
But the capital treatment is more lenient because they basically do it on a collateralized basis. The exposures are structured differently than just making ones and holding them on your
balance sheet. So again it's a phenomenon of only slapping regulation and tougher standards on the banking sector that looking toy what you're doing on the non banks, And at very minimum, we could impose tighter requirements, things that the banks should know about those private funds, having a holistic view of their financial position, not just looking narrowly at the collateral and Gosh only knows they probably bought that collateral with the loan.
Who else has a claim on that collateral? They don't have good The banks don't have it. I don't think the regulators have it too.
And I think if T had a very good piece on this kind of breaking down all the different financial engineering that's used to pile leverage on leverage.
In these funds, and it doesn't you know, we talk about recession risk.
I worry more about that so much private credit has shifted into the non bank sector and if that sector implodes and that fulls back.
Into the banks, then we are going to have a real problem. Then we are going to have a deeper sept along the lines we have.
Unfortunately I have to leave it there, but something to rediscuss very soon. Shei la bert Up, formerly of the FBI c