For decades, William Isaac’s insights on the U.S. financial system have been featured in leading news publications. Now, you can browse them all in one location.


in leading business publications

Small Business and the Crisis: What We Are Doing Isn’t Fair . . . or Smart by Brian Graham, Co-founder and Partner in The Klaros Group

Small Business and the Crisis: What We Are Doing Isn’t Fair . . . or Smart by Brian Graham, Co-founder and Partner in The Klaros Group

April 20, 2020

Last Thursday, the Small Business Administration officially announced the inevitable: the Paycheck Protection Program (PPP), the Federal government’s only large scale initiative targeting small businesses, ran out of money less than two weeks in. Untold numbers of businesses, particularly the smaller firms, were left out in the cold.

Small businesses drive just under half of jobs and the U.S. economy. Yet we allocated them only $349 billion of relief, less than 15% of the total funding in the CARES Act. What a surprise that the funding would wind up woefully short.

Through a blizzard of liquidity programs, the Federal Reserve has thrown money at the crisis as well, orders of magnitude more than Congress. Unfortunately, here too the interventions have been skewed to the disadvantage of small businesses. Thanks to its responses to the 2008 crisis, the Fed was able almost instantly to reactivate programs for interest rates, quantitative easing, bank liquidity, repos, asset backed securities, money market funds, and investment grade corporates almost instantly – delivering trillions almost overnight to big banks and corporations. The Fed’s liquidity program for PPP loans and the Main Street Lending program for middle-market companies are both a tiny fraction of the overall assistance (it is hard to calculate an exact share given the unlimited nature of some of the Fed programs but to date clearly well below 15%) and also remain very much a work in progress.

In addition to being a dollar (or, more precisely, hundreds of billions of dollars) short, our efforts to aid half the economy have sadly been a day (or, more precisely, weeks) late. It took us weeks to stand up PPP, with many banks struggling to process loans. Thank goodness for the community banks that stepped up as larger banks faltered. And, by initially freezing out the non-bank private lenders (including fintechs) and community development financial institutions that actually serve small businesses and are the best distribution channel to reach this sector, we made it unnecessarily hard for small businesses to access any assistance that was available. Of course, even if as expected Congress ultimately adds some money, the stoppage as of Thursday has injected even more delay and uncertainty.

For small businesses struggling to meet payroll, days matter and weeks can easily be the difference between survival and extinction. If they go down, so do the jobs that they have created.

There’s always a lot of rhetoric from politicians and policymakers about the importance of small business. So why would a politically potent and substantively critical sector of the U.S. economy get the short end of the stick when it comes to real relief? Drawing on experiences from past crises, I can see three basic reasons. First, in a crisis, policymakers tend first to pull out and re-purpose the playbooks they already have; in this case, their existing playbooks were created in the last financial crisis when large banks and companies were in fact the center of the problem and thus the target of government assistance. Second, again in part driven by the last crisis, policymakers tend to equate big with both risky and important. Even though small businesses, in the aggregate, are clearly hugely important and hugely at risk. Finally, it is simply easier to figure out and deliver aid to a few hundred

sophisticated large firms than to hundreds of thousands of small enterprises; like all of us, policymakers tend to do the easiest stuff first.

While this unintended but real neglect of half the economy can be explained, it should not and cannot be tolerated. According to the US Chamber of Commerce, as of the beginning of April – two weeks ago now – one in four small businesses had already shut down and another 40% expected to have to shut down within two weeks. That means that roughly two-thirds of small businesses, which again account for half of the jobs in this country, face ruin without assistance – which is to date has been both inadequate and late.

I am not arguing that large banks and corporations do not merit support; they do. But American small businesses need, and deserve, at least as much help as the banks or large companies. What we have done to date is not fair, smart, nor sustainable substantively or politically (certainly, with respect to the latter, in the long run if past fallout from crises is any guide). We have to get this right immediately, which means three simple but challenging steps:

  1. Add money to PPP. Proposals are circulating in Congress to add another $300 billion. But we probably need at least twice that amount or another $600 billion more. I could be wrong, but why would we take the risk of falling short again? So what if the SBA has unused authority that it returns. Every qualified small business should receive their fair share and have confidence that they will get it. That confidence is critical to protecting these jobs. Why nickel and dime the most important sector of our economy and risk falling short – again? Go big.
  2. Aggressively utilize responsible non-bank small businesses lenders to distribute the aid to their customers. These lenders include traditional players, fintechs and community development financial institutions. And these firms, more than large or small banks, have the connectivity and in many cases the technology chops to get it done right and quickly. Yet they have in practice to date been cut out. If every depository in the country was made eligible by default, why wouldn’t we do the same for every state licensed lender? The point is to get the aid to the small businesses fast. Shouldn’t we bend over backwards to make use of the best channels available to do that?
  3. Require the Fed to craft and implement new programs that deliver support to small businesses and the middle market. This is admittedly complex and hard. And the Fed should be commended for the scope and pace of what they have done to date in response to the crisis. But we were able to figure out rapidly how to expand the safety net in the last crisis to banks and large corporations; we can do so now for smaller businesses. The right place to start is to get the only two programs so far aimed at small businesses, the nascent PPP liquidity and Main Street Lending programs, actually out there. While both programs need big changes, and just need to be bigger, something is better than nothing at this point. And we can build from there.

Coronavirus, and the Media’s Lies, Damned Lies, and Statistics by Edward Pinto

Coronavirus, and the Media’s Lies, Damned Lies, and Statistics by Edward Pinto

April 15, 2020

[My friend Ed Pinto, Resident Fellow of the American Enterprise Institute, is one of the nation’s foremost authorities on the housing markets and the giant government  housing agencies.  Ed took time off from his day job to write the op-ed piece below on the geographic distribution in the US of the Covid-19 virus.  Ed’s analysis paints a vivid portrait of where the virus is and where it is not, which suggests which markets might be re-opened soon and which ones might remain closed for a while longer.  I found Ed’s analysis enlightening.]

“US has more known cases of coronavirus than any other country” – CNN

Reading breathless headlines such as this, one would never know that the on a cases per million population basis, the United States  is on par with Germany, often held out as European country with a low incidence of cases, and well below the rates for Spain, Italy, France, Belgium, and Switzerland.

But wait, this must be because of the US’s low testing rate, notwithstanding that our testing rate per million is above that of Spain, France, the UK, and Switzerland.

“The United States is reporting 20,000 coronavirus deaths, more than any other country” – CNN

This headline gives no hint that the US has one of the lowest death rates per million when compared to Western European countries.  In fact, the rate for Spain is about 6 times the US, with Italy, France, Belgium, and UK, being 5 times, 4 times, 6 times, and 2.5 times respectively.  Only Germany has a rate lower, at about half the US’s.

“What California is doing right in responding to the coronavirus pandemic” – CNN

Yes, California does have a low rate per million of cases and deaths.  But Texas is lower on both metrics and is little praised.  In terms of cases, California is at 572 per million, but Texas, the second most populous state, has an even lower rate of 474.  What about the much maligned state of Florida? Yes, its rate is higher at 939, but this is about half the rate in Pennsylvania, and one tenth the rate in New York.  The multiples for New Jersey, Michigan, Massachusetts, Louisiana, Illinois, Georgia, Connecticut, Washington, Maryland, Indiana, and Colorado.   Of the 16 states with the largest number of cases, Texas, California, and Florida have the lowest numbers of cases per million.

How California Has Avoided a Coronavirus Outbreak as Bad as New York’s…So Far: Earlier stay-at-home orders and a less dense population have helped state manage pandemic, but risk remains high, particularly in L.A.” – WSJ

This reporting on California seems to confuse correlation with causation. Texas’s stay-at-home order (March 31) came much later than California (March 19), yet, as already noted, its metrics are much better that even California’s. Florida’s order came a day later than Texas’s and as already noted, it has the third lowest case per million.  Its deaths per million stands at 22, only somewhat higher than California’s 16.  And Texas’ stands at 10, one of the lowest rates in the country. The facts around California, Texas, and Florida, suggest that stay-at-home orders be unnecessary in these large, less, densely populated states.  Social distancing, limits on crowd size, and a focus on vulnerable populations may be a much more sensible solution, one that inflicts much less damage on the economy and economic well-being of most American households.

Providing the complete facts to the American people is of the utmost importance as we debate and decide how and when to start reopening the economy and begin some normalization of activities.  The data demonstrate that the pandemic has been most severe in 7 states with the highest number of cases per million population: New York, New Jersey, Massachusetts, Michigan, Pennsylvania, Illinois, Louisiana, and Connecticut.  These 8 states account for 67% 0f all cases and, as recently as April 11, accounted for 71% of new cases.  With the exception of Mardi Gras –plagued Louisiana, 7 of these hard-hit states are in the Northeast and Midwest.

The sooner we begin to take measured steps in the weeks ahead to start reopening the economy and begin some normalization of activities, the sooner we will stop inflicting incalculable harm on our economy and American households.

Ex-Regulator and New York Banker Establish Advisory Firm William Isaac and Howard Milstein identify risk management as central focus by Ted Knutson published by GARP on March 27, 2020

Ex-Regulator and New York Banker Establish Advisory Firm William Isaac and Howard Milstein identify risk management as central focus by Ted Knutson published by GARP on March 27, 2020

April 10, 2020

William Isaac, a former chairman of the Federal Deposit Insurance Corp. and of Fifth Third Bancorp, and Howard Milstein, a prominent New York banker and real estate developer, have formed a strategic advisory firm specializing in corporate governance, risk management and compliance for the global financial sector.

“The key service is consulting on what risks banks face and how to guard against risks and minimize the effects,” said Isaac, who is co-chairman, along with Milstein, of the Isaac-Milstein Group.

According to a March 12 announcement, they aim to “offer critical guidance and counsel to institutions in today’s rapidly evolving global regulatory and competitive environments.”

Their timing coincided with the coronavirus crisis, but Isaac said he did not want to “oversell” on that specific issue. Expertise would be sought from outside if required.

He did recently co-write, with Thomas Vartanian of the program on Financial Regulation & Technology at George Mason University’s Antonin Scalia Law School, “How Regulators Can Kick COVID-19’s Bank Shock into Remission,” for American Banker’sBankThink. They contend that the banking system was hobbled in the 2008 crisis by mark-to-market accounting rules, and that the now-unfolding current expected credit loss (CECL) standard is “another form of mark-to-market accounting . . . [that] is almost certainly going to diminish longer-term bank lending at the worst possible time.”

“Long Track Record”

“I have a long track record in this field. I know most of the risks,” said Isaac, citing involvement in such areas as banks’ dealings with governments, and how risks are addressed in board governance and senior-executive-level oversight.

An Ohio State University law graduate, Isaac was general counsel of First Kentucky National Corp., a bank holding company, before President Jimmy Carter appointed him to the FDIC board in 1978, at age 34. He was elevated to chairman by President Ronald Reagan in 1981 and served until 1985, his tenure marked by significant financial industry upheaval and reforms, and bank and thrift institution failures.

Isaac moved on to law firm Arnold & Porter; founded consulting firm Secura Group, of which Arnold & Porter was a founding partner; and sold Secura to FTI Consulting, where he stayed on as senior managing director from 2011 through 2019.

He was chairman of the regional banking group Fifth Third from 2010 until 2014, when he reached the mandatory retirement age.

Milstein Affiliations

“Bill has an impeccable reputation for integrity and is among the most experienced leaders in the world when it comes to financial regulation, compliance and risk management,” said Milstein, chairman, president and CEO of New York Private Bank & Trust and its operating bank, Emigrant Bank.

“Our experience in these areas will prove invaluable to institutions worldwide as they confront a world where financial security, transparency and regulatory risk management is paramount,” added Milstein, who also has real estate development, merchant banking and philanthropic interests.

Isaac has joined the board of New York Private Bank & Trust and Emigrant and is chairman of two other entities under the NYPB&T umbrella: Sarasota Private Trust Co. (Isaac resides in that Florida city) and Cleveland Private Trust Co. They plan to add more trust companies to the group.

Isaac has joined the board of New York Private Bank & Trust and Emigrant and is chairman of two other entities under the NYPB&T umbrella: Sarasota Private Trust Co. (Isaac resides in that Florida city) and Cleveland Private Trust Co. They plan to add more trust companies to the group.

Global Scope

Isaac-Milstein said more information about its growth plans will be forthcoming. Isaac said in an interview that it will be looking for people or groups who can grow with management assistance and capital. “We know what the good firms are. We’re not going to hire 40 people. We don’t have that appetite,” he said.

“Our goal is to provide a level of service to the financial and corporate community that is unmatched,” said Richard Wolf, a governance, risk and compliance expert who has joined Isaac-Milstein as managing director.

The firm is stressing “deep hands-on experience in strategic planning, risk management, information governance, organizational culture, business ethics and regulatory compliance,” and serving financial institutions and their boards, domestically and internationally, along with central banks and regulatory agencies.

Banks “face heavy fines and damaged reputations if they do not proactively nurture corporate culture, as well as measure and remediate compliance weaknesses,” Isaac-Milstein noted in its announcement. “The Isaac-Milstein Group will also focus on data security issues and global financial transparency in a world where the stability of economic systems depends upon the trust companies build with their shareholders, regulators, creditors and clientele.”

Laffer Associates: Expanded comments on the Corona Virus-Induced Economic Crisis based upon my side of a Conversation with the President by Arthur B. Laffer, Ph.D.

Laffer Associates: Expanded comments on the Corona Virus-Induced Economic Crisis based upon my side of a Conversation with the President by Arthur B. Laffer, Ph.D.

March 24, 2020

 [Art Laffer and I have been friends for quite a few years, and I have great respect for his brilliance intellectual honesty.  He has advised a number of Presidents, and  I thought you might enjoy reading about this latest conversation with President Trump.]

 On Thursday night, March 19th, 2020, after my bedtime, I missed three calls from the President. While I missed the last call, I did hear my phone ring (which was downstairs) and I tried to call the number back. Finally, at 9:18 CT (10:18 ET), the President called back and we were able to talk. We talked for about 20 minutes. The President directed me to call Larry Kudlow after our conversation and set up a conference call with both Larry and me and Steve Mnuchin. I did just that but to no avail. No one picked up their phone and the White House operator did not come online. On Friday, I also tried and tried to make contact. Finally, on Saturday, I received not one, but several calls from Larry and one from Steve. 

I’d like in this note to give you my part of the conversation with the President. I’ll leave it up to President Trump to tell you his thoughts and comments. That’s not my job or my right. Before I start, let me just say that the President is amazing: even at that hour, he was alert, fresh and laser focused. And he “gets it” right away, if you know what I mean. My points: 

A) I (Arthur Laffer) have experienced firsthand up close and personal any number of similar (but not identical) crises. I was in the White House as George Shultz’ economist at the OMB during the 1971-72 economic crisis first resulting in the Camp David edicts: a.) devaluation of the dollar, b.) America going off gold, c.) the 10% import tax surcharge, d.) the Job Development Tax Credit (an ITC which excluded foreign made capital) and of course e.) wage and price controls. The catastrophe that ensued is the stuff of legend. The stock market fell by over 50% and people were running around and squealing like five-year-olds in a scary movie—except, of course, for George Shultz. 

I was also heavily involved in the inner circles in the 1972-74 Watergate fiasco. I’ve always said (probably with some, but not too much, exaggeration) that 18 of the 25 staffers in the White House back then were convicted of some transgressions. My only excuse for not being one of the 18 was that my boss wouldn’t let me join the others. George Shultz is the most honest, straight-shooting, ethical person I believe I’ve ever met. Someday I’ll tell you all the anecdotes I have. 

I was also in the mix with President Ford’s Whip Inflation Now (WIN) set of policies that sank his presidency. My close friends and constant contacts were Don Rumsfeld and Dick Cheney (my classmate at Yale). In fact, it was with the two of them and Jude Wanniski that I drew “The Curve” on a cocktail napkin at dinner in the Washington Hotel. I worked closely with the Reagan campaign as an insider in 1976. 

I was an active member of the “resistance” during the Carter debacle. In Reagan’s 1980 campaign, I was a member (and the note taking secretary) of the Reagan Executive Advisory Committee (some 15 members at the outset) from 1979 through the election. I was also a member of President Reagan’s Economic Policy Advisory Board (PEPAB) for both of Reagan’s terms in office. In 1984’s re-election campaign, I was one of 12 members of the executive committee of the Reagan/Bush Finance Committee. 

I was intimately involved in the 1981 tax bill, the Crash of 1981-82 and in staving off the elimination of the third year of the tax cut attempted in the 1982 tax bill. It was lonely for me being an insider back then. But if you had the support of George Shultz, you knew you were right, and, in addition, if you had the support of Ronald Reagan, you knew you would ultimately prevail. 

In 1987 with the market crash in November, as a member of the President’s Economic Policy Advisory Board, I was part and parcel of all the inside discussions and brouhaha which ended in the correct decisions—“Don’t just stand there. Undo something!” As a result, Reagan won his third term in office under the pseudonym George Herbert Walker Bush. One second after winning, President Bush 41 showed his true colors and four years later lost to Bill Clinton in 1992. Nonetheless, the decisions President Reagan didn’t make in 1982 and 1987 led to a prolonged period of prosperity. 

During the Clinton Administration, I was one of 25 members of the Congressional Policy Advisory Committee, most of whom were foreign policy experts: Wolfowitz, Rumsfeld, Cheney, etc. etc. We economists were few in number. I believe our presence was instrumental in how the Republican leadership (Gingrich et al.) handled President Clinton’s economic agenda. A great period of prosperity was kept from being derailed by ill-conceived policy actions. When the economy has been doing well, doing nothing is a wise policy. 

Lastly, I was a party to—unsuccessfully—the policies of Bush 43 at the onset of the Great Recession. This led to the weakest recovery in U.S. history under President Obama. 

B) There is no one whom I know in the Trump inner circle who has any experience with or has any idea what it is like being a decision maker in times of crisis. This in no way is meant to be a put-down of President Trump’s wonderful team. It’s a fact. His people—who, I believe, are world-class professionals—are in way over their heads and, like previous crisis participants, are either too ashamed or too proud to ask for help. Having Secretary Mnuchin sell his plan is painful, pitiable and scary. It takes only five days of bad decisions to ruin a lifetime of success. Calling helicopter money a stimulus is like calling a nuclear bomb “the peacemaker.” Government spending is taxation, as Milton Friedman repeatedly said. Platitudes and bromides are no substitute for good policies. It’s easy being a top government official during peacetime prosperity, receiving accolades from adoring crowds. In times of crisis, being the point person sucks and no one admires or likes you. All that happens is that everyone yells at you and blames you. 

This current crisis is deadly serious and has within it the wherewithal to wreak massive economic damage that could last for years and years. This current crisis also contains an essential opportunity for any leader who makes good decisions to become a legendary hero of biblical proportions. Just think of Winston Churchill, Thatcher, MacArthur, or Ronald Reagan. It’s a choice between the tiger or the lady. The issue quite simply comes down to the experience, competence, knowledge and content of character of the decision making inner circle. I’m worried. It is a matter of great consequence who prevails in the internal debates. The House, Senate and President Trump need cool, calm and clearly thought-out advice. 

Whenever politicians make decisions when they are either panicked (which today they are) or drunk (which I hope they aren’t), the consequences are rarely attractive. We are still living with the disastrous consequences of bad policy from Nixon, Ford, Carter, Bush 41, Bush 43 and Obama. We need more Reagans, Kennedys and Clintons. Let’s let Trump be Trump. He has what it takes. 

It is clear that the response to the Coronavirus precipitated this ensuing crisis, which is now more economic than medical. But whatever its origins, the economy and our economic future are up-for-grabs. The near-term outlook is dark dark dark. What we now face is the question as to how we address the future which will determine the long-term prosperity of this great country and the political future of one of America’s best presidents. Our “five days of decisions” are at hand. Just look at the chart below of U.S. Real GDP per adult detrended and you’ll see what I mean. 

C) One huge part of the crisis that faces the U.S. (and other countries) is the short-term need for liquidity faced by otherwise solvent industries and companies. These companies had the rug pulled out from under them with huge overnight shortfalls in revenues and what now looks like excess leverage on their balance sheets. Industries like cruise lines, airlines, hotels and healthcare, all of which had heretofore been highly profitable and comfortably solvent, now face a credit crunch of unimaginable proportions. If everything goes right, which it can and should, these industries and companies will be back on their feet in no time—within 12 months. If the government acts judiciously and carefully, those companies who were unprepared and vulnerable will have new owners. Those companies who were intrinsically solvent will get the liquidity they need and will prosper. It is not the role of government to pick winners and losers, especially not in a time of crisis. Free markets and the removal of government intervention is never more needed than it is in a time of crisis. 

The worry is if these industries and companies don’t get the liquidity they need and deserve, their liquidity crisis will morph into a solvency crisis and will spread to every nook and cranny of the U.S. economy. Inherently solvent companies need temporary access to liquidity. 

Without the liquidity, these inherently solvent companies will terminate too many employees and will sell assets in a fire sale way below their replacement costs. Depression will permeate every aspect of the economy bar none. This happened in 2008-09 and 1930-31. You should have seen what happened in Chile in 1970 and the following two plus years when Salvador Allende replaced Eduardo Frei as president and before the Chicago Boys moved in. Unsuccessful companies with inherently insolvent businesses should not be bailed out. Who cares who owns Boeing? As long as someone owns it and runs it well, America is fine. 

What needs to be done and can be done quickly by the Federal Reserve, the Treasury, the Small Business Administration, Housing and Urban Development, etc. is for the government to lend to these good companies or to provide loan guarantees to these good companies to tide them over these unforeseen hard times back to normalcy. The good airlines, cruise lines, hotel chains, restaurants, etc. should have ready access to liquidity. 

Paraphrasing the words of Walter Bagehot, “In times of crisis, discount freely.” No words are more true. These companies don’t need bailouts, they need access to liquidity to tide them over this deep downturn. Already, some companies that see the writing on the wall are choosing bankruptcy. Remember that bankruptcy is not the destruction of capital, it is the reorganization of capital. Schumpeter said it best—this is creative destruction. 

Extending credit to otherwise solvent firms is what the Fed and others should do right now. Banks that extend credit to small companies should be given backstops by our financial institutions, especially the Fed. 

D) What shouldn’t be done: 

a.) Dumping liquidity into the overall economy by open market operations or interest rate cuts is not warranted. The U.S. banking system has plenty of excess reserves. 

b.) Intervention in the foreign exchange markets to prevent the dollar from rising is also unwise and will disrupt much needed trade. 

c.) Purchasing equity in private companies is always a bad idea. Once the government takes over, it doesn’t leave easily. 

Just help good companies with their liquidity needs. And, make sure that they pay the government back when they are back on their feet. 

E) The equally large second part of a recovery process has to be making working more attractive and making employing workers more attractive. Today, there is only one policy that can achieve both of these objectives: a temporary payroll tax (Social Security and Medicare) waiver for both employers and employees through December of 2020. This policy also has the added benefit of providing widespread benefits across all segments of the population. No one is to blame for the Coronavirus and no one should be selected for special dispensation at the expense of others. 

The payroll tax for employees is roughly 7.65% of the employee’s gross wage and for employers, it is also 7.65%. Just think of it, virtually every worker or employee in America pays this tax. Likewise, every single employer in America also pays this tax. Nothing could be more broad-based than this tax. It is the perfect vehicle to recreate the prosperity we lost. We have a supply problem today, not too little demand. If you need more production, reward all producers—both employers and employees—more for producing. It ain’t rocket surgery. 

By waiving the employee contribution to the payroll tax, each and every employee will receive an increase of 7.65% in their after-tax wages. For a $50k per year employee, this is an after tax bonus of almost $4k annually. 

Also, by waiving the employer contribution to the payroll tax, the cost of hiring or retaining an employee is reduced by 7.65%, as well. Again, for a $50k per year employee, the cost savings to the employer will be roughly $4k per year. 

The second part of the crisis caused by the consequences of protecting Americans from the Coronavirus—the loss in output and employment—can best be reversed both in magnitude and timeliness by a temporary waiver of the payroll tax through December of 2020. 

By making sure the waiver is only temporary, what happens is that both workers and employers know that these benefits won’t last long, and, therefore, they will have an enormous incentive to put as much production as they can into the eight-month period when the payroll tax is waived. They will pull 2021 production forward and increase 2020 production as much as possible. This will make the bounce back as large and as fast as possible. Helicopter money such as $2,000 per family (needs-tested, of course) will reduce the bounce back. When Steve Mnuchin asked me “what harm” can helicopter money do, my response was “lots and lots.” Just look at Europe and Japan over the post-World War II era to see the enormous damage done by helicopter money. The Treasury Secretary then blurted, “Let’s agree to disagree.” Huh? 

The total static cost of a plan to waive all payroll taxes through December 31st will be scored in budget terms at around $750 billion. But believe you me, in dynamic terms, the total cost will be a lot less than $750 billion. If one includes the costs of welfare payments and other tax revenue losses—federal and state and local—the feedback effects on the budget will be very large indeed. And if you only consider the human suffering that will be alleviated, I can’t think of any policy more compassionate than the quick reversal of the economic downturn brought on by the health policies implemented to stop Coronavirus. 

Spending other people’s money indiscriminately is not compassion. It would be symbolic pandering if only it weren’t so damned serious in damaging the economy. 

F) In addition to the two policies listed above that we should do—1) discounting freely and loan guarantees for liquidity needs and 2) waiving the payroll tax to redress production losses—there is a much larger set of policies we shouldn’t do. But these bad policies have been done time and time again in crises when panic freezes rational thought. 

When panic (or alcohol) freezes rational thought, rash actions rarely have good consequences. Take, if you will, President Nixon’s set of policy decisions made at Camp David in 1971. The damage they did to the economy and markets was immense. And yet, everyone at the time was screaming “we’ve got to do something!” The correct answer should have been to do nothing. Doing nothing is very hard, but it is often correct. In medical terms, i.e. Latin, it is called primum non nocere: first, do no harm. Also President Nixon’s and his advisors’ panicked policies around Watergate reverberate today as causing a terrible crisis for America, the likes of which we’ve never seen before. Wouldn’t it have been better if President Nixon et al. had just told the truth right away and not tried to cover up the Watergate break-in? 

We could add to the set of panic faux pas in policy President Ford’s Whip Inflation Now, Jimmy Carter’s wellhead price controls, excess profits tax and gasoline rationing. It doesn’t get any worse (oh yes it does). Jimmy Carter’s attempt to free the hostages was a panicked decision gone bad. Remember that? If you’re going to use the military, think it through carefully. And the same goes for economic policies. Take your time and do it right. 

With President Reagan, when confronted by panic situations, the response was very different. We had the huge market and economic crash in 1981 and 1982 brought about by our phase-in of the 1981 tax cuts. Everyone—except for a few of us—recommended eliminating the third year of the tax cuts and increasing social spending à la George McGovern. Reagan, to his credit, was well-aware of the problems created by mistaken, fear-driven policies and didn’t succumb to the emotional stampede. The recovery, starting on August 14th, 1982 for the stock market and January 1st, 1983 for the economy was a wonder to behold. 

Reagan (with Shultz at his side) also resisted the screams and hollers of panic-driven howler monkeys and uttered the phrase, “Don’t just stand there. Undo something.” A profound response to a panic situation. In medical terms, i.e. Latin, this response is called vis medicatrix naturae: the healing power of nature. 

But then we had George H.W. Bush’s panicked response to his situation in 1992 by raising corporate and personal income tax rates plus lots of other distasteful initiatives, and lo and behold the economy went in the dumpster and he lost the election to Clinton. Bad policies forged in panic have consequences, both political and economic. You cannot be warm-hearted if you aren’t also clear-eyed. It’s not compassionate to give away other people’s money, and it doesn’t do any good either. In fact, it does a lot of harm. 

President Clinton, upon taking office in 1993, stupidly passed a tax increase. It’s amazing how well he handled himself in economics after making that initial mistake. The 1993 tax increase caused the Democrats to lose the House, the Senate and governors’ seats in 1994, but Clinton, like Reagan, learned an economic lesson. Unfortunately (for him), his panicked decisions to lie about sex hurt him badly. The lesson is simple: think things through carefully, be modest, recognize your own limitations and don’t lie. 

And then we come to “W” and Obama. Yikes! Just how bad decisions can be when people make them in a panicked state was sorely tested by these two losers. In five days, a panicked government can enact enough policies to ruin decades of prosperity. These two Presidents and their actions are sufficiently recent to not require recounting. 

What one must remember, whether you make a panicked decision or not, a year from now all the buildings and people and computer code and trains and factories and airports etc. etc. will all still be there. They may be owned or reorganized in very different ways, but they will still all be there. The potential of the economy will barely be affected. When people say the economy will be destroyed, they are simply wrong. Who cares who owns Boeing a year from now as long as all the component parts of Boeing still exist? Unless they are solvent, why should we ever bail out the company’s current owners? We shouldn’t! 

Remember that financial crises are just that—financial crises. Financial destruction and collapse does not affect a country’s production capacity one iota. But once you try to help losers, whether their circumstances are their fault or not, by underwriting their losses, you set into motion a process that is destructive of growth. We live in a profit and loss economy where losses are just as important as profits. The financial system can be rebuilt quickly with only a pen and a ledger. That’s not true of the real economy. 

G) We should not give demogrants (George McGovern’s phrase) or helicopter money à la Larry Summers’ $600 per capita income-tested “tax rebate”, cash for clunkers, $2,000 plus gifts to all families, $50 billion bailout for Boeing, special compensation for sick (Coronavirus) people etc. etc. etc. 

We need only i.) protect solvent companies with extended lines of credit or loan guarantees to stave off a liquidity crisis and ii.) waive the payroll tax for both employees and employers until December 31st, 2020. 

If either political party wants to block this bill, let them make that clear so we all know who is to blame. In the words of the political savant James Carville, “keep it simple…” (KISS). People do deserve the governments they get. 


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Former FDIC Chairman William Isaac and Howard Milstein Form The Isaac | Milstein Group, a New Banking and Corporate Governance Advisory Firm

Former FDIC Chairman William Isaac and Howard Milstein Form The Isaac | Milstein Group, a New Banking and Corporate Governance Advisory Firm

March 12, 2020

– Isaac | Milstein will focus on governance, risk management, and compliance for financial institutions

– Mr. Isaac also joins the boards of New York Private Bank & Trust (NYPB&T) and its operating bank, Emigrant, and will serve as Chairman of NYPB&T subsidiaries Sarasota Private Trust Co. and Cleveland Private Trust Co.

NEW YORK, March 12, 2020 /PRNewswire/ — Howard P. Milstein, Chairman and CEO of New York Private Bank & Trust (NYPB&T) and William (“Bill”) Isaac, former Chairman of the FDIC and former Chairman of Fifth Third Bancorp, today announced the formation of The Isaac | Milstein Group, a new strategic advisory firm specializing in corporate governance, risk management and compliance for the global financial sector.

Messrs. Milstein and Isaac will serve as co-chairs of the new firm, which will offer critical guidance and counsel to institutions in today’s rapidly evolving global regulatory and competitive environments. Separately, Mr. Isaac has been elected as a member of the Board of Directors of New York Private Bank & Trust (NYPB&T) and its operating bank, Emigrant. Mr. Isaac will also serve as Chairman of the Sarasota Private Trust Co. and the Cleveland Private Trust Co., both under the NYPB&T umbrella. The Isaac | Milstein Group will soon announce further growth plans.

From 1978 through 1985, Mr. Isaac served on the board of the Federal Deposit Insurance Corporation (FDIC) under Presidents Carter and Reagan, and was named Chairman of the FDIC by President Reagan in 1981. As the youngest FDIC board member and chairman in history, Mr. Isaac led the FDIC during the banking and thrift crises of the 1980s, working closely with the late Federal Reserve Board Chairman, Paul Volcker, helping to maintain stability in the financial system during an extremely tumultuous period in which over 3,000 banks and thrifts failed, including many of the largest in the nation.

“I am pleased to be joining with Bill Isaac in the formation of The Isaac | Milstein Group,” Howard Milstein said. “Bill has an impeccable reputation for integrity and is among the most experienced leaders in the world when it comes to financial regulation, compliance and risk management. Our experience in these areas will prove invaluable to institutions worldwide as they confront a world where financial security, transparency and regulatory risk management is paramount.”

“It’s truly an honor to be partnering with a business and civic leader of Howard Milstein’s stature and caliber in creating a premier financial and regulatory compliance consultancy,” Bill Isaac said.

The Isaac | Milstein Group will bring together a team of former regulators and financial executives with deep hands-on experience in strategic planning, risk management, information governance, organizational culture, business ethics and regulatory compliance. The firm will serve financial institutions—including central banks and regulatory agencies—and their boards of directors both in the US and throughout the world. In today’s evolving global regulatory environment, all of these entities face heavy fines and damaged reputations if they do not proactively nurture corporate culture, as well as measure and remediate compliance weaknesses.

The Isaac | Milstein Group will also focus on data security issues and global financial transparency in a world where the stability of economic systems depends upon the trust companies build with their shareholders, regulators, creditors and clientele.

“Our goal is to provide a level of service to the financial and corporate community that is unmatched,” said Rick Wolf, Managing Director of The Isaac | Milstein Group.

About William (“Bill”) Isaac
In addition to his service as FDIC Chairman, Bill Isaac has decades of experience in regulatory counseling and risk management services. Upon leaving the FDIC Chairmanship, Isaac founded The Secura Group, a leading consulting firm for financial institutions that was sold by Mr. Isaac in 2010. Mr. Isaac served as a Senior Managing Director of FTI from 2011 to 2020. He has also been Chairman of Fifth Third Bancorp a leading regional banking company. Mr. Isaac is a frequent writer and commentator on banking and financial issues for media outlets that include The New York Times, The Wall Street Journal, Washington Post, Forbes, American Banker, Fox, Bloomberg and CNBC. Mr. Isaac is the author of Senseless Panic: How Washington Failed America, foreword by Paul Volcker, a thought-provoking critique of the mishandling of the Wall Street crisis of 2008-2010.

Mr. Isaac began his career as a corporate attorney at Foley & Lardner and has also been a senior partner at Arnold & Porter. He earned a BBA from Miami University in Oxford, Ohio and a JD, summa cum laude, from the Moritz College of Law at Ohio State University.

About New York Private Bank & Trust (NYB&T) and Emigrant Savings Bank
Founded in 1850 to serve the financial needs of a growing America and its dynamic emigrant population, New York Private Bank & Trust (NYPB&T) and its operating bank, Emigrant, is the largest privately held, family owned and operated bank in America. Emigrant offers a full range of deposit and home mortgage products, and also specializes

in meeting the needs of wealthy individuals, families, endowments, foundations and corporations, directly and through its various subsidiaries. In addition to Sarasota Private Trust Company and Cleveland Private Trust Company, NYPB&T subsidiaries also include Emigrant Capital, New York Private Trust (including fully-integrated banking, custom lending, insurance services, and trust administration services), Emigrant Fine Art Finance, Personal Risk Management, Galatioto Sports Partners and Emigrant Partners, which makes minority investments inwealth, asset and alternative asset managers.

(212) 683-8100
Jim Haggerty,
Lucy O’Brien,

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SOURCE The Isaac | Milstein Group

Paul Volcker, former Fed chairman who inspired bank risk rule, dies at 92

Paul Volcker, former Fed chairman who inspired bank risk rule, dies at 92

December 26, 2019

[Paul Volcker devoted most of his adult life to public service, spending years at the U.S. Treasury, the Federal Reserve Bank of New York, and as Chairman of the Federal Reserve during my tenure at the FDIC. Paul was given marching orders to bring inflation under control by President Carter who appointed him Chairman of the Fed in 1979. Despite intense criticisms and even death threats, Paul resolutely raised interest rates until the prime lending rate reached an astounding 21 1/2%. The bitter medicine caused a lot of pain: two recessions, widespread farm failures, voluminous bankruptcies, plummeting energy and housing prices, and thousand of bank and thrift failures. I dealt with Paul regularly and never saw anything but firm resolve to finish the necessary task at hand — breaking inflation’s back. His success is literally history, and due to it, he was reappointed Chairman of the Fed by President Reagan. Personally, he was intriguing. At 6’7″, with a booming voice, he was an imposing figure with deep knowledge of the financial world. The FDIC had been a sleepy agency from the 1940s to the late 1970s, staying in the background while the Chairman of the Fed and Secretary of the Treasury took the lead. It was clear that the Chairman of the Fed expected me to maintain that status quo, but he accepted that I couldn’t with the very viability of the FDIC in doubt. Paul and I had policy disagreements to be sure. But I never doubted that Paul always acted in good faith based on what he considered to be in America’s and the world’s best interests. I will always be grateful for the generous forward Paul wrote for my book, Senseless Panic: How Washington Failed America. Referring to our initially bumpy relationship he said: “My first impression of Bill was of a rather brash young man, certainly vigorous and self-assured, but perhaps lacking the seasoning that one might expect of an agency head. He was certainly not deferential. But as we got into the trenches together, I came to realize the importance of his character, of the personal strength desperately needed in perilous times.” Paul was clearly a man who was larger than partisanship and ego. He and I became friends and visited regularly over the years after we’d both left government. We each remained active in the financial and government worlds and tried our best to make the financial system stronger and more responsive. Paul was always on call to governments throughout the world whenever they needed a person of his stature, integrity and experience. Paul and I visited regularly throughout his last days, and I was deeply honored to attend his memorial service in New York City. It was a fitting tribute to one of the best public servants — and his family — it has been my privilege to know. I will miss him greatly.]

Paul Volcker, the former Federal Reserve chairman who broke the back of U.S. inflation in the 1980s and three decades later led President Barack Obama’s bid to rein in the investment risk-taking of commercial banks, has died. He was 92.

He died Sunday in New York, according to The New York Times, which cited his daughter, Janice Zima.

In a career that spanned more than half a century, Volcker became a one-man economic cleanup crew, called on to devise a successor to the gold standard, a cure for runaway inflation and, in 2008, a response to the housing-market collapse that exposed Americans as perilously leveraged and their banks as highly prone to risk. That last effort led to the Volcker Rule, widely loathed by bankers and subsequently a top priority for overhaul by the Trump administration.

The grandson of German immigrants, Volcker held strong beliefs about the dangers of inflation and the virtues of frugality. He flew coach, grumbled about restaurant prices and took his first wife on a honeymoon to a fishing cabin in Maine rather than to Bermuda, as she’d hoped. He scorned financial industry innovations such as credit-default swaps and quipped that the best new financial product in recent decades was the automated teller machine.

Obama’s Call
Volcker worked at the Treasury Department, the Fed, or as an economic adviser under six presidents. At 81, two decades removed from his Fed days, he was recalled to government duty in November 2008 by Obama, the president-elect, who named him to head a new Economic Recovery Advisory Board as the nation was struggling to pull out of a recession and recover from the worst financial crisis since the Great Depression.

Within months, the 6-foot-7-inch (2 meters) Volcker was standing out as the White House insider pushing for the most radical regulatory reforms. He wanted to bar traditional deposit-taking banks from making speculative investments on their own account, the practice known as proprietary trading, and from investing in hedge funds and private-equity funds. Obama formally proposed the idea in January 2010, calling it “a simple and common-sense reform, which we’re calling the Volcker Rule — after this tall guy behind me.”

Volcker’s rule was incorporated in the 2010 Dodd-Frank law — though not before being weakened, which led Volcker to express doubt about the Obama economic team’s commitment to it. “They say they’re for it, but their hearts are not in it,” he told Ron Suskind, author of the 2011 book “The Confidence Men.”

When Volcker left his White House post, in February 2011, regulators were sifting through a flood of public comments on the implementation of Dodd-Frank. Banks continued to argue that Volcker’s proposal would excessively restrict their business.

Wall Street critics
“Paul Volcker, by his own admission, has said he doesn’t understand capital markets,” Jamie Dimon, the chief executive of JPMorgan Chase & Co., said on Fox Business News in February 2012. “Honestly, he has proven that to me.”

The Federal Reserve, Federal Deposit Insurance Corp. and three other agencies completed the final rule in December 2013. It ran close to 100 pages, with hundreds more in supporting material, and sought to distinguish proprietary trading from still-permitted market making and hedging to mitigate risks. Volcker quipped that in the end, “I was gratified to see that the rule itself is shorter than my own home insurance policy.”

The rule took effect in July 2015. President Donald Trump, in 2017, ordered regulators to rewrite the rule and soften its effect. In an Aug. 20, 2019, letter to Fed Chairman Jerome Powell, Volcker complained that regulators had used “simplification” as an excuse to weaken the rule in a way that would amplify risks to the financial system.

Paul Adolph Volcker Jr. was born on Sept. 5, 1927, in Cape May, New Jersey, to Paul Sr., the coastal town’s manager, and his wife, the former Alma Klippel. The family moved to Teaneck, in northern New Jersey across the Hudson River from New York City, in 1930 when the elder Volcker, a civil engineer, became that town’s manager.

Known as Buddy to distinguish him from his father, Volcker had to repeat kindergarten because teachers interpreted his silent manner as a sign of immaturity, his mother told Newsweek for its 1986 profile.

Princeton, Harvard
He received a bachelor’s degree in 1949 from Princeton University and a master’s degree in political economy and government from Harvard University in 1951. In 1951-52, as a student at the London School of Economics, he toured Europe at the expense of his planned Ph.D. thesis, which never got done, Joseph B. Treaster wrote in “Paul Volcker: The Making of a Financial Legend,” his 2011 book.

Volcker’s career as an economist began in 1952, when he took a job at the Federal Reserve Bank of New York. He left five years later for Chase Manhattan Bank, where he worked closely with David Rockefeller, then the vice chairman. In 1962, Volcker took his first job in Washington, as director of the Treasury Department’s Office of Financial Analysis during the administration of President John F. Kennedy. He served as deputy undersecretary of monetary affairs under Lyndon Johnson, where he witnessed the president’s attempt to prevent then-Fed Chairman William McChesney Martin from raising interest rates. In 1965 Volcker returned to Chase.

He left Chase for Washington for a second time in 1969, this time to be Treasury’s undersecretary for monetary affairs in the Nixon administration. In that role, he helped craft a new international monetary framework to replace the fixed exchange rates and gold standard of the Bretton Woods system, which had been in place from 1944 until Nixon ended it in 1971.

Inflation warrior
As president of the New York Fed from 1975 to 1979, Volcker became the loudest voice on the Federal Open Market Committee advocating monetary restraint and high interest rates — a full-fledged inflation warrior. “Sometimes we still hear the argument that in time we can learn to live with inflation,” he said in a 1978 speech. “But experience suggests the contrary — that this powerful economy of ours will simply not work smoothly or at anything like maximum efficiency or output when there is pervasive uncertainty about the price level.”

President Jimmy Carter appointed Volcker as Fed chief in 1979, succeeding G. William Miller, who became Treasury secretary. Miller had been criticized for being insufficiently focused on fighting inflation. During his 17 months as Fed chairman, inflation had risen to 11.8% from 6.6%.

“The challenge was very clear when I was there: you’ve got an inflation problem and it was getting out of hand,” Volcker said in a 2006 interview. “And the country knew that something was the matter. There was unhappiness with the economy. That is a situation in which you can act.”

Volcker announced what became known as his “Saturday Night Special” on Oct. 6, 1979: a series of measures intended to squeeze inflation. The moves began with a 1 percentage point increase in the rate Fed banks charge financial institutions, to 12%. But the most dramatic was the Fed’s shift to focusing on limiting money supply growth — even if it meant large jumps in interest rates. Which in the end it did, as interest rates climbed as high as 20%.

‘Internal discipline’
In his 2018 memoir, “Keeping At It,” Volcker said that targeting the money supply provided the Fed with two advantages: A simple message to convey to the American public, and “an internal discipline that had been lacking.”

“We were ‘lashed to the mast’ in pursuit of price stability,” he wrote. “Did I realize at the time how high interest rates might go before we could claim success? No.”

Volcker’s policies came at a high price and the fallout contributed to Ronald Reagan’s landslide victory over Carter in the 1980 presidential election. The U.S. economy went into recession twice during his tenure, the jobless rate climbed to 10.8% in November 1982, and bad loans and bankruptcies soared. Homebuilders and farmers protested. Congressional leaders including Democratic Sen. Robert Byrd of West Virginia and Republican Rep. Jack Kemp of New York introduced legislation aimed at requiring the Fed to lower interest rates. The bills were not adopted.

A bodyguard was assigned to Volcker after a man entered the Fed building in Washington with a sawed-off shotgun, revolver and knife, according to William Greider’s 1987 book “Secrets of the Temple.”

Congressional hearings
Volcker struck some as aloof during televised congressional hearings, puffing on a cigar and shaking his head while being questioned by angry lawmakers. Toward the end of his tenure at the central bank, he was challenged by Reagan appointees to the Fed who favored lower rates.

Though he was vilified in some quarters for the impact on business, his determined — and successful — assault on inflation won him admirers in both U.S. political parties and among a generation of central bankers from New Zealand to South Africa.

Volcker “deserves primary credit for the signal macroeconomic achievement of the past 30 years — slaying the inflation monster that was engulfing the American economy at the end of the 1970s,” Charles R. Morris wrote in “The Sages,” his 2009 book about Volcker, Warren Buffett and George Soros. “The stable global economic growth of the 1980s and 1990s was grounded on Volcker’s conquest of inflation.”

Volcker stepped down in 1987, saying he didn’t want a third term. His departure and Reagan’s nomination of Alan Greenspan prompted stocks, bonds and the dollar to slide. By that time, the Fed’s benchmark rate was at 6.75%, inflation had slowed to about 4%, and the economy was in the fifth year of an economic expansion.

Volcker became chairman of James D. Wolfensohn & Co., a mergers-and-acquisitions firm that became Wolfensohn & Co. He left after the firm was sold to Bankers Trust in 1996.

Global assignments
His reputation for rigor and fairness led to his appointment in 1996 to supervise the payment of claims by Swiss banks to Holocaust victims, and in 2004-2005 to lead an independent investigation of the United Nation’s oil-for-food program in Iraq. In 2002 he led an unsuccessful effort to salvage part of Arthur Andersen LLP, the accounting firm that collapsed following its conviction of obstructing justice in the investigation of Enron Corp., its client — a ruling that would be overturned by the U.S. Supreme Court in 2005.

Volcker became a critic of the Fed’s response to the financial crisis after the central bank orchestrated the sale of Bear Stearns Cos. to JPMorgan Chase in March 2008 by taking some of Bear Stearns’s riskiest assets on to the Fed’s own balance sheet. The central bank was operating at “the very edge” of its legal authority, he said in an April 2008 speech to the Economic Club of New York.

He also challenged the easy-money policies under Greenspan, without attacking his successor by name. In an October 2008 interview with Charlie Rose, he said, “We bent over backwards to ease money for reasons I didn’t understand.”

In 2013 he formed the New York-based Volcker Alliance, an organization aimed at rebuilding public trust in government and enhancing the effectiveness of public administration.

Volcker had two children, Janice and James, with the former Barbara Bahnson, whom he married in 1954. Her severe arthritis and diabetes kept her in New York during her husband’s tenure as Fed chairman, and he would commute home from Washington on weekends. She died in 1998. In 2010, Volcker married his longtime assistant, Anke Dening.

A Rescue by the Unelected by Daniel Burgee

A Rescue by the Unelected by Daniel Burgee

November 29, 2019

[The following article, published by the Washington Post and also carried in the Sarasota Herald Tribune on November 29, 2019 is reprinted with permission from its author, Daniel Burge. The article responds to recent calls for the Federal Reserve to lower already historically low interest rates. Burgee provides a succinct and accurate description of efforts during the 1980s by both Congress and the Reagan Administration to pressure the former Federal Home Loan Bank Board and the former FSLIC to prop up badly insolvent S&Ls rather than providing meaningful financial assistance to merge them into stronger banks and thrifts as the FDIC did with the FDIC-insured mutual savings banks. Burge observes that the FDIC spent $7 billion from its own funds (maintained by bank assessments) to resolve the savings bank issues, while the much-delayed failure resolution costs for the S&L industry ultimately rendered the FSLIC insolvent and cost taxpayers over $125 billion.]

President Donald Trump has called Federal Reserve officials “boneheads,” and even speculated whether Fed Chair Jerome H. Powell was a “bigger enemy” than China’s Xi Jinping. Most recently, Trump claimed that the experts at the Fed “are their own worst enemies, they don’t have a clue.” “People,” the president later added, “are VERY disappointed. …”

The president’s mistrust of technocrats taps into a more widely shared sentiment. In the view of many Americans with populist impulses, both left and right, appointed technocrats or experts wield too much power. Regular voters have no direct way of holding these officials accountable when they make serious mistakes.

These concerns are understandable. But the savings and loan crisis of the 1980s — at the time, the worst rash of banking failures since the Great Depression — demonstrates that populist-oriented prescriptions might be worse and more dangerous. Sometimes effective regulatory decisions are politically unpopular. They can only be enacted by technocrats insulated from pressure by elected officials who are focused on short-term political objectives.

The S&L debacle had its roots in the rising inflation of the late 1960s and 1970s. In October 1979, with inflation around 11 percent, Federal Reserve Chairman Paul Volcker tightened the money supply, and allowed short-term interest rates to reach double digits in an effort to stop the inflationary spiral. As a result, savings and loans and mutual savings banks — which were community-oriented local banks — confronted disaster.

Before the high inflation of the late 1970s, these institutions had concentrated on making home loans. According to the standard joke, during the mid-20th century, bankers from these local institutions paid 3% interest on deposits, charged 6% on home loans, and headed to the golf course at 3 p.m.

But Volker’s disinflation turned this model into a disaster. On the one hand, S&Ls and MSBs had to pay higher interest rates to satisfy their customers. On the other hand, S&Ls and MSBs still had fixed-rate home mortgages that they had extended in years when interest rates were lower on the books. These older loans earned less than the new going rate for deposits. That meant that local banks paid more interest to their depositors than they made on their loans.

As a result, S&Ls and MSBs lost money. Lots of money. Savings and loans struggled to stay afloat in a pool of red ink deeper than $100 billion. Meanwhile, $3.3 billion of losses over three years threatened to debilitate MSBs. Both sets of institutions tottered on the brink.

The two crises unfolded in dramatically different ways. The MSB troubles cost the Federal Deposit Insurance Corporation (FDIC), which insured their deposits, roughly $7 billion. By contrast, the S&L problems ultimately cost American taxpayers $123.8 billion.

According to economists Paul M. Romer and George A. Akerlof, if the management program for mutual savings banks had been applied to S&Ls, the cost of the savings and loan crisis would have been substantially reduced.

Different regulatory agencies oversaw the two sets of local institutions. The FDIC insured the deposits of mutual savings banks. A separate entity with a different structure, the Federal Savings and Loan Insurance Corporation (FSLIC, pronounced “fizz-lick,”) backed the funds of S&L customers. Importantly, technocrats with financial and political independence managed the FDIC, while the Federal Home Loan Bank Board oversaw the FSLIC’s operations. The FSLIC remained vulnerable to political considerations because Congress controlled its purse strings through the appropriations process.

With such a financial structure, officials at the Bank Board could not easily ignore political pressure. The Reagan administration demanded that its appointed technocrats be faithful to its political agenda.

L. William Seidman, who served as FDIC chairman between 1985 and 1991, later recalled that “anyone calling for more banking supervision was branded a ‘re-regulator’ and by extension a disloyal Reaganite, the worst condemnation possible inside the Reagan administration.”

In January 1982, Bank Board Chairman Richard Pratt took actions that comported with the Reagan administration’s approach. He permitted S&Ls to make loans with even less of their own funds at stake. This action contributed to a deeply perverse incentive structure: S&Ls could grow and profit from high-risk, high-reward loans, without worrying about losses, which would first accrue to the FSLIC, and then to American taxpayers.

Later in 1982, Congress — cheered on by Pratt and the Reagan administration — made things worse by opening up previously closed off risky lending areas for S&Ls, including that of commercial real estate. Soon thereafter, the insolvent S&Ls that were still operating began making reckless, “Hail-Mary” loans with government-insured deposits. Other bankrupt S&Ls engaged in outright criminal activity, such as looting. Over time, losses piled up, bankrupted the FLSIC and left American taxpayers with a mess.

In contrast, the FDIC averted disaster by pursuing more measured policies than the FSLIC. In 1982, chairman William M. Isaac explained that “the FDIC … does not intend to litter the financial landscape for decades to come with crippled banks.”

Rather than allowing its banks to “gamble for resurrection” as Pratt permitted some S&Ls to do, Isaac pursued policies that bought time until the high interest rates declined. With many favoring the FSLIC’s approach, the FDIC received its fair share of criticism. But given that the FDIC’s funding was not subject to lawmakers’ political considerations, Isaac and his colleagues successfully resisted politically motivated but misguided fixes.

The case of the S&L crisis reveals that while technocrats may appear aloof and unaccountable, their insulation from politics is important for sound crisis management. Banking troubles tend to present policymakers with difficult choices that require careful analysis. Sometimes, the right responses to a crisis are politically unattractive to the administration in power and Congress.

For this reason, today’s lawmakers would be well-advised to protect the relative independence of appointed technocrats.

Daniel Burge is an associate lecturer in American Studies at the University of Massachusetts, Boston.

BankThink Regulators’ push for innovation shouldn’t come at expense of prudence by Thomas P. Vartanian published by American Banker

BankThink Regulators’ push for innovation shouldn’t come at expense of prudence by Thomas P. Vartanian published by American Banker

October 28, 2019

[My longtime friend, Tom Vartanian, wrote the following article for the American Banker on the rapidly evolving technological innovations affecting financial institutions throughout the world. All of us have been and will continue to be impacted by these developments – for the most part in positive ways but also in ways that threaten our right to privacy and even our national security. Tom’s article is a clarion call.]

As federal regulators rightly begin encouraging technological innovation rather than lagging behind it, one must also consider the darker side of technology.

There is a growing race for control of money, information and payments systems. The Washington Post recently reported that the government is seeing increasing warning signs of cyberattacks on industrial control systems that could cause “massive financial damage.”

Ultimately, technology will either empower or overpower financial services companies and their regulators. The difference will depend on how proactive firms and regulators are to control that evolution.

The head of the Federal Deposit Insurance Corp. is running the innovation baton down the field, encouraging the government to lead fintech rather than follow it. FDIC Chairman Jelena McWilliams offered an important insight in a recent op-ed: “If our regulatory framework is unable to evolve with technological advances, the United States may cease to be a place where ideas and concepts become the products and services that improve people’s lives.”

She could not be more correct.

Read the full American Banker Article

Public option for banking: solution in search of a problem by Rob Nichols published by San Francisco Chronicle

Public option for banking: solution in search of a problem by Rob Nichols published by San Francisco Chronicle

October 28, 2019

[The governor of California has signed into law legislation to authorize local governments to own banks.  The President & CEO of the American Bankers Association makes a strong case against publicly owned banks, a view I very much share for a lot of good reasons.  Nationalized banks in other countries – Israel and Mexico come immediately to mind – have never worked.  Politicians use them as their playthings to finance whatever the cause du jour may be, leaving it to taxpayers to clean up the resulting mess.  The FDIC and various state governments spent a lot of time and money cleaning up the substantial losses and hardships during the 1980s created by the failure of state-backed deposit insurance funds in Ohio, Maryland and Massachusetts.  The California idea will likely go nowhere unless the FDIC grants deposit insurance to the publicly owned banks, which we all should pray never happens.]

To its credit, California has always been a place of big dreams and experimentation. The Golden State has given us Hollywood, Silicon Valley, McDonald’s hamburgers and even blue jeans. Now some in California think they have discovered the next great innovation when it comes to financial services.

Taxpayers should be wary.

Gov. Gavin Newsom recently signed AB857, which will allow California’s local governments to charter their own banks, and there are already efforts under way. Supporters say the legislation will enable cities and counties to stop relying on regular commercial banks to help manage their own finances, while competing with those banks to provide financial services to the public. They point to other public banks in the U.S. as proof that this big idea can succeed. They should brush up on their history.

The reality is America’s experience with dozens of public banks over the years is littered with painful and costly failure. Nearly all have been closed down — many failing because of political interference that resulted in making risky loans and operating with too little capital (or both), then collapsing when the boom times ended. In fact, Abraham Lincoln’s earliest recorded speech as an Illinois legislator in 1837 criticized just this kind of political interference.

Read the full San Francisco Chronicle Article