Sheila Bair's Bank Shot - Essay Example

?Sheila Bair’s Bank Shot Sheila Bair’s Bank Shot as written by Joe Nocera is an exit interview on Federal Deposit Insurance Corporation’s (FDIC) chairperson Sheila Bair published a day after her term expired. The interview basically revolved around the 2008 financial crisis, highlighting the important role played by Bair before, during and after the event. She sounded the warning bell on an impending crisis, she lead FDIC in managing troubled financial institutions and provided one of the most significant arguments in the policy reform at the aftermath. From Nocera’s perspective, Bair’s position on FDIC’s role on regulation and several policies in the financial industry has been effective and correct, but often left unheeded and unappreciated. Two of the most significant of these is: 1) her insistence on greater regulation long before policymakers and experts started to preach it; and, 2) her position that banks in trouble are not necessarily needed to be bailed out. The article, hence, underscore the importance of listening to this lady in the context of averting possible reoccurrence of similar crisis in the future. Charles Kindleberger’s theory and analyses of financial crises are descriptive and it provided the general basis for Nocera’s agreement with Bair’s position on regulation and the 2008 financial crisis. Kindleberger’s model describes an exogenous shock to the system also called as displacement. The causes of such displacement are varied and could provide diverse degree of crisis severity. The tendency to speculate as well as the inevitable complacency that comes with a stable and growing financial economy on the part of regulatory bodies are crucial elements in aggravating such displacement. These run parallel with actions taken by Bair before the 2008 crisis struck. She has started warning about the explosive growth of subprime mortgages, demonstrating traces of the principles behind the Kindleberger model on financial crises. One of the most important contributions by Bair, which could enhance the Kindleberger’s model, is in the area of crisis control. One of her most forceful positions was that banks do not necessarily need to be bailed out in order to stop the onslaught of the financial crisis. This is contained in her position on the larger issue about the too-big-to-fail financial institutions. For instance, Bair vehemently opposed the federal government’s rescue of Bearn Stearns. The article’s focus on FDIC inevitably tied it with the theme of lender-of-last resort. The organization is mandated to rescue and manage failed financial institutions and regulate banks’ soundness, among other functions by virtue of its mandate to safeguard the interests of depositors and of consumers. With Bair at the helm of FDIC during the financial crisis of 2008, these functions had been highlighted and that the manner by which the organization is and should function as a lender of last resort has been clearly defined. Bair’s traditionalist position has played a significant part, particularly in reinforcing FDIC’s power and influence today, which in the early years of her tenure as chairperson, appeared to have been largely symbolic, with weak regulatory power, clipped by the federal government, with low budget allocation. In my opinion, Bair’s position on the financial crisis is sound, with particular emphasis on the crisis management and the reforms that should take place afterwards. For example, if a huge financial institution fails, the government could further aggravate the economic landscape by infusing more funds that come from taxpayer’s money. The too-big-to-fail policy does not make sense in the long-term. First, failing financial institutions mean bad management, structure and practices. Rescuing them is more painful than having the market start over with another better managed institution rather than dumping money and implementing reforms that may never really be effective considering the sheer size of the institution. In addition, it seems to be unfair to use taxpayer’s money to rescue an institution just to save the interests of its shareholders, who, in the first place, were responsible for the failed operations by choosing their managers. Suffice it to say, I do not find any disagreeable arguments and points both on Bair’s and Nocera’s ends. Bair’s position has been the lone voice among the policymakers for a long time and nobody paid attention. Her arguments addressed fundamental issues and variables that eventually lead to the financial collapse. It is interesting and, perhaps, imperative to consider her take on what needs to be reformed and introduced in the policy landscape today. Bair’s experience during the crisis, including in the area of politics during the critical stage of the economic collapse speaks volumes with regards to her capability to help in drafting or designing governmental policies that would cover regulation or measures to avert and minimize financial risks. Nocera was quick to point this out. In the article, for instance, it was highlighted how Bair has successfully stalled the American participation in the Basel II convention, which, unarguably, helped mitigate the impact of the financial crisis. Secondly, she effectively worked and ingratiated her way in the policy response to the problem. She insisted on being part of the policymaking immediately after the crisis. Given the fact that many of her peers among the regulatory agencies saw her as a dissenter and not a team player, she was able to have her voice heard. These factors show that she is not only a political savvy operator, but also she has the courage and the instinct to contribute something meaningful in the long-term financial health of America. Nocera’s interview with Bair has been peppered with the writer’s personal insights and observations, making the issues such as regulation and concepts like too-big-to-fail easily understood. Before reading the article, I have always thought that the government rescue on big financial institutions makes sense in responding to financial crises. But Bair’s arguments and Nocera’s narrative changed my view about the validity of such policy. Their collective arguments, as outlined in the article, provided sensible positions in the area of financial policymaking and reform. They draw from established economic models such as those by Kindleberger’s and also update them with current perspectives and personal beliefs that could only come from intelligent judgment and uncanny instincts. This is not to say that Bair has all the answers in our attempt to avoid financial crises from happening in the future. As per Kindleberger’s principle, there are varied reasons for its occurrence and Bair could not possibly anticipate all of them to suggest an all encompassing solution to the problem. However, what is being offered is a personal capability to offer a meaningful contribution. Read More