INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. And this is a special bonus edition of Inside Economics. And to help with this is my two co-hosts Chris, Cris deRitis. How's it going, Dr. DeRitis?

Cris deRitis:                       It's been all right. Hanging in there.

Mark Zandi:                      Yeah, I see you're still in the office. You're about the only person in that office.

Cris deRitis:                       There are three of us here today, I believe.

Mark Zandi:                      Yeah, I was there yesterday, briefly and it was I don't know. It doesn't feel like people are going back.

Cris deRitis:                       Yesterday was actually a bit of a busy day. I think we were up to six.

Mark Zandi:                      Oh, okay. Critical mass. Very good. And Ryan, Ryan Sweet. Director of real time economics got any good statistics for us, Ryan? What's the top of mind right now? What statistics should we all know? I got one for you. I got like three of them, but I'll give you one.

Ryan Sweet:                      Well, I was thinking about the CPI tomorrow, but I was going to tell you, I made a big mistake over the weekend.

Mark Zandi:                      Oh, what's that?

Ryan Sweet:                      I bought the kids a cotton candy maker.

Mark Zandi:                      Oh no, I didn't...

Ryan Sweet:                      I thought it was going to be like a treat now it's like after dinner, before bed, they're like, "Can we eat cotton candy?"

Mark Zandi:                      I didn't even know there was such a thing.

Ryan Sweet:                      Oh yeah, this thing's pretty cool. But their dentist is going to not be happy.

Mark Zandi:                      Or sugar prices.

Ryan Sweet:                      Yeah. There you go. There, I'm going to watch the sugar price component of the CPI tomorrow.

Mark Zandi:                      Ryan has every gadget on the planet, I think.

Ryan Sweet:                      One of every gadget. Somebody has two of some gadgets.

Mark Zandi:                      That's true. I've got a couple of everything.

Ryan Sweet:                      That's one of your numbers.

Mark Zandi:                      Oh yeah. Oh, did you notice natural gas prices are approaching $10 for million BTU?

Ryan Sweet:                      Crazy.

Mark Zandi:                      Yeah. That's crazy. That's more than double what it was a year ago. I was just giving testimony to the PA, the Pennsylvania state house because I'm a Pennsylvania resident and I was the subject of a lot of that discussion. Very high gas prices. Anyway, that's not the topic at hand. This is a special bonus edition. It's special because we have Sheila Bair. Sheila, hi. How are you?

Sheila Bair:                        Mark, nice to be here.

Mark Zandi:                      It's so good to have you. Our points of contact, we've had many points of contact over the years. Just somehow our paths are intertwined in some way.

Sheila Bair:                        That's true.

Mark Zandi:                      Going all the way back to the FDIC.

Sheila Bair:                        Magnets. That's right.

Mark Zandi:                      Did you know Sheila? I don't know if you know that, but you were my biggest client at one point. FDIC was my biggest client.

Sheila Bair:                        I'm not surprised we were, there were a lot of people's biggest client.

Mark Zandi:                      Oh well, okay. Good point. I thought I was special.

Sheila Bair:                        Deloitte, I just... Oh yeah we had like a... I can't remember the size of our consulting budget. Oh my goodness. But thank you, Mark. Your forecasts were good and helped. I think we benefited, we had a guy named Rich Brown, who I think you probably remember.

Mark Zandi:                      Yeah. Rich was great.

Sheila Bair:                        Who passed away unfortunately. But anyway, he was... We were early in terms of predicting, there were going to be problems in the housing market and the need to proactively do something, and you were certainly helpful in that. So yeah, it was a good partnership.

Mark Zandi:                      Yeah. I mean it really... Because you were regionally focused as you should be. The FTC's regulating the banking system. And particularly if you go back 30 years ago, the footprints were very regionally focused. And that was our claim to fame. We did a lot of regional economic analysis. That's how we got to know you very well.

Mark Zandi:                      But Sheila, I mean, I mentioned the FDIC, but you have a very storied kind of career. Can you just give us a sense of the expanse of what you... First of all, how did you... I guess my knowledge of you really began when you became at FDIC, but you had done lots of things before then. Can you just give a general sense of things?

Sheila Bair:                        Yeah, sure. So I'm a Kansas Republican, grew up in Kansas, prairie populist, kind of a William Allen White philosophy around government. And my first big job was with Bob Dole actually, who was on the Senate judiciary committee, back when Joe Biden was the ranking member, Strom Thurmond was the chair at the time, that was in the early 1980s. Got to know Senator Biden a bit, worked on the Voting Rights Act. I was a civil rights lawyer actually back then, that's where I started my career.

Sheila Bair:                        And we worked on the voting rights act extension, successfully, Dole and Biden, forged a compromise. And it was an amazing experience. So I stayed with Dole for six or seven years, worked on his '88 presidential campaign. And then segued into financial services after that. It was a big change for me.

Sheila Bair:                        I'd traditionally been in more constitutional law, immigration, all the judiciary issues, but it was a good transition. And so I was a senior executive at the New York stock exchange. I was commissioner and acting chair of the Commodity Futures Trading Commission. I was the assistant secretary for financial institutions at Treasury. That was my first foray into banking in the early 2000s, had some small children. Found a government career in DC was not conducive to raising small children. So we fled to the University of Amherst for four years where I taught. And then I came back in 2006 to chair the FDIC, which is where we met. So yeah, I've had a lot of the government experience, political experience and financial market with securities at the New York stock exchange, and derivatives with the CFDC.

Sheila Bair:                        And then of course finally with banking at treasury and then at the FDIC. So I think that helped me during the crisis because I had a sense of, I wasn't completely bank centric. I had a sense of what was going on in derivatives and securities. And clearly there was a... With OTC derivatives playing such a big role. And then the problems we were having at the mortgage securitization market, and lack of disclosures there, they were helpful insights to have, as we navigated that difficult space. It was a very difficult time, very difficult time.

Mark Zandi:                      And you've had a couple of other jobs since FDIC.

Sheila Bair:                        I have. So I worked at the Pew Charitable Trust for several years. We set up something called the systemic risk council, which still continues. I serve as a chair emerita and senior advisor there. And Erkki Liikanen and Simon Johnson currently chair, it's a great group of mainly former regulators, but also industry people, academics. And we try to keep an eye on system stability and try to advocate for measures to promote system stability. And then I was a college president for a few years where I became very involved in student debt issue and very proud of some of the initiatives we pioneered. It was at Washington college.

Mark Zandi:                      I think Ryan went to Ryan Washington college.

Sheila Bair:                        Oh my gosh, really. Small world.

Mark Zandi:                      You played baseball, Ryan, at Washington College.

Ryan Sweet:                      I did, I went to Washington College.

Sheila Bair:                        Oh I remember we had a great baseball team. What a small world.

Mark Zandi:                      So Sheila-

Sheila Bair:                        Are you from Maryland? Are you from the area originally? Or how did you end up at Washington College?

Ryan Sweet:                      Baseball. So I grew up in south Jersey and really a guy on my team went to Washington college and he was like, you need to come visit this place. And I fell in love with it as soon as I set foot on campus, it's a beautiful campus.

Sheila Bair:                        Yeah. It really is pretty. And a storied history too. It really was George Washington's school. It was the first... Actually it is the oldest, I believe, chartered institution under the United States. So Harvard under the Brits got chartered. But we were next. So we were the oldest and George Washington was actually on the board. We benefited from his personal philanthropy. We've got a wonderful center for the American Experience that is all about American history. And yeah, it is a special place. I'm glad. Nice to hear an alum speak well of it. Because it is a great school. It really is. Anyway, we initiated a lot of affordability initiatives there that I'm very, very proud of. And after that I decided to do more of a portfolio approach, to have a little more time with my family, with my husband to travel. So I've been doing corporate boards and advisory work since then. Including with the PT Peterson Foundation on student debt.

Mark Zandi:                      Got it. And we'll come back to that for sure.

Sheila Bair:                        Okay, great.

Mark Zandi:                      Absolutely. I said before we went on that I was going to tease you a little bit. So here it is. I was reading your bio just in preparation for this or Wikipedia page. And it says, Forbes said you were the second most powerful woman in the world twice. So why not the most powerful woman? What the heck?

Sheila Bair:                        Well, I wanted to know that too. Angela Merkel beat me out.

Mark Zandi:                      Oh, Angela Merkel.

Sheila Bair:                        So what can I say. Some heavy competition there. Yeah. But the sad thing was once the crisis subsided, I dropped to number 14 and I was behind Lady Gaga and I was quite upset about that.

Mark Zandi:                      Oh, that is upsetting. I have to say.

Sheila Bair:                        And then when I left the FDIC I dropped off, but I was at the top of the list of people who dropped off. So there you go. But I think it was more about the agency than me, but it was a nice accolade because we were... I'm proud of what the FDIC did during the crisis. It was stabilizing. It was reassuring. And I was very proud of the job we did.

Mark Zandi:                      Absolutely critical, I think. And what a wonderful career, I mean, just an amazing career. The one thing I want to talk a little bit about the past, the financial crisis and the role there and what FDIC did. And then use that as a basis for talking about now because there's a lot of concern out there about recession risks. And generally before recessions, you have these imbalances in the financial system or the economy. And want to talk a little bit about that.

Mark Zandi:                      And in that context, I do want to bring in the work you're now doing with the Pew, the Pew Foundation around student loan debt. And Chris does a lot of work in the student loan area. And there's a lot to talk about there with regard to current policy, in terms of forbearance and debt forgiveness, and that kind of thing. Curious what you think about all those things. But first up the financial crisis. I think I might have said this to you before. I can't remember your answer, I want to try it again and see how you respond.

Mark Zandi:                      In my view, in my humble view of all of the policy actions taken during that period, 2008, 2009, particularly after Fannie and Freddie were taken over by the government, Lehman failed, it was just very chaotic obviously. And there were a lot of policy responses trying to quell the crisis. Everything from TARP to all kinds of bailouts and everything else. But the one thing that I think doesn't get enough credit that really made a huge difference was when you at the FDIC guaranteed bank debt. You said, look to creditors out there money good. If you buy a bond issued by a bank, and of course, banks issue bonds to raise the cash, they need to make loans and extend credit, keep the economy moving. If you buy that bond, it's money good. That you'll get your money back.

Mark Zandi:                      And as soon as that happened, as I recall, I think literally to the second, when it was announced, you could see LIBOR TED spreads come in. TED spreads being the difference between LIBOR, the rate banks charge each other, and the risk free short term treasury yield. And if that gaps out, that means people are panicked, and banks need to charge each other a lot of interest to compensate for the risk. But when that comes in, that's an indication that people are feeling calmer. And it maxed out, right before the announcement at the all time high. And it came in very rapidly. Does that resonate with you? That action, is that in the top of the list of things that you think really played a key role in quelling, the financial crisis?

Sheila Bair:                        Yeah, so I actually, I wrote a book Bull by the Horns, my memoir of the financial crisis. And I spent quite a bit of time on that. We were originally asked I'll never forget it. So, Hank Paulson said, "You need to come to my office." And we couldn't find out what the meeting was about. And I kind of walked in and I had, I spelled an ambush. So he was sitting in their office with Ben Bernanke and on the phone was Tim Geitner. And I think kind of some of our different perspectives are well known at this point. But anyway, they basically had a script for me, a press release. They wanted me to stand up there and say that we were going to backstop all bank debt, not just bank debt, [inaudible 00:13:08] banks, but holding company debt. So this went beyond insured depositories.

Sheila Bair:                        And that the fed and the treasure would be right behind me. So I said, well, that's interesting. So I took it back. I talked with my team, I talked with my board. And my main question was why do we need to guarantee all debt? The problem is banks couldn't roll their debt. They were heavily reliant on short term financing, overnight financing, a lot of it. They couldn't roll their debt. And so I said, we'll guarantee newly issued debt. We can do that. The stuff that's already out there, investors are still going to be at risk. But we should also charge for it, because this is a risk for us. We're using the deposit insurance fund basically to backstop debt of very large financial institutions, including at a level where we're not directly backing the depository, which is our charter and mandate.

Sheila Bair:                        So we took that back and after some toing and froing, that was the program we put in place and it was successful. And I think you're right because look we terminated that program pretty promptly. Whereas the fed facilities continued on for many years. And I think that's a mistake because you should look... In times of true crisis looking at temporary debt guarantees, I think is a better way. It does not increase money supply. It's easier to put on and take back off, which was clearly the experience. And it was immediately stabilizing as you point out. So I do think it was successful. I don't like bailouts at all, but if you have to do them, I think going back to that model, as opposed to this heavy reliance on these fed facilities that end up becoming standing facilities, needs just to have more and more... With the best of intentions, but more and more Fed intervention and market functioning.

Sheila Bair:                        I think that's an unfortunate trend. And we saw it again during the crisis, the pandemic crisis. So yes, thank you for recognizing that. I would also say though, I think on a macro level that probably was one of the more significant things. But at a household level, I am more proud of what we did for insured depositors. We had to put things... Look, when I came to the FDIC the receivership function had really been shrunk. I mean, this was the golden age of banking. They knew risk, they understood risk. We weren't going to have bank failures anymore. And really that component of the FDIC which had been downsized. And we started rebuilding it when I got there. But we also just used a lot of purchase and assumption transactions.

Sheila Bair:                        In other words, the smaller banks, we sold them to other smaller banks. And that was so much better to ensure seamless access, continuous access, not just to people's deposits, but also all their other banking relationships. There were no disruptions because of that strategy, which we used overwhelmingly. And so that took a lot of work. I think we made it look easy, but that took a lot of work, but it was really... There were no backgrounds, money was coming into banks. And I think a lot of that was because at the main street level, people understood, we were there and we were taking care of them.

Mark Zandi:                      Yeah. The US treasury, you, were sitting behind the bank deposits and giving people confidence.

Sheila Bair:                        Exactly.

Mark Zandi:                      I want to try a couple of other sort of conventional wisdoms. They're Zandi conventional wisdoms of the crisis, just to get your take on it. Another one is that the thinking out there is that the crisis really got going with Lehman's failure. When the decision was made by secretary Paulson that there's no bailout here, the creditors of Lehman are on their own.

Mark Zandi:                      And of course things kind of fell apart after that. But in my thinking, the beginning of the end wasn't... The real catalyst for this part of the crisis where things completely went off the rails wasn't Lehman. It was the takeover of Fannie Mae and Freddie Mack one week before. Because it literally, it was one week before. I believe it was Saturday, the week before Fannie and Fred were put into conservatorship. And I think that kind of rocked creditors' thinking. The investors in financial institutions, they thought Fannie and Freddie was an extension of the US government. And there was no way that the government would back away from that commitment and they did. And that just completely eviscerated sentiment and confidence. And then of course, Lehman got caught up in the tsunami that followed that. But what do you think of that narrative or that kind of perspective.

Sheila Bair:                        Yeah, it's a good question. There were so many things happening at once. It's hard to know what the single factor was, what was on investors' mind and the market's mind in reacting to that. Again, clearly there's a lot of bank exposure, especially banks that were exposed to Fannie and Freddy when that happened and we had to get busy to deal with that.

Sheila Bair:                        So I do think it was jarring, you're right. Lehman was the one that got the big headline, but Fannie and Fred in terms of their role in the economy and their size was way more significant than Lehman ever thought about being. I mean, Lehman was kind of a mid tier institution that I thought, [inaudible 00:18:32] investment bank was not... I don't think anybody ever thought it was particularly well run, did you? I never did.

Mark Zandi:                      No. Remember they had a crazy structure?

Sheila Bair:                        It's going down. Yeah exactly. There was a lot of opacity and they were taking dumb risk. And so Fannie and Fred was much more... Because people thought they were rock solid. They were more like government utilities but they were clearly taking some risk too... Ironically that the catalyst for that was the market losses they were taking on their private MBS exposures, not on their own loan book, which was not so not nearly as bad as what you saw in the private label securitizations.

Sheila Bair:                        But yeah, you're right. And there's not been much scrutiny of that. And it's sad, I think that they're still in conservatorship. That shouldn't happen. Nobody should be in a conservator for 14 years now or whatever. I mean, it's not what the law was set up to do. It's not what conservatorships are equipped to do. And the problem is it just keeps being everybody's last priority to some extent, Fannie and Freddy are victims of their own success, because they're kind of keeping things going anyway, even in conservatorship with all the challenges that provides. And so if it ain't broke, don't fix it. But really, they need to get out of conservatorship. There's just no doubt about it.

Mark Zandi:                      Well that's the last big thing right out of the crisis. I don't think there's anything left. That's the last unresolved-

Sheila Bair:                        That's right. That's exactly right.

Mark Zandi:                      Yeah. Chris and I had a bet, I don't know, back 10 years ago about would Fannie and Freddy ever get out of conservatorship within, what was it Chris, within-

Cris deRitis:                       It was a 10 year bet.

Mark Zandi:                      A 10 year bet. And I said yes. And he said, no. And of course I had to pay him a buck.

Cris deRitis:                       I'm still waiting by the way.

Mark Zandi:                      It was a metaphorical book.

Sheila Bair:                        I mean, you would never see that at the FDIC unless there might be a shell of something that would stay in conservatorship for a long time. You would never see operating companies stay in conservatorship that long. I mean, they lose their edge, they lose their agility. You've got all these constraints, you lose the market discipline.

Sheila Bair:                        There's just so many reasons why this is not a healthy thing. And like I said, I think we've been lucky that they've been able to function as well as they have in conservatorship. I mean you look at title II of Dodd-Frank, which gave the FDIC new authorities to put systemic institutions into essentially conservatorship. And that's got a three year limit on it, which really is the outside of how long you want to keep financial institutions under government stewardship. So I do think it's a problem that's eventually going to become more obvious than it's a problem. Like I said, they're being good sports and continuing to do a good job, even though they can continue to operate in conservatorship without much control of their own destiny.

Mark Zandi:                      Well, I think he, you said it if the view is that it ain't broke, I just don't see it change. It's pretty hard to-

Sheila Bair:                        No, it's hard to see it. No, I think that's right. But at some point, I think there are going to be issues. Because operationally, well, they need to build capital and that sweep was clearly a mistake. And so they're finally accumulating capital now and getting more stable balance sheets, but operationally too, there's a lot of... With credit risk, it's less of a concern because they've still got the government backstop. That's, I guess, a benefit of being conservatorship. But operationally there's a lot of risk there and you want top talent, you given their imprint, you want top talent, especially on the technology side.

Mark Zandi:                      Well, I'd love to have you back just talk about Fannie and Freddy, because it feels like we could have a really good conversation slash debate disagreement. But we got a lot of ground to cover here, but that-

Sheila Bair:                        Okay, all right, so I digress.

Mark Zandi:                      No that's excellent. I had another kind of Zandi conventionalism but I think we should push on to one other thing in the wake of the financial crisis, Dodd-Frank, obviously that was a major reform legislation, I think passed in 2011. And I guess this is a Zandi conventional wisdom. I view it as a success.

Mark Zandi:                      There was a lot of moving parts there and not all parts worked as well as the other, but at the end of the day, it feels like it got the system to a much higher level of capitalization, liquidity, much better risk management. You can be very critical of the stress testing process. But at the end of the day, that feels like that's been a therapeutic process, at least from my perspective. How do you feel about Dodd-Frank? Do you view it as fondly as I just articulated it?

Sheila Bair:                        Well I was very involved with it and yeah, I think we pushed hard on title II to give us broader authority to take over entire institutions. We only had a jurisdiction over the insured depository piece during the crisis, which was another impediment. Our toolkit wasn't as adequate it should be. So I think that was good. We pushed for the Financial Stability Oversight Council, obviously. Ironically Dodd-Frank, except for the Collins amendment Dodd-Frank doesn't really address capital. Other than extolling the regulators to do the stress tests and et cetera. But still, there's a lot of discretion, but I mean the regulators got religion on it. I think the banks could use some more capital. I got to be honest with you.

Mark Zandi:                      Really, is that right?

Sheila Bair:                        I mean, I think in normal times, they're fine. And I think in mild dips, they're going to be fine. I think during the pandemic, if the Fed hadn't stepped in, especially with the corporate debt backstop, I think you'd seen a lot of banks in trouble again. I mean they like to brag about, "Oh, see how well capitalized we were and we did fine." They did do fine. Good for them. I'll give them that. But I don't think that would've been the case if the Fed hadn't stopped in with really massive liquidity support. So we need to be honest about that. And if we're just going to accept a paradigm that to be banks, we're going to accept these very large banks and accept that to be profitable, they have to operate of the level of leverage that is going to be unstable in deep times of economic stress.

Sheila Bair:                        And we're going to bail them out. I think that's what we've got now. Let's just say it. That's what we're doing. But I think we overplay this. Oh, they're so well capitalized. If mother Fed hadn't come in, I think we would've seen a very different situation. Maybe that's okay. But I do think that the capitalization of the banking industry is sometimes... People are overly optimistic in terms of how it's described.

Sheila Bair:                        I also think and countercyclical capital buffers, boy, this year. I don't know if they're going to do it or not. But if they're going to invoke the countercyclical capital buffer, this would be the year to do it. Profitability is still strong. Recession risks are high. Do it now build, in a little extra cushion before the economy hits the skids, which it may very well in the next year or two.

Mark Zandi:                      One interesting thing in support of the perspective you just articulated that I have been surprised by is that despite the dramatic increase in capitalization, if you just look at tier one capital and basic the measures of capitalization, it's definitely way up from where it was.

Sheila Bair:                        Oh, God yeah.

Mark Zandi:                      But despite that return on equity return on assets is pretty good. I mean not bad.

Sheila Bair:                        First of all, you were starting from a very low baseline to see this huge increase. So let's note that. But yeah, all this belly aching about bank capital requirements. It's like, oh my God. And they become globally dominant. I mean, European banks are on the skids. It's just, what is your problem? I mean, but they're relentless. Oh, no. Relentless.

Sheila Bair:                        They want to take treasuries out of the denominator and reserve accounts out the denominator and they're just relentless. More leverage, more leverage. They won't stop. Even though to your point, it has served their interest. They are still very profitable and globally so much more competitive than they were before.

Mark Zandi:                      Yeah. I mean, I was looking at ROA, return on assets and the ROA to the system. This is FDIC data, today is as high as it was in the teeth of the housing bubble prior to the financial crisis. And of course, that was all fictitious profits. That was stuff they were making up.

Sheila Bair:                        Yeah, that's right. And this, we still have fairly low interest rates, interest rates-wise their spreads, the net interest margin is going to go up unless it's a recession, then we'll see what the credit losses look like then.

Mark Zandi:                      Well that the economists are saying Modigliani–Miller works. That's what it seems to say.

Sheila Bair:                        Yeah, yeah.

Mark Zandi:                      I won't go into that. You guys studied Modigliani–Miller, right?

Sheila Bair:                        Oh, of course.

Mark Zandi:                      You young guys. You studied that.

Cris deRitis:                       Yeah.

Mark Zandi:                      Actually I think they wrote that seminal paper when they won the Nobel prize in 1959. That's the year I was born.

Sheila Bair:                        That long ago.

Mark Zandi:                      1959.

Sheila Bair:                        Well, the only thing that distorts that analysis is too big to fail. So if there was no perception of government backstop. Let's face it there still is. That would be a more perfect theory, but yeah at some level I think it does prove the point.

Mark Zandi:                      Yeah. Anyway, well, let's roll forward to the current time. And let me ask you this broadly and let me preface it by saying that... And I think I mentioned this earlier, that recessions that we've experienced here in the US since world war II have typically had some significant what I would call imbalance in the economy. Something wrong deep in the balance sheet of the economy, either in the financial system or the American household or American corporations or state and local government or federal government. Somebody's done something really untoward kind of a fault line down the balance sheet.

Mark Zandi:                      And it's not a problem if everything sticks to script, but if you get into a rising rate environment like the one we're in now, or the economy starts to weaken, it exposes that fault line, that fault line shakes. And that is the thing that sends you down under? So with that as context, first, does that feel like a good characterization of the dynamics here? And second, and this is really hard and I can't do it, but you can, if anyone can do it, you can. Is there something out there in the balance sheet of the economy, the financial system, households, corporates, that make you nervous, worried kind of on the radar screen top of mind?

Sheila Bair:                        Yeah. So I'm actually... Look, we need to get inflation under control and the economy's can have to slow down to do that, but I'm optimistic that this time around it's going to be wealthier people if they take the hit. Because the household balance sheets are still in pretty good shape. Consumer spending is not so heavily driven by borrowing, especially mortgage borrowing, the home equity refis that we saw prior to the crisis.

Sheila Bair:                        So in terms of hitting consumer spending and consumer wealth, I'm more optimistic that this will be really hitting and it is already hitting financial markets, hitting real estate markets, hitting community markets with... Wealthier people tend to be exposed to those and wealthier institutions. At the household level. I'm hoping that it's going to be a pretty, not tempered response, impact, excuse me, at the household level.

Sheila Bair:                        So the things that I worry about in terms... But we may go into recession or just a stagflation environment. I do worry about corporate debt. It's at all time highs. Was it 12 trillion now or something? I mean, that's just non-bank, non-financial institution debt. I think about 70% of it is fixed. That's good. But there's still a lot out there that floats and then stuff that needs to be refied is going to be at higher rates. And a lot of it's been by issued by non-investment grade companies. So as financing costs go up for the corporate sector, can they handle it? Even if they do handle it, will they compensate for the higher financing cost with reduced... Try to cut expenses through labor force reductions to maintain their margins and their investor distributions or shareholder distributions.

Sheila Bair:                        So I do worry about that hitting people at the Main Street level. And there may be corporate failures too. I don't know. We'll see how high the financing costs go. But if you're in a stagflation environment where demand's going down, demand for the products going down, the financing costs are still going up, that could be challenging for a lot of them. On the banking sector to our earlier point yes they're much better capitalized. I don't think we have a good handle on the largest banks, especially those with prime brokerage operations, their non-bank clients and what those market exposures look like. Obviously there's a lot of market volatility right now. We've seen a few naked people swimming already. I think it was Warren Buffett said you don't know-

Mark Zandi:                      Yeah, when the tide goes down.

Sheila Bair:                        ... who's swimming naked until the tide goes down. So we've seen a couple naked bodies already. So I don't know. And this is something [inaudible 00:32:02] Janet Yellen focused on. The non-bank and back to Dodd-Frank gave regulators some authorities to do with the non-bank sector. And it's really not done much with that. But I think that's really what's going on in the unregulated sector where there's not a lot of transparency and more importantly interface of that sector with the regulated sector, which we have to keep stable and operating. So that those are my two worries. [inaudible 00:32:28].

Mark Zandi:                      So just to paraphrase, to make it sure I got it right. Kind of on the list is corporate leverage or the increase in debt among non-financial corps. Non-banks, the non-banks and when I think about non-banks, it's kind of fintechy, maybe nonbank mortgage, private equity.

Sheila Bair:                        Hedge funds, private equity, venture capital. All of the above.

Mark Zandi:                      Yeah. All of the above the kind of Milan of folks that aren't regulated, they don't have insured deposits.

Sheila Bair:                        And they use a lot of leverage. A lot of them use a lot of leverage.

Mark Zandi:                      And they use a lot leverage of leverage, and it's less transparent, more opaque. You're not really sure. No stress testing, that kind of thing.

Sheila Bair:                        Nope. Nope. That's right.

Mark Zandi:                      I want to talk about two things you did mention one is mortgages. And the second one is student loans. And I know you've been doing a lot of work there. Where would you like to go first? Mortgages or student loans?

Sheila Bair:                        Well, let's do mortgages, because I want to spend more time on student debt.

Mark Zandi:                      Do loans. Okay, sure. Absolutely. So how do you feel about-

Sheila Bair:                        Mortgages? Yeah, so I think we're in pretty good shape.

Mark Zandi:                      Pretty good shape.

Sheila Bair:                        Well, at least for Fannie and Freddy, the credit quality is dramatically... Stronger credit scores, stronger debt to income ratios, stronger... A lot of equity. We have a lot of that's through home price appreciation that may correct. And you've done some good research on that, but even that, I mean, FHA is maybe another situation. Again, that's on the government's dime. You're not going to see those losses go back into the private sector. Same way the student debt, going to have losses there, continued losses, but again, that's on the government's balance sheet. It's not in the private sector. So in terms of precipitating an economic or financial crisis, I don't see either of them triggering that. Actually for home prices my big worry is not so much crisis risk or whatever. I think, look, I want home prices to correct. I don't know about you, but I think taking some air out of that bubble would be a really good thing.

Mark Zandi:                      Well, Sheila, not my home. Not my home, please. Chris's home no problem. Not my home.

Sheila Bair:                        Look, even people who already own their home, so they're going to be there for a while. What's the impact? Their taxes are going up. They might have a 30 year fixed rate mortgages, but now they've got a bigger tax bill and they're not going to monetize on their house for a long time. And people who want to buy houses, it's becoming nigh on impossible.

Sheila Bair:                        So at least the starter home, the modestly priced home segment, boy, I would really like to see more supply come in, bring those prices down. And we don't have a lot of underwater borrowers. So I don't think you're going to... Some mild correction there or at least a sustainable gradual correction I think would be actually hugely beneficial. But no, I don't see a crisis brewing in residential mortgage markets at all. CR may be another thing with exposure there will... That may be a little bit of a risk with the banking sector. And student debt is... There's massive amount. We've get what 1.75 trillion now. About 1.6 of that is government debt.

Mark Zandi:                      Oh is it up to 1.7.

Sheila Bair:                        Yeah. Including private. Yeah. And I think it's about 1.6 for government. So yeah, it's a lot. And there are a lot of borrowers who are unable to make their payments when they graduate. We've had a payment suspension for over two years now. So we don't really know what's going to happen when payments have to resume again. But my guess is it's going to be very, very difficult for a lot of borrowers to start making their payments, which is why the Biden administration really needs to decide what are they going to do on debt cancellation. And then have a definitive time for people to start up payments again. And add some preparation time. But to start up payments again, without clarifying whether or to what extent you're going to forgive debt, people are going to say, "Well, why should I start paying if you're going to cancel it two months from now."

Sheila Bair:                        Yeah. So they need to sequence it. What are you going to do about debt cancellation? And then get the payments restarted again. Rich Cordray's over there are doing some great work trying... Student debt, automatic default is a 10 year payment plan. And that's best for most people. Because you don't want your debt payments to go on forever. So a 10 year amortized loan. Again, if you keep your borrowing within affordable levels, and that's really what the Peterson Foundation initiative's about, that's fine. But if you've got trouble, there's something called income driven repayment, which basically is you pay a percentage, it's based on the percentage of your income, not just a fixed ten year amortized loan. But there's some downsides to it too, which is that if your payment doesn't cover your interest, you're going to have negative amortization. Your interest is going to accumulate.

Sheila Bair:                        And a lot of the outstanding debt now it comes from interest accumulation on loans that are not performing or are not... The payments aren't sufficient to cover the interest. Plus most of them go out 20, 25 years. So going to be paying for a long time. And even at the end, you get whatever's left is forgiven. There's a tax bill that goes with that. Congress has never really fix that either. So the idea of income driven repayment is a good idea. There are a lot of problems administratively with the design that makes it easy for people to move into it. It's too complex. Rich Cordray's been trying to... And there are multiple plans. So Rich Cordray's been trying to simplify it and put everything into a single repayment plan and then better incentivize the loan servicers to put them in. Because there's too much paperwork involved.

Sheila Bair:                        It's expensive to get kids into IDRs, income driven repayment. So the default is just kind of put them in forbearance where they're not paying, but their debt just keeps getting bigger and bigger and bigger. So there's a lot of issues the Biden folks need to address, which I think they're very aware of. But really they need to provide clarity on cancellation and repayment. And then they should start repaying. I mean, look, I have compassion for student borrowers. Absolutely.

Sheila Bair:                        But most, and there have been ripoff schools and there's been marketing of debt to kids that's just not been appropriate. But overall, most borrowers have gotten good degrees that have enhanced their income potential. They can afford to pay back either through the ten year repayment plan or the IDR. And they should, because I think debt is a serious thing and we're teaching kids all the wrong lessons with this kind of mess we've got for student loans right now.

Sheila Bair:                        And I'm speaking in a personal capacity here. But it's so well intentioned. And so not working the way it should. And this idea, maybe you'll have to pay it. Maybe you won't. Young people need to take student debt, any kind of debt, seriously, including student debt. And that's going to be their first experience with debt. It's a financial obligation. It's going to put a burden on your future for many years. What you have to pay on your student payment is money you're not going to be able to spend on vacations or dinners out or whatever. They need to understand that. And so many don't. I mean, Beth Akers, who's an economist, she's at AEI, she did a survey a few years ago of students after their first year to find out what they thought about debt.

Sheila Bair:                        And a third of them didn't even know they had debt. I mean, there is such a crying need for transparency around what student debt is, what it means, what they're borrowing, what's going to cost them when they graduate. I mean, and that's really what the Peterson Foundation is trying to do. They do not, I do. They do not get into any of the policy debates or anything like that. That's not the kind of foundation they are. They just want to empower young people, provide more transparency, help them sort through a process is now too complicated.

Mark Zandi:                      Let me provide a little context.

Sheila Bair:                        I don't care about this or anything.

Mark Zandi:                      Yeah, yeah, yeah, no, I can see this is big deal. There's lot to unpack there. You talked a little bit about the fact that the... And this is for the listener out there, who's not as well versed in all this. The first thing is obviously since the pandemic there's been a moratorium on student loan payments, the president Trump first and now president Biden under executive order has continued to extend that forbearance. That comes up in August, I believe is the next...

Sheila Bair:                        It's been a moving timeframe, the most recent extension's up to August. You're correct.

Mark Zandi:                      And I think on that issue, Chris has actually done a lot of work here. Correct me if I'm wrong, Chris, but we if people start repaying, let's put the debt forgiveness aside for a second and they have to begin paying again on August. The macro economic consequence of that is small. Do I have that right, Chris?

Cris deRitis:                       That's right. Because most of the debt forgiveness... Well a lot depends on how this thing is actually structured. We're talking about $10,000 of debt forgiveness. Is that for everyone? Is that just for folks with less than $10,000 worth of debt? To Sheila's point, there are plenty of people who have large debt amounts, but have the income because of their education to pay. It's really the population that's at risk is that lower balance population that didn't complete their degree.

Cris deRitis:                       So if you had something that was very targeted towards them, perhaps you actually would have a little bit more of a net impact on the economy versus the broader of debt forgiveness. But yeah, as it's been discussed a blanket $10,000 debt forgiveness would actually have a pretty limited impact on macroeconomic activity.

Mark Zandi:                      Right. And then on the debt forgiveness. So this is a debate that's been raging for quite some time, but it's taken on added life under the Biden administration. And of course Biden during the campaign. And I think his heart is in the income repayment plan that Sheila you talked about.

Mark Zandi:                      He put forward, I remember evaluating it and writing a paper about his income repayment plan. And it's basically kind of juicing that up and it's very targeted. Meaning if you have to spend more than 10% of your income on student loan debt, then we'll cut you a break. And if you're still paying on that debt 10 years later, it's more than likely you're one of those folks Chris just mentioned you didn't graduate or you got a degree that was not going to give you the income you need. And if you worked in government or for public service and yeah, we'll give you some debt forgiveness. That seems like-

Sheila Bair:                        Yeah, it's 10 years for public service. It's more like 20, 25 for if you're not. So, anyway.

Mark Zandi:                      Yeah, exactly. So that feels more right. But now they're talking about... And of course we don't know what they have in mind because we're all waiting to hear, and I think they will sequence it. I'd be pretty shocked if they don't sequence it.

Sheila Bair:                        I would assume so.

Mark Zandi:                      I mean, it doesn't make sense. But some of the numbers here are pretty big that you're hearing. And it sounds like that's not the direction you would go Sheila and Chris, I don't think that's a direction you would go either.

Sheila Bair:                        I have publicly endorsed $10,000 of debt cancellation. The Center for Responsible Lending came out with that recommendation a few years ago. I used to be on their board. I think they did some really good analysis. Of all the different options it is the most progressive. Sure, if you do it for everybody some very wealthy people are going to get $10,000 in debt forgiven. But proportionally, it helps lower income kids, kids of color, first gen, kids who went to a school, didn't get a good degree. Kids that went to a poor quality school. Didn't get a good job. Those are, I think about half of the students in default would have their debt wiped out with $10,000. So it's well targeted and I'd be all for it if they wanted to further target it to kids who didn't graduate with a degree or kids that are in default. Borrowers that are in default.

Sheila Bair:                        But they don't understand what debt is. They don't understand what they're getting into. They find out they're not well suited for college. And then they've got this debt and it's not... So I have sympathy for them, especially the lower income, first gens who are not going to have the families at home to help them navigate this because they didn't go to college either.

Sheila Bair:                        So I have compassion for them and I think we should try to help them. I know it's politically unpopular. I do think too that if you target it to that population, especially just the ones that didn't graduate or already in distress, if you read the language that gives the president authority, arguably executive power to do debt cancellation is clearly intended for loan workouts. So like any private borrower would do, you got a distressed borrower? Yeah. You write some of it off. I mean, that's really what is what was designed for. And I think if you targeted to the more distressed populations, they'd have a better case to defend in court as well. But look, I'd be fine with that, but they just need to make a decision at this point so we can get on with it.

Mark Zandi:                      You're making a really good point just to reiterate that the president is doing this under executive order. But it doesn't mean it's not going to be challenged in the court.

Sheila Bair:                        That's right.

Mark Zandi:                      Depending on what he does actually-

Sheila Bair:                        How broad it is.

Mark Zandi:                      Yeah, will determine whether this actually sticks or not.

Sheila Bair:                        I agree. Exactly right. Exactly.

Mark Zandi:                      Very important. Well, this all brings us to the work you're now doing with the Peterson Foundation, and this is work we've been collaborating with you I think, on.

Sheila Bair:                        We have yes.

Mark Zandi:                      It's been really something we've been working on for the last couple of years. And it's now coming to fruition, and this goes to your point that kids don't really understand what they're getting into when they take on a student loan. And this tool that you've developed is to help students kind of figure that out and determine how much debt they can actually take on from financial [inaudible 00:47:13]. Did you want to explain that tool a little bit?

Sheila Bair:                        Yeah. No, that was a nice explanation of it. So it's really focused... You look at the student debt tools that are out there now, again, they're focused on maximizing how much you can borrow. This tool is unique. It's really about how much can you afford based on some key metrics. So there are only four inputs you need. Where do you think you want to go to school. What do you think you want to major in? When do you want to start school. Because it depends what the economy's like once you graduate after four years and we Moody's Analytics has been so helpful to us in modeling that. And then where do you think you want to live? Because that's going to definitely drive what your expenses are, what your living expenses are. So you put in those four inputs, that's all you need to put in.

Sheila Bair:                        You don't need all your family financial information. I mean, some of these tools are so invasive, asking for this and that. It's really what is in the young person's head in terms of their aspirations, school, major, where they want to live and when they want to start. And you can put in as many as you want, and it will give you a number, an aggregate number of the total amount for undergraduate degrees, the total amount you can borrow and still have an affordable payment once you graduate. And it'll walk you through...

Sheila Bair:                        And we define affordability to have, at least after you pay out for all of your essential living expenses, you have at least $150 a month left. And we're transparent about that. That was a judgment call. We worked with your folks to figure out to be affordable, how much spending money, extra spending money [inaudible 00:48:41] and we settled on 150, but the tool will allow you to do more or less if you want to borrow a lesser amount or a greater amount.

Sheila Bair:                        So that's really what it is. And it's just so simple to use. And we tested it with a lot of young people before we're just launching today, actually. And it got a tremendously favorable response, because it's really easy to use. It's fun to use. It's not invasive. We're not selling anybody's information. We're not asking for information about you. We're not selling your information again like so many of these other student debt tools used. So it's really just to help young people navigate this very important first decision they're going to be making about borrowing. And we're really excited about, we really appreciate the partnership with you.

Mark Zandi:                      I've been playing with it.

Sheila Bair:                        Good, good, good.

Mark Zandi:                      It is really cool. Very slick and quick. Really, you get an answer. You don't have to wait. Exactly. Ryan's models you click solve and it takes a minute later because it he's doing 10 gazillion calculations. This gives you an answer. And I plugged in... Oh, the other cool thing is lots of majors. It's very detailed.

Sheila Bair:                        Yes it is.

Mark Zandi:                      It's not broad strokes here. It's like very specific. Can I put in economics and University of Pennsylvania because that's my alma mater. And I said, okay, I dreamed a little and said, "Okay, I'm going to start in 2023." And it came back and it said, I could borrow, given my income prospects because, I was getting an economics major from the University of Pennsylvania, $48,000. $47,350 to be precise. And it goes-

Sheila Bair:                        Yeah, well that's good. Well economics must have good income potential. Where are we going to live? Where are we going to live?

Mark Zandi:                      Oh, I'm sorry, Philadelphia.

Sheila Bair:                        In Philadelphia, okay.

Mark Zandi:                      I'm not moving. This is where I was... My kids say I've been sheltering in place all my life. I'm not moving. Philly. That's a great point. That's a really good point. Because it asks you, where are you going to live? Because of the cost of the living-

Sheila Bair:                        Yeah. The cost of living is going to change.

Mark Zandi:                      ... is going to change quite a bit. So I go, well, $50,000's a lot of money.

Cris deRitis:                       It's the annual tuition.

Mark Zandi:                      That's what I was going to say. I mean, what's the annual tuition?

Sheila Bair:                        But again, you've got a number. It can help guide your decision making when you get your quote unquote financial aid offer from University of Pennsylvania, if that's where you end up going. You can gauge that, what your likely for your cost will be against that dollar amount. And I think that will empower a lot of students and their families to know. And I will say it's a little secret as a former college president. Families should know, they can negotiate that. That headline number and tuition number is not necessarily the number you have to pay.

Mark Zandi:                      I'm sure Ryan did that when he was at Washington College. He's a negotiator.

Sheila Bair:                        But that's right. But you can go back to financial aid office and say, "Look, sorry, we don't want to borrow more than $12,000 a year. And so what can you do for me?" And they might have scholarships. They might provide a discount. So, or if they won't do it, then you might want to look at a lower cost school, Washington College.

Mark Zandi:                      Well, I thought the really cool thing is because a lot of kids don't know exactly what major. But this allows them to kind of get a... That should be a criteria in people's thinking. It's not like-

Sheila Bair:                        Yeah, well they need to. Well, that's the other thing, it's educational in the sense that it gets them thinking about these choices are important in terms of what their financial situation's going to be once they graduate. Because again, it is from an educational perspective, it's really, really valuable as well.

Mark Zandi:                      And by the way, you got to graduate. You've just got to graduate [inaudible 00:52:22], please.

Sheila Bair:                        It cannot be emphasized too much. That the worst thing is to have a debt in no degrees, you've got that debt load and you don't have the enhanced income from a college degree. So yes, that is the most important thing. And also to try to finish in four years, you take it to five. Even just one more year, it could really add to your debt load.

Mark Zandi:                      I did want to say that this is obviously a passion of yours. Because I can see if you're on YouTube and watching it, you can see behind Sheila are a couple books you've written. You want to just tell us about the books.

Sheila Bair:                        Well, yes. So I have a series of books, kids books, called Money Tales. There's six in the series all together.

Mark Zandi:                      Oh, I didn't know that.

Sheila Bair:                        Yeah. So, well I put this one up, Billy the Borrowing Blue-Footed Booby because it's about... I want kids to learn what debt is in grade school. I want kids to learn about the risk of unaffordable debt and the burden that can place on you in grade school. So that is a fun book about... It takes place on the Galapagos. About a little Blue-Footed Booby gets into big trouble with a buy now, pay later scheme actually, which is borrowing by the way.

Sheila Bair:                        And this is Rock, Brock, and the Savings Shock. Actually, this is my first book. This is sold very, very well. And it's just about compound interest and the importance of savings. And again, starting at an early age, it's a little bit every year, how you can really build significant wealth just through a regular savings plan and the power of compounding. So those are two. Thanks for the opportunity to plug them.

Mark Zandi:                      No, but here's the thing. Here's the question, did you illustrate those books?

Sheila Bair:                        Oh God, no.

Mark Zandi:                      If you had illustrate those books...

Sheila Bair:                        No, Amy Zhing did this one and Barry Gott did this one. My publisher is Albert Whitman and they arranged for the illustrator. I wish I could draw like that. But the illustrations are fabulous.

Mark Zandi:                      You should know if you said yes, I illustrated, then I'd say you are the most powerful woman in the world. I mean, geez Louise, what can't you do?

Sheila Bair:                        Yeah, I know, I wish I could, I cannot.

Ryan Sweet:                      I want to take away the cotton candy machine and I'm going to get these books.

Mark Zandi:                      Exactly.

Ryan Sweet:                      This is going to be our nightly reading now.

Sheila Bair:                        Good.

Mark Zandi:                      Yeah, exactly. Well, Sheila, it's really been a pleasure to have you. This is not an exaggeration and I'm not sucking up, but you are a national treasure. I'm not kidding.

Sheila Bair:                        You are sweet.

Mark Zandi:                      I am not kidding. You have devoted your life to the American people and with a very productive end. So thank you for all that you've done.

Sheila Bair:                        Well, let me return the favor, Mark, because you've been a long time advisor to people in government and your objectivity and quality of economic analysis and thinking has always been a help to me and a lot of people in government. [inaudible 00:54:53]

Mark Zandi:                      You're kind, but as you can see, all I'm doing is having fun.

Sheila Bair:                        This was fun.

Mark Zandi:                      This was fun. It really was. Well, thank you. And I can't wait till our paths cross again.

Sheila Bair:                        Yes. In person that would be good.

Mark Zandi:                      That would be wonderful. Take care now.

Sheila Bair:                        Okay. Bye-bye then.

Mark Zandi:                      Bye-bye.