In a surprisingly forthright and honest interview between Barrons and Sheila Bair, the former FDIC chair who was responsible for big banks avoiding bank runs in the aftermath of the Lehman bankruptcy, discussed what she sees as the trigger for the next financial crisis, her thoughts on China’s record leverage (and the recent promotion of Xi Jinping to emperor), how she views the current economy, on $ 1.3 trillion in student debt, and finally on bitcoin.
While we will focus on the latter, here are some excerpts on the other key points. First, here is Bair on what she thinks will trigger the next crisis:
I’d keep an eye on credit-card debt. Subprime auto has been a problem for a couple years, and valuations on loans used to finance leveraged buyouts are high. Any type of secured lending backed by an asset that is overvalued should be a concern. That is what happened with housing. Corporate debt also has not gotten as much attention as it should. It is market-funded, rather than bank-funded, but the banks still have exposure. Then there’s cyber-risk. It took us so long to get around to the reforms postcrisis that we got a little behind on systemic cyber-risk, but regulators are very focused on it now.
On China’s risk to the global financial system:
We look at their debt and wag our fingers and tsk, tsk. It is high. But they realize it is a threat to financial stability and are dealing with it. Last month, regulators took over privately held Anbang Insurance to keep it from collapsing. It is a sign they are continuing to crack down on reckless growth and excessive leverage.
On Student Debt:
That debt is all on the government’s balance sheet, so no, not a market crisis. But there are parallels to 2008: There are massive amounts of unaffordable loans being made to people who can’t pay them, and the easy availability of those loans is leading to asset inflation. In 2008, that was reflected in housing prices. Today, that’s tuition. It’s too easy to raise tuition because kids will borrow to pay for it. If the loan defaults, the primary beneficiaries — educational institutions — have no skin in the game, like in the mortgage crisis.
How record student debt promotes inequality:
Student-loan stories always feature someone who borrowed $ 90,000 to go to grad school or med school. But those people generally get jobs and have earnings potential, and debt-forgiveness programs disproportionately help them. The distress and high default rates are among the kids borrowing $ 10,000 to go to a for-profit school and dropping out; $ 10,000 may not sound like a lot to you and me, but for a first-generation student or someone without a college degree, that’s a lot of money. Student debt also suppresses small-business formation. Kids who would have started a business in their parents’ garage can’t do that now because they owe $ 50,000. Beyond that, it’s just a terrible financial burden for our kids that didn’t exist 20 years ago.
And finally, and most importantly, is Bair’s tacit endorsement of bitcoin. By saying that “we should not ban it”, Bair has effectively become the highest ranked current or former administration official to recommend keeping bitcoin while pointing out that – just like the dollar – its value is only what someone else would be willing to pay for it.
Here is Bair’s view on cryptocurrencies.
Don’t put any money into bitcoin that you can’t afford to lose. But I don’t think we should ban it — the green bills in your pocket don’t have an intrinsic value, either. The value is based on what others think is its value. That’s true of any currency. Regulation should be focused on good disclosure, education, warding off fraud, and making sure it is not used for illicit activities. Let the market figure out what it’s worth. That is what it is doing now.