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Former FDIC Chair Sheila Bair on how the financial sector can help resolve the government’s budget crisis.
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-- Treasury Secretary Timothy Geithner has just ended his meeting with congressional leaders today admits to close he was the last one.
They're talking about the fiscal cliff hoping to bring some of us closer to some sort of deal.
But our next guest says leaders in Washington aren't the only ones that can help our fiscal health Wall Street.
Has to step up as well joining us now is former FDIC chair and author of bull by the fourth Sheila Bair.
Love the name of that bull by the horns Sheila candidacy again thanks for coming under -- I'm sitting here thinking now you all want to increase taxes on investment a lot of these -- come down tremendously over the past 1015 years of course it started with a Clinton administration -- cut capital gains tax.
Now usually the more you tax something the less you get a bit as a result don't we want more investment.
Now well.
I think there there's -- investment dollars out there it's just that they're not going into very protective investments.
You know and -- -- -- -- that the the issue is that what they want to penalize investment income the issue is whether you -- penalized.
Wages.
And we pay substantially higher rates on wage and come -- where most Americans get their money -- we -- investment income.
There's really no economic resource it shows that -- having a lower capital -- -- -- investment but he's jobs and -- economic growth.
There's no there's really just no correlation.
-- products and prettiest opulent he has stuck around a lot of people see a lot of correlation going back to the days when Clinton.
Lowered the capital gains rate from 28% down -- 20% and we saw a doubling of revenues so you have that supply side effect I know that -- is a dirty word in some quarters.
But she did have when we lowered rates from twenty to 20% we doubled the revenue.
Well there there could have been a lot of different explanations for that a few but if you look historically over time when we got rid of it after 86 we had a fairly healthy period.
He has some -- which was mr.
Clinton benefited when he came him.
So I -- I do think if you look historically over time it's very hard to see any kind of causal relationship between economic growth and job production.
And lowering our rates on investment income mrs.
Warren Buffett says -- -- at the gonna make a proper -- gonna make a profit whether.
-- you know even there is taxed at a higher rate.
I I personally like via the Simpson -- idea which is what Reagan did -- -- take everybody's -- downright you know close this loophole for investment and come.
Cut back on the mortgage interest deduction cut cut other loopholes and get the Marjorie sound more like 20% for everybody -- even pulled off the pounds I -- lobbyists -- -- I I understand that night it gets better like I I think we do have to we look we have a lot of tax -- charged.
By people trying to take advantage of this slower rate a lot of income being recast.
Wage income being recast as a capital gains income a lot of derivatives.
Constructed just so people get this slower rate it has complexity in the tax code I say get rid of it checks -- over the same -- Texan.
The lower right.
-- let you know the thesis of of your idea of why Iran today is to talk about how forget congress forget the present at the moment that Wall Street has to step -- up if we're really -- figure out how to solve this problem in US for ways you know we've talked about how you believe that.
Capital gains and dividends -- the special treatment that they get must stop but what are your other ideas about her Wall Street and how it should get involved.
Well I think that would be one big one that's about ninety -- new year I believe I you know there's another question about whether we should subsidize excessive leverage -- some of these financial institutions.
Are right now the tax -- actually gives.
Financial -- institutions aid and financial and senate.
To fund themselves by borrowing a lot of money as opposed to putting themselves -- shareholder equity.
So some -- suggested you know capping out of pure levered over it to certain percentage or certain number ratio say twelve to -- which is what I suggest.
You don't get the -- -- Another way to do which will be more expensive resist equalize treatment of -- interest and dividends you can deduct dividends.
And that might make it more helpful for some -- US stop the preferential treatment for dividend income -- Deductible for tax the corporate level and you could N double taxation of dividends.
But I think that's that's another would be -- have a stabilizing impact of the financial sector and also potentially raise some revenue.
Are raising guarantee fees on all these mortgages were the government's guaranteeing right now we're still about a 140 billion dollars on the -- with Fannie and Freddie.
But -- and let them looks like the taxpayers -- that several billion -- and FHA.
Raise those fees that we charge of financial sector for guaranteeing these mortgages to make sure taxpayers get paid back.
-- Sheila.
We're about to talk about the Federal Reserve -- -- John hills and -- that -- course he had Debra breaking story on that subject just today.
I you have warned -- about the Fed's low rates you've warned that it is pushing a lot of fixed income folks and a far more riskier bets and they should be and you warned about that is that still a concern of yours.
Well yeah you know I guess I'd ideas and I just tunnel at the exit strategy -- so I do think that this when you flood the system with all this liquidity you create the risk of asset bubbles.
-- whether it's bonds were those agriculture.
You know it's agricultural land that you you create a lot of money -- looking for return.
And this is that this phenomenon that we saw at least -- the sub prime crisis they had very accommodative monetary policy so nothing compared to what we have now.
And people kept looking for yield because the safe investments have had such low return.
So look if I thought that money was going into lending that actually supported economic growth and job creation.
I -- is worth the risk but this that the evidence just isn't there and deadly risks down the road -- are substantial.
So I do wish the Fed would stand down.
And the other problem is said the longer this goes on you have.
Very low yielding assets building on bank balance sheets which they are funding with deposits.
When interest rates start to go up the interest rates on deposits that the -- will have to pay on their deposits still increased with a still have these low yielding assets that the kind of probably -- -- with the ethanol prices so.
The risk are substantial I don't know what the exit strategy has and I just Aussie they were getting much really -- benefit from it.
Sheila -- same Wall Street has to step it up and take some some punches to the gut start acting accordingly as -- -- thank you alternative way to supply -- gets you -- Jolie's character okay I'll -- -- Ever vigilant we will we will talk about --
