U.S. Markets closed

Sheila Bair: 'The time has come' to raise interest rates

Andy Serwer
Editor in Chief

Sheila Bair has a new job, but still has some of the same concerns. The former outspoken head of the FDIC during the financial crisis, will this August become the president of Washington College, a small liberal arts institution on the eastern shore of Maryland. Oh, and she has a new book out explaining the financial crisis to young people. (More on the latter in a second.)

So how is Bair feeling about our economy right now? “It’s a little bit safer, a little more capital in the banks, liquidity is a little better, regulation is more robust, there are some better parameters about risk taking. These are all positive improvements, but they aren’t the kind of fundamental change we needed given the horrific consequences of the financial crisis,” Bair tells me in a recent interview. “I do worry that it could happen again. And there is disagreement about this but I believe if monetary policy is too accommodating for a very long period of time it can be destabilizing…I fear we’re seeing that again. The risk may actually be greater once the market turns. And is the system resilient enough? I don’t know, I really don’t think it is.”

Bair believes that stimulation by the Fed was a good idea at the worst moments of the crisis in late 2008 and 2009, when she says “the system was seizing up,” but that after that, banks and individuals needed to reduce their debt levels, not we should not have “flooded the system with cheap money” to encourage more borrowing. As for raising interest rates, Bair says, “The time has come. I hope it’s not too late. It needs to be done very slowly, very gradually, but yes they need to do it.”

[Get the Latest Market Data and News with the Yahoo Finance App]

Bair spoke critically about regulatory oversight, saying, “there’s a lot to be desired in the implementation of Dodd-Frank. It’s taken too long. For heaven’s sake, we haven’t even finalized the capital rules for large financial institutions.” This is particularly exasperating, Bair says, because it was something both liberals and conservatives agreed on. Rule changes are incremental, she believes. The rule-making process has gone on too long and the rules that ensued are “hideously complex,” she says.

As a Republican from Kansas who has worked with Democrats throughout her career, Bair bemoans the lack of cooperation in Washington. “It seems like every issue devolves in bipartisanship. Dodd-Frank is devolving in bipartisanship.”

The narrative is that Democrats are for reform and Republicans are not. But that’s not true, she says, pointing out that some Democrats are not reform-minded while Republicans like Maine Sen. Susan Collins are. Bair says we particularly need to come together to reform our tax code, which she says now benefits the wealthy and large companies. “The only way to get tax reform is to lock arms on a bipartisan basis and say ‘OK, we’re going to move together, we’re going to close these loopholes. We know a lot of people are going to get mad at us, but if we do this together no one is going to use this against us at the next election.’ But you don’t see that kind of leadership these days.”

In Bair’s book for teens, “The Bullies of Wall Street,” she encourages young people to go work in finance if they like, but to make sure they're creating something of value and “be accountable when you make mistakes.” Bair says there is still a dispute about what caused the financial crisis. She hopes the young learn from the debacle: “Hopefully, they will do a better job [than we did.] Our baby-boomer generation did not do a good job as a steward of the economy.”

“Most Americans don’t feel like the government is working for them anymore,” she says. “They feel like the government is working for special interests and at some point it’s going to break.” She calls on business leaders to demand a level playing field that ultimately would benefit all Americans and all American businesses too. If this doesn’t happen, no doubt Sheila Bair will keep reminding us that it hasn’t.

Watch Andy Serwer's full interview with Sheila Bair