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Former FDIC Chair Sheila Bair talks BNPL, her choice for next Fed chair, and cryptocurrencies

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Former FDIC Chair Sheila Bair joins Yahoo Finance Live to discuss the benefits and risks of Buy Now, Pay Later stocks, her choice for the next Fed chair, and cryptocurrencies.

Video Transcript

JARED BLIKRE: Welcome back. Buy now, pay later, it's a trend that's getting some consumers into trouble, but is it another case of predatory lending or a respite from some of the behemoth credit card industry leaders? Former FDIC chair Sheila Bair joins us now to discuss, and you're writing about this in an op ed for us today. And we can see that there is some potential for abuse here, but maybe some potential for good. So can you break it down for us?

SHELIA BAIR: Yeah, so I think this is basically just a way to finance a consumer purchase, the decision is made at point of sale. So you're on Amazon, Nike, whatever, they all partner with BNPL providers. So you have a chance, you can pay cash for your purchase or spread the payment out. Typically, the core product is over four payments over six weeks. It's interest free money, so that's nice, and it's theoretically clear and easy to understand.

So those are the advantages over credit cards that are going to be very difficult to understand how the interest is computed and compounded, the minimum payments. So those are the advantages. The disadvantages are is that because this decision making is compressed, it's a point of sale decision, it looks like a growing number of users and the target audience or younger, 18 to 35-year-olds, the younger generations. They're falling behind, they're having to take out other debt to pay it off, because they're not being thoughtful about financing the purchase to begin with. So purchases they used to make with debit cards, they just pay in full or they wouldn't make the purchase at all because they couldn't afford it, now they're buying more, which is good for retailers, but bad for a lot of consumers, because they're falling behind on their payments. They're borrowing more than they can afford.

JARED BLIKRE: Well, and this kind of reminds me of another area in finance, which is kind of disrupting the old model, for instance, Venmo giving payday advances.

SHELIA BAIR: Right.

JARED BLIKRE: We've even seen Robinhood offer this on beta Visa. So I mean, you're telling me Robinhood giving you a two day pay roll loan to buy stocks on potentially margin, optics not the greatest, but is this another example of something where we're just going to see this kind of innovation or disruption?

SHELIA BAIR: Yeah. Well, you're right. There is a trend in a common thread here. Generally, these products are designed for impulse decision making, right?

So you've got to make a-- You got two days, go quick, make the decision. It's cheap, easy money, kind of the you can worry about the payments later or the amount of leverage that you're taking on that may expose you to heightened risk. And it's targeted at a younger people, because younger people typically, let's face it, I'm a mother of two 20 somethings, so they can make decisions more impulsively.

They don't always have the financial knowledge that they should have. We do a lousy job of financial education here in this country. And so they tend to misuse this. And you see this in credit cards too.

Younger generations, typically they carry balances, they pay late fees, they use credit cards in the most expensive way possible. And all of this is financing for kind of frivolous desires versus things you really need, and that's, in my view, that's the dumbest kind of debt, right? To take on debt, even if it's interest free, it's a future obligation that could be late fees, et cetera.

To finance anything to be borrowing from your future to pay for something that's really just kind of something you may or may not need. If you don't need it, wait until I have the money to actually buy it. But that's-- We're eroding that culture with our young people. It's buy, borrow, buy, borrow. That's pretty much the signal we're sending these days and that does trouble me.

JARED BLIKRE: Yeah. Well, I want to shift our attention here to the selection for Fed Chair. And we know that Powell's term is up at the end of January and you had a tweet the other day. I just want to read this.

"Acknowledging Powell's strength, I still think the big threat to his reappointment is a smart, savvy woman known to markets, expert at monetary policy and regulation climate risk and financial tech. If this administration prioritizes diversity, seems Brainard is a no brainer." So on that, I'm guessing you're in the Lael camp?

SHELIA BAIR: Well, yeah, you know, I've held back on this. I know her, I worked with her back during her days as a senior official under Tim Geithner in the Geithner Treasury Department. She's a very mainstream person.

She's super smart, really, especially on regulation, understands that I think it's one of her many strengths that, frankly, is superior to Chair Powell. Chair Powell has done some good things and I've written about that in the past, especially his leadership in the pandemic.

But I just think, you know, in terms of strengths, she's known to the market, so it's kind of laughable to think she's going to disrupt or scare the markets. I just, you know, this is-- she's very mainstream, but she does understand regulation. She'll be independent from the banks.

And if they're going to be spooked by her because of that, then too bad. But she also understands financial technology, we've discussed that before, central bank digital currency. She's been a thought leader at the Fed on all these issues. Climate, the same thing.

And so I do think she's got a superior skill set and I do think if it was strictly on merit, she should get the job. Not to say that Jay Powell isn't well qualified, he is. But I think she's better qualified and I think her public statements, that people are thoughtful and listening to her and reading what she said, and some of her very powerful dissents on regulation, which have been spot on.

I think that informed people would have a hard time disagreeing with that. She's just a very impressive person and I think has a more holistic knowledge that would serve her well as Fed Chair. It's not just monetary policy, she's great at that. She has all these other skill sets.

JARED BLIKRE: Mm-hmm. Well, and before we go, we got time-- quick time for one more. I want to talk about crypto.

SHELIA BAIR: Yeah.

JARED BLIKRE: And I guess we'll talk about stablecoins, that more pertains to your banking experience. But, you know, at the beginning of the year it suddenly became known that one stablecoin was a huge player in the commercial paper market. Now we're thinking systemic risks, maybe crypto?

SHELIA BAIR: Yeah, yeah.

JARED BLIKRE: Kind of accelerated the timeline, but what are your thoughts on this?

SHELIA BAIR: Well, first, flag up here, I'm on the board of a company, Paxos, that has a stablecoin, so I want people to be aware of that. I don't speak for the company, I'm on the board and my job is oversight, but I do have that affiliation. Look, I think a stablecoin, I have argued for a government money market fund model so that if you're going to issue a stablecoin, if you're going to say give us $1, we're going to give you a crypto dollar in its place that you can use to trade and make transactions.

If you're going to do that, dollar in, dollar out, which is basically what many market funds tell you, then those dollars, those fiat dollars the stablecoin issuers collect should be in very highly liquid state, basically short term government-- federal government Treasury securities. I think that's what they should do or insured deposits in FDIC insured institutions. That's what Paxos does. That's what the Circle does as well, another major US stablecoin issuer.

That's best practice and I think that's really what you need to do. That would have be a stable business model. The only two places that have been stable in crisis, right? So going back to the great financial crisis and the pandemic as well, there were inflows into FDIC insured deposits and government money funds.

Those are the two places that we know are stable. So if you want to have this, you know, I think stablecoins have tremendous promise in terms of making payments faster, cheaper, more inclusive, it's a very promising technology, but it needs good regulation. And others say-- The President's working group just came out and said, well, they thought these were deposits that should be in banks. I think there is some problems with that.

But it does need some regulation and some investor safeguards so that the money backing those stablecoins is actually money good. You want to able to get your fiat money out. You can get your fiat money out at the same value that you put it in.