Former FDIC Chief Bill Isaac: We’re Headed for Another Financial Crisis

Thursday, 21 Jul 2011 02:00 PM

By Forrest Jones and Kathleen Walter

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Another fiscal crisis is the top threat to the nation — and it could come within the next year, says former FDIC Chairman Bill Isaac.

Financial regulations such as Dodd-Frank won’t prevent another crisis, but getting the nation’s spending and debt under control could, Isaac told Newsmax.TV in an exclusive interview.

The government must get spending under control to ward off the fiscal crisis, says Isaac, author of "Senseless Panic: How Washington Failed America."

Regulations created in the wake of the crisis designed to protect consumers have been whipped up in a way that fail to address the underlying problems facing the country's financial system, Isaac says.

So unless the government rids itself of a bad habit of applying regulations that do no good, more crises await.

"The fiscal crisis is the number one threat to our nation right now, and if we don't address that in a serious way soon we will be back in a far more serious crisis than we have ever seen," Isaac says.

"I'm hoping that our political leaders can get together and address this fiscal crisis and get it under control."

Entitlement programs will need some adjustments but so will tax loopholes.

And proper regulations are needed, not those outlined under the year-old Dodd-Frank law.

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"Dodd-Frank is the worst piece of financial legislation that I have seen in my lifetime, and I have been around a while, and I've been in this industry for about 40 years. Dodd-Frank would not have prevented the last crisis, and it won't prevent the next crisis," Isaac says.

Dodd-Frank fails to address many issues that threw the housing sector into a tailspin and the economy with it, such as business practices at mortgage companies Fannie Mae and Freddie Mac, or the repeal of the Glass-Steagall Act, which allowed commercial and investment banks to operate under one roof.

Plus certain accounting practices are still in place, including fair-value accounting that required financial institutions to write off $500 billion of assets, which in turn shaved $4 trillion off of the nation's lending capacity, based on the assumption that banks loan about $8 for every $1 of capital.

"There's certainly plenty of blame in the private sector. Sure, there was greed, there were poor risk management practices in our financial institutions, there was poor governance, there were compensation systems that were out of whack and giving the wrong incentive," he said.

"The private sector clearly was responsible in meaningful way for the crisis, but I blame the government for not having proper regulation in place to control greed, to control risk-taking to control compensation practices," Isaac says.

"That's what good regulation is supposed to be about. And then once the crisis hit, I blame our government for turning a crisis that should have been manageable into a panic, which almost shut down the world financial sector."

Editor’s note
: To get Bill Isaac’s new book, “Senseless Panic,” at a good price — Click Here Now.

The economy was in far worse shape in the 1970s and early 1980s than it was prior to the most recent crisis.

Stagflation — high inflation coupled with a stagnant economy — was hurting Americans in the 1970s. Prime interest rates shot up to 21.5 percent, the country hit a recession and a global debt crisis rocked the global economy.

"Altogether we resolved some 3,000 bank and thrift failures during that period during the 1980s without creating a panic," Isaac says.

"We've only had about 400 failures this time around and yet we created a worldwide panic by the way the government mishandled the crisis."

Congressional Republicans are giving Dodd-Frank a failing report card.

"Dodd-Frank burdens the private sector," says Representative Spencer Bachus, the Alabama Republican who heads the Financial Services Committee, according to Reuters.

"The vast majority of these rules have created an atmosphere of uncertainty in which innovators, job creators, and lenders can't put their ideas and capital to work."

Some in the financial sector say they still don't know what awaits them with Dodd-Frank even a year later, especially when it comes to reforms regarding capital and liquidity standards, limits on proprietary trading, and whether banks will have to restructure to make it easier for regulators to break them up.

"The very bank-specific stuff is coming at us... what kind of business are banks going to be allowed to be in, what will the business of banking be going forward," Wayne Abernathy, a top official at the American Bankers Association, tells Reuters.

© 2014 Moneynews. All rights reserved.

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