“I am delighted to be here and speak. Jamie is someone I worked with and respected and admired, and Shore Bank is an institution of which I think very highly.
I heard David talk about what a hard job it is to debate and pick the Banker of the Year, but I would assume probably 10 years from now it will be a lot easier, because there will be three eligible bankers. You’ll have to rotate the award.
The committee on which I serve went from being the Committee on Banking, Finance, and Urban Affairs to the Committee on Financial Services, and some people has asked if we will change the name back if the Democrats [regain control of the House]. I said “Yes, but by that time it may be called the Committee on the Bank.”
I have enjoyed the past couple of years, and I’m really grateful to a lot of the people in this room.
When I came to Congress in 1981, I joined this committee primarily because of housing. As the years progressed, I got very interested in the Federal Reserve and in the international area. When I became the ranking member, my responsibilities broadened. We have broken down barrier after barrier -- interstate banking and a whole range of things -- and I think on the whole those have been intelligently done. But we do have some problems.
I spend a lot of time talking to my fellow liberals, and one of the points that I make to them is we should be very clear that we are capitalists. We should also be very clear: inequality is a good thing. If you do not have inequality, you do not have a free-market system. If people are not rewarded unequally for the quality of their work, if they are not rewarded unequally because they have good ideas about what consumer preferences would be, you don’t get productivity, you don’t get resource allocation. Inequality is a necessary part of a free-market system.
The problem is, left entirely to its own, the free-market system will produce more inequality than is either socially healthy or economically necessary. The value that I try to bring to this process is to try to limit inequality, not get rid of it, but to limit inequality to the point where it is not socially unhealthy, not to the point where it impinges on your ability as capitalists to perform your function.
And I must tell you, I think we are in a problematic situation right now, because I think the country has gone too far in the direction of allowing inequality to get out of hand, and that has several problems.
One, I think it’s just inequitable. And I will tell you, one of the things I’m going to be working on is executive compensation. I am not begrudging the amount, but I am increasingly troubled by what appears to be the role that various forms of incentives play in distorting effects.
There was a very interesting article by Gretchen Morgenson in The New York Times about a month ago noting the large number of corporations in America, not just financial services corporations, but corporations that beat the quarterly projection of analysts by a penny. She quite correctly pointed out that there is no way that this is just happening. This is clearly kind of a conscious thing, and it’s clear that the incentive is there. I have to tell you, at the level of pay that those of you who run banks get, why the hell do you need bonuses to do the right thing? Most people in the world don’t get bonuses to do the right thing. I mean, do we really have to bribe you to do your jobs? I’m serious. I don’t get it.
And the problem is not just the bonuses, but … think what are you telling the average worker: that you, who are the most important people in the system, that your salary isn’t enough. You need to be given an extra incentive to do your job.
One, I don’t believe it’s true. I think you undervalue yourself, that’s what bonuses say. But secondly, it is clear -- human nature being what it is -- that bonuses have an effect, and it’s especially true when you take the interactivity of bonuses in accounting.
I must tell you, when young people say to me, “What courses should I take if I want to go into politics?” I always used to say, “Economics.” And … for the past few years I’ve been especially telling them “accounting.”
I mean, accounting is a major part of it, and I wish I had taken more accounting. But … as I listen to some of the debates, for instance, accounting for derivatives -- I am convinced that accounting for derivatives as it exists today ranges somewhere between astrology and alchemy.
You combine the incentivizing effect of bonuses with the inherent ambiguity of accounting and you’ve got trouble. And I don’t understand, why, if you’re worth $14 million a year, you don’t just pay yourself $14 million a year.
I know, you don’t do it, the board of directors does it.
That’s the other thing, I am now convinced that boards of directors come down from the hills after the battle is over and shoot the wounded. That appears to me to be the role that boards … have played in many of these crises.
If you are running these complicated, important operations on a seven-day-a-week basis and you’re putting in all these hours and a director comes in once a month for lunch, how the hell is the director going to have any impact on what you do?
And if you can’t get the director to do almost anything you want, shame on you, you shouldn’t be running the operation. There are inherent limits to boards of directors. We shouldn’t be relying on them as much; I really do believe we have a problem there.
Let me talk about one other problematic area: preemption.
Obviously in today’s world, you need to have uniformity to a great extent in economic activity.
For the time in which they lived, the men who wrote the Constitution did an extraordinary move toward democracy, but they did write in 1787. Today is a very different world. In particular, one of the central facts of the American constitutional scheme that doesn’t make sense anymore is a distinction between interstate and intrastate commerce. It has been technologically, absolutely obliterated.When I came to Congress, my Republican conservative colleagues used to talk a lot about states’ rights. Today there is not an area that comes within the jurisdiction of the Financial Services Committee where the Republican party isn’t overwhelmingly for preempting the rights of states. I will tell you, in fact, in a gesture of bipartisanship I’ve offered to make up for all my Republican colleagues on the Financial Services Committee -- whether we’re talking about national charter for insurance, or OCC preemption on banks, or getting rid of Eliot Spitzer -- I’m going to make up a bumper sticker for them that says “States Suck,” because that’s really become the motto of the Republican party with regard to financial services.
There are two motivating factors in moving from state regulation to national. One is the perfectly sensible one of having uniform rules, and there are economies of scale if you don’t have to do all these different regulations. We have international competition, also clearly important.
But states have been over time the major regulators of consumer protection, and, again, the national regulators -- many of whom are here, all of whom I admire -- their job is on the whole systemic. They have been charged with keeping this wonderful economic machine that is the free-enterprise system in America performing. That’s their job: to keep this system functioning.
If an old lady gets diddled somewhere in Minnesota, the national regulators really haven’t got the time to worry about it. The fact is that institutionally, there is not as much interest there. There is more interest in the states. The state regulators of consumer affairs are much more likely to be elected officials. It’s not an accident that Eliot Spitzer is an elected official running for governor, or that Bill Galvin in my state of Massachusetts -- who I think has been a very responsible regulator -- is an elected secretary of state who would like to go on and do things.
There is something about running for office that makes you pay attention to people who you may think are pains in the ass, but they are pains in the ass who are going to decide whether or not you stay in office.
There is a very good capitalist argument for uniform rules. On the other hand, a reasonable degree of consumer protection is perfectly able to co-exist with that, especially if we do it uniformly and nationally.
One of the arguments against some of the consumer protection established at the state level is well, yeah, but then we won’t do business in your state. I think this has a relevance to predatory lending, because if one state gets too tough compared to other states, they may lose out. But if every state has done it because it’s done on a national level, that’s a different story.
The model I have in mind was a law last year on consumer credit, the Fair and Accurate Credit Transactions Act. We preempted all state rules, but we increased consumer protection at the same time, so that in most states, with the exception of California, and after a recent court decision maybe not so much even there -- but in almost every other part of the country consumers as a result of that law have more protections than they had before, and we have uniformity.
That’s what we need you to work on. Sort this out. Resist the temptation to use nationalizing the rules from the standpoint of economic efficiency to stick it to consumers.
I really believe that the people in power today in Washington, the President, his chief economic advisers, and certainly my colleagues in Congress, genuinely believe that most of what you need to do to achieve the good life is simply to remove the restraints on capital. And if you let the owners of capital send that capital where it’s going to get the highest return, we’ll all be better off.
I think that’s a generally good principle, but I think it needs more restraint.
We are moving in the opposite direction, we are at a point now in the society, I believe, where we have too much inequality.
Alan Greenspan, in April, said to the Joint Economic Committee that the gains of increased productivity are going to the owners of capital -- not to wages paid in compensation. To the extent that there’s been any increase in compensation as measured nationally, it is that the employers are paying a higher amount for health insurance. The take-home pay has not moved. So employees are getting the same pay and the same benefits, the employer is paying for it; it doesn’t seem like a raise to most people.
And we’re at a point now where there is a great degree of unhappiness, I think, over increased inequality. Now, I think that’s unfair and I don’t like to see it, but I’m not going to try to appeal to this group solely on fairness. I think there are good, self-interested reasons why the financial services industry should be more supportive of our efforts to diminish inequality.
Yes, of course we need to work with you to make sure that you are able to perform the essential function you perform in a capitalist system. We are moving in that direction; no one with the votes behind him or her is trying to move that back.
But it is not in your interest for the current trends to continue, and there are a couple of reasons. First of all, there’s a political cost. I’m sure most of the people here think that the political outcry against outsourcing was excessive, demagogic. I agree with you to some extent, not entirely. But the outcry against outsourcing is fueled by the fact and the perception of inequality.
You have an administration that is theoretically for free trade, but much of what they have done in the last few years has been to buy off the opponents of free trade so we now have a patchwork of protectionist measures, and therefore we have a hard time getting trade treaties through Congress.
I was going to be running for the United States Senate (if Sen. John Kerry had been elected President), and I was doing pretty well. One of the things I was preparing to defend myself against was attacks on my vote for the law that says you don’t have to send people their checks any more. Check 21, to you, is very routine, very sensible. But it’s going to be a political problem in some cases. I’ve already had people say, “I can’t get my checks,” and I said to them, “Well, do you save your credit card slips? What is this attachment you have to them?”
But if people find over the next few months that the checks they write are cleared immediately but the checks they deposit lag a few days, be ready to hear a lot of noise and a lot of anger. They are not going to understand you can charge them right away, but you can’t credit them for two or three more days.
It is not in the interest of this country for people to be as angry as they are. There is a macroeconomic problem here. To the extent that income distribution lags general wealth, if we’re at a point where we’re getting fewer jobs per unit of GDP and wages have stagnated, then you have the potential of an economic problem. I think if we continue this trend, there is a very real possibility that economic growth slows down because there is too much inequality and it interferes with consumption.
So I would just close by saying, I have enjoyed this work, and I look forward to working with you. You have a great advantage right now. You’ve got a President who very much wants to free you from all those meddlesome regulations. You have a Congress, the leadership of which thinks, if anything, the President is a little too soft.
You have some short-term advantages. I would urge you not to press them too far lest the kick-back be more than you need. I think we can work together to continue to rationalize the economy and provide for you a set of conditions in which you can do your free-market work. But I think it is also important for you to work with us to make sure that we don’t let inequality get out of hand and we don’t let the average American think that he or she is being abandoned and to some extent screwed by these rules.
Now I don’t think we should do that for moral reasons, and I think most of you would agree with that. But whether you do or don’t, I really think there is a self-interested reason here.
There is something about the American political system, I think, that can penalize people who go too far, and … as I contemplate 2005, I think there are people in Washington who will do you the “favor” of giving you everything on your wish list. And nobody ought to want to get everything on your wish list, because that, I think, generates some counter-pressure.
Thank you.”
