Sheila Bair, chair of the Federal Deposit Insurance Corporation, gained much respect and notoriety in Washington for her warnings about - and handling of - the subprime mortgage crisis.
And so it is somewhat unnerving to see her offer remarks today warning about the potential for a bond bubble that could do significant damage to the US financial system if banks do not prepare for higher interest rates down the road. Especially in a context of possible additional quantitative easing by the Federal Reserve, which could easily push treasury yields even lower than they are now.
“The consensus is that this low-rate environment will persist for some time into the future,” said Ms Bair. “But what will happen when interest rates inevitably rise, and how disruptive will that process be? “
Sheila Bair, the chairman of the FDIC, today spoke on regulatory reform. Her comments were nothing surprising or new. She called for the creation of a resolution mechanism for large failing institutions, more sharing of information between regulators, and strengthening consumer protections.
But one interesting statement:
In the wake of the financial crisis, the Federal Reserve has made much of the dangers of using interest rates to “lean against” asset bubbles, such as the one in the housing market whose collapse brought the US economy to the brink. Fed governors have implied that this was their only practical tool. (There have been quieter on the influence they may have wielded by warning of the bubble). The problem, several Fed governors have said recently, lied in a failure of regulation.
At today’s Financial Crisis Inquiry Commission hearings, Sheila Bair, chairman of the FDIC, had a response: the Fed, she said, should have regulated.