Mr. GREGG. Mr. President, I rise to speak a little bit about one of the major issues which we are about to take up here in the Senate and which has been discussed at considerable length throughout this country, and especially here in Washington, over the past 2 years as we have dealt with the financial crisis, and that is the issue of fiscal reform and financial reform.
The country went through a traumatic experience of inordinate proportions.
We were on the verge in the fall of 2008 of having our entire financial industry implode, and not only the big financial systems in New York City and around the country, but Main Street America was clearly at risk and had the potential to suffer massive damage.
That cataclysmic event didn't occur because we as a Congress and the administrations of President Bush and of President Obama took some very bold and aggressive action in the way of coming in and stabilizing the financial industry of this country. As a result, we did not have the type of events that were predicted.
Some had said if the financial institutions had been allowed to unravel, we would have been into another Depression-like period. One former Secretary of the Treasury projected that unemployment could have gone as high as 25 percent. Obviously, we have been through a difficult time. The recession has caused great harm. Americans have been under tremendous financial stress. But the damage that might have occurred has been muted to some degree by the actions we took. Now we are at least getting the TARP money back with interest from the banking industry. We are not getting it back from the automobile industry or AIG, but from the banking industry we are getting it back with interest, and we are going to actually make money for the American taxpayer, the stockholders in these various entities we had to support.
The question remains, how do we avoid this type of event occurring again. That involves a lot of different actions that should be taken, because the causes of this event were multiple. One of the causes was clearly that the Federal Reserve kept interest rates too low for too long and made money too readily available. Another cause was the Congress's own decision throughout the 1990s and the early part of this decade to basically promote--and in some instances force--lending for the purpose of buying homes, when the people buying the homes didn't have the wherewithal to support the obligation they were undertaking. The homes in many instances didn't have the value at which they were assessed. There was an assumption of appreciation that would occur that never occurred.
A third cause was plain, old-fashioned, horrible, and sometimes illegal underwriting, where people were essentially putting out loans in a totally inappropriate manner. Then those loans were being securitized. I have described it as an inverted pyramid, where possibly the person who was giving the loan was just interested in the servicing fees of making the loan, in the origination fees of making the loan, not in the actual obligations of the loan, and then the loan ending up being securitized out in the market. You had all sorts of counterparty liability and multiple structure built on top of this one loan that basically didn't have either the asset value or the capacity of the individual to pay it back. That was the systemic event that was a function of bad underwriting.
So what can we do to correct this? Well, one thing we can do, obviously, is reform our financial structure in this country. It clearly wasn't up to the regulatory needs that were necessary, and there was clearly a lot of activity occurring in the financial markets that was wrong and inappropriate. There is this huge discussion going on now, bills have made their way through the House, and there has been a proposal from the administration--in outline form at least--and there is one from Senator Dodd and specifics that have been brought forward in the Banking Committee. There is going to be a major attempt to reorganize our financial institutions.
I think that as we go down this path we have to be thoughtful and constructive. There is this fervor of populism sweeping across our Nation on this issue. The fires have been fanned by the White House and a lot of other people in a very inappropriate way. Populism isn't a good way to try to address something as complex as this type of issue. It is sort of like a beach ball bouncing down the beach that is caught up in the wind. That is the way this financial reform effort seems to be going forward. There is not a lot of thought behind it--just a lot of energy and talk, with ideas that may be politically attractive but in the end will probably do more harm than good.
Our goal should be three things: One, we should reform the systems. We need to put into place, to the fullest extent we can, changes in the way we regulate the financial structure so we avoid a future systemic event. It is pretty hard to project what the next systemic event will be, but we know what the last one was and we should be able to correct those problems. We can anticipate to some degree what the next events may be, and we should try to do that.
Second, we should recognize that we are in a competitive world, and that what we do in the United States to structure our financial system is going to determine whether the United States remains competitive with other nations that have sophisticated financial systems. It is very important that in doing this we not push offshore American jobs and American capital, because it becomes too onerous to manage capital and create jobs in the United States in the financial sector. We, in fact, should have as one of our goals--the first goal being addressing the system's risk--the desire to make America the best place in the world and the soundest place in the world to create capital and credit, so that the engine that drives our economy--remember, our economy is driven not by the government. I know the President says the more you grow government, the more prosperity you get, and he is certainly trying to prove it, but that is not what drives our economy. What drives our economy is entrepreneurs, people willing to take risks, the initiatives by Americans to create jobs. You cannot do that unless you have credit, and you cannot do it unless you can get capital.
One of the great geniuses of our system, which has made us more competitive than the rest of the world, is that we have always been a place where capital and credit have been readily available to responsible people and risk-takers. We need to keep that atmosphere. When we are finished with this process, we should have a regulatory regime that addresses the issue of systemic risk and at the same time says to the world: bring your capital here; this is the best place to make a loan and underwrite entrepreneurial spirit.
Third--and this is tied to the second--we need to remember this is about Main Street, about making sure that on Main Street in America people have the wherewithal to take that risk, and to get that job, and to buy that house, but that they have it in a context of a sound banking system, one that is a supportive and strong one, and a sound financial system--not one that has been forced to retract as a result of excessive regulations being put on it here in Washington.
If we approach this in a thoughtful way, a pragmatic and constructive way, rather than this populist fervor, where we say everybody on Wall Street is evil, and everybody in banking is evil, and everybody who makes loans is evil--which seems to be the philosophy or theme around here--if we take a more constructive and thoughtful way, we will actually end up with a much stronger and better nation. Often these periods of populist fervor--and we have had a lot of them--Huey Long, William Jennings Bryan--the list is long. Those folks usually end up cutting off their nose to spite their face. These ideas sound good and have a nice jingoistic ring to them, but in the end it undermines the ability to do the basic purpose, which is to make America more prosperous and create more opportunity for Americans and create more jobs.
This is not an issue that needs to be partisan. We have a lot of big, complex questions here to address. With the exception of one, as far as I can tell, none of them has any partisan flavor to them of any significance. First, of course, is what do you do about ``too big to fail.'' First, it should not exist. There should be no business in this country that is too big to fail. Basically, any company, any business that makes bad decisions should not have some implied guarantee that it is going to be bailed out by the Federal Government or the American taxpayer. If you make a bad decision and put your financial house at risk, your stockholders should pay the price; your secured bondholders should pay the price, not the American taxpayers. I think there is agreement on that.
On our side of the aisle we have some good ideas on how you end ``too big to fail.'' As a practical matter, they are better ideas than have been put out by anybody else so far. But they are not partisan ideas. They are just good, sound policies as to how you accomplish this. It could be done. The best ideas have been put forward in a bipartisan way, by Senator Warner from Virginia and Senator Corker from Tennessee. That is the first issue. We should be able to reach a comprehensive agreement on that.
Second, of course, is how do you manage risk and structure our regulatory regime so they can see that risk coming and take action. I think there is consensus on both sides of the aisle. Basically, you set up some sort of risk council, where you bring key regulators in and make sure there is communication, you try to end the stovepipes, and you try to cross-fertilize the information, and you don't allow arbitraging regulators so people don't go out and hire the cheapest or weakest regulator. There is not much difference of opinion on that. We can reach agreement on that.
Third, of course--which is huge here--is the question of derivatives, which are very complex. There is no simple answer to this question, on this issue, when you look at the detailed language. What is the purpose of derivatives? It is to basically give the market liquidity, to make sure you have the ability to put out the credit, to make sure that when some business in America needs to protect itself from a downside risk it sees coming at it, it has the capacity to buy that type of protection in the market, that type of insurance. They are extremely important instruments for the purpose of basically being the insurance and the oil that makes the American machinery of entrepreneurship and job creation work. Big companies and smaller companies need them, but especially big companies need these instruments. They need to have them readily available in a way and in a form that makes them usable.
I have been working with Senator Reed from Rhode Island for a number of months on almost all the technical issues of how to make the derivatives market stronger, better, and more sound, basically get more liquidity and transparency. On almost all issues we have a pretty good agreement and sense of where we can go. If we continue to work on it, hopefully, we can reach a complete agreement. We do have an issue on the question of mandated exchange treatment of derivatives, which I think can be resolved--I hope. It is not a partisan question. It is a question of how you do it best. That is the approach we should take.
Last is the issue of regulatory structure. Who should regulate what? That is a question of how best you line up the regulators to make sure there isn't regulatory arbitrage where people try to shop for the best regulator. I strongly believe the Fed needs to be a major player in the regulatory structure. The Fed has shown itself to have the depth and professionalism and the resources to regulate effectively. I hope we would end up with a structure that would recognize that fact. I think there is general agreement on structure that can be reached here. Again, I think we can reach an understanding.
The issue where we have significant differences is consumer protection and how you deal with that. On our side, most of the folks strongly believe you cannot separate consumer protection from safety and soundness. The regulators who have the responsibility for safety and soundness should have the responsibility for consumer protection, and it should be at the same level so there is no question that the consumer receives the same type of attention and support that the regulators put into trying to make sure the banks the consumers get their loans from are safe and sound. When you separate the two and set up a freestanding, autonomous consumer agency, you create significant issues on safety and soundness. The purpose is to make our financial system stronger, not weaker.
A separate independent consumer agency with potentially a political agenda or social justice agenda, which has nothing to do with safety or soundness, could easily undermine safety and soundness of the banking industry, especially the community banks--remember, these are the folks on Main Street--essentially creating an atmosphere where loans have to be made to people not based on safety and soundness but based on a social or political agenda of whoever runs the consumer agency that is independent and autonomous. It makes no sense. But, again, this is an issue that can be resolved.
There have been good ideas put forward by Senator Shelby. At one time, we almost had an understanding between Senator Shelby and Senator Reid on this issue. So this is no reason, in my opinion, to stop the progress on getting a bipartisan, comprehensive bill. The only thing that stands between us getting a bipartisan, comprehensive bill, stopping that progress, is this political issue; the fact that the administration has two paths it can take. It can take the path where we reach a comprehensive, thoughtful, constructive bill that basically does what we need to do in the area of protecting the financial structure of this country from systemic risk and make sure we have the most competitive financial markets in the world and protect Main Street and make Main Street viable, allow people to get loans on Main Street, it can pursue a bill such as that or it can pursue a political bill, carrying the banner of populism forward on the theory that somehow they win points by doing that.
They may win short-term political points. I don't think they do, actually. But in the long term, the effect that will have on our capacity to produce credit in this country for Americans who need credit in order to do things such as buy houses, send their kids to colleges, or basically just start a business and create jobs, it will be dramatically chilling, to be kind.
We will see a lot of the institutions which compete in this Nation having to go overseas. We will see a lot of companies that need to use derivatives in order to make their products salable and make sure they are not hit with unexpected cost increases or events which are out of their control unable to buy those instruments or obtain those instruments in the United States, so they will have to go overseas. We will see credit markets where consumers will end up paying higher interest rates because they are basically paying for people who are not paying back their loans at a much higher rate, so the good performers end up paying for the bad performers, which inevitably ends up costing the good performers much more in the way of their credit.
These are the results of a populist tact, and they are not good results, in my opinion. They are not constructive. They are so unnecessary because we really have within our grasp the capacity to reach an agreement, pretty much across the board, on all the major issues that affect the question of financial stability and to try to address what happened in late 2008 in a constructive way.
I am hopeful that will be the course that is taken, that we do have a consensus approach rather than a confrontational approach, and that we do have an approach which understands that our first obligation is not to get votes, not to win a political fight, not to have a jingoistic saying that resonates at election time but, rather, to make America stronger, more economically sound, more vibrant, and a place where when one wants to create a job, one has the capacity to get the credit to do it. That should be our goal. I hope we will pursue this regulatory reform effort in that manner.
Mr. President, I yield the floor and suggest the absence of a quorum.