FDIC chairman blames “short-termism” for nation’s financial crisis

Outgoing Federal Deposit Insurance Corporation Chairman Sheila Bair, making her final public appearance as head of the banking oversight agency, told a National Press Club luncheon on June 24 that pervasive short-term thinking led to the worst financial downturn since the Great Depression.

“‘Short-termism’ is a serious and growing problem for both business and government,” she said, noting the tendency of humans to discount potential problems that could occur far into the future.

While not specifically blaming one segment of American society more than another, she said the nation’s political process has institutionalized the concept of seeking gratification today and not worrying about potential consequences tomorrow.

It's a particular challenge to find leaders who will commit to policies that will pay off long after they have left office, she said.

Bair said policymakers failed to attack effectively the root cause of the recent financial crisis -- the enormous backlog of unaffordable mortgages that continue to undermine the recovery of the housing market and the economy. As a result, market discipline has been undermined, the restructuring of troubled financial companies inhibiited and substandard management perpetuated.

“That’s why the FDIC was so determined to press forward with a more robust and more effective resolution framework as the centerpiece of the Dodd-Frank financial reform legislation,” she said.

During the crisis, Bair established programs that provided temporary liquidity guarantees to help thaw credit markets and raise deposit insurance limits. The FDIC oversaw the sale of failing banks to solvent institutions and provided credit support for future losses from bad loans issued by those banks.

The Dodd-Frank law broadly expanded the agency’s power and authority, extending its resolution process to large, systematically important financial institutions once perceived to be too big to fail.

Companies subject to the law will now face greater oversight and must meet higher capital requirements. They also must maintain liquidation plans to guide how they would be wound down in a financial crisis.

Closing out a five-year term as head of FDIC, Bair urged the news media to go beyond the “sound-bite-of-the-day” to reveal the truth of an issue.

“You know better than anyone that getting a story factually correct requires going beyond sound bites to verify the accuracy of claims,” she said.