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Sheila Bair's Bank Shot - Essay Example

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Sheila Bair's Bank Shot

She sounded the warning bell on an impending crisis, she lead FDIC in managing troubled financial institutions and provided one of the most significant arguments in the policy reform at the aftermath. From Nocera’s perspective, Bair’s position on FDIC’s role on regulation and several policies in the financial industry has been effective and correct, but often left unheeded and unappreciated. Two of the most significant of these is: 1) her insistence on greater regulation long before policymakers and experts started to preach it; and, 2) her position that banks in trouble are not necessarily needed to be bailed out. The article, hence, underscore the importance of listening to this lady in the context of averting possible reoccurrence of similar crisis in the future.
Charles Kindleberger’s theory and analyses of financial crises are descriptive and it provided the general basis for Nocera’s agreement with Bair’s position on regulation and the 2008 financial crisis. Kindleberger’s model describes an exogenous shock to the system also called as displacement. The causes of such displacement are varied and could provide diverse degree of crisis severity. The tendency to speculate as well as the inevitable complacency that comes with a stable and growing financial economy on the part of regulatory bodies are crucial elements in aggravating such displacement. These run parallel with actions taken by Bair before the 2008 crisis struck. She has started warning about the explosive growth of subprime mortgages, demonstrating traces of the principles behind the Kindleberger model on financial crises. One of the most important contributions by Bair, which could enhance the Kindleberger’s model, is in the area of crisis control. One of her most forceful positions was that banks do not necessarily need to be bailed out in order to stop the onslaught of the financial crisis. This is contained in her position on the larger issue about the too-big-to-fail financial institutions. For instance, Bair vehemently opposed the federal government’s rescue of Bearn Stearns. The article’s focus on FDIC inevitably tied it with the theme of lender-of-last resort. The organization is mandated to rescue and manage failed financial institutions and regulate banks’ soundness, among other functions by virtue of its mandate to safeguard the interests of depositors and of consumers. With Bair at the helm of FDIC during the financial crisis of 2008, these functions had been highlighted and that the manner by which the organization is and should function as a lender of last resort has been clearly defined. Bair’s traditionalist position has played a significant part, particularly in reinforcing FDIC’s power and influence today, which in the early years of her tenure as chairperson, appeared to have been largely symbolic, with weak regulatory power, clipped by the federal government, with low budget allocation. In my opinion, Bair’s position on the financial crisis is sound, with particular emphasis on the crisis management and the reforms that should take place afterwards. For example, if a huge financial institution fails, the government could further aggravate the economic landscape by infusing more funds that come from taxpayer’s money. The too-big-to-fail policy does not make sense in the long-term. First, failing financial institutions mean bad management, structure and practices. Rescuing them is more painful than having the market start over with another better managed institution rather than dumping money and implementing reforms that may never really be effective considering the sheer size of the institution. In addition, it seems to be unfair to ...Show more

Summary

Sheila Bair’s Bank Shot as written by Joe Nocera is an exit interview on Federal Deposit Insurance Corporation’s (FDIC) chairperson Sheila Bair published a day after her term expired. The interview basically revolved around the 2008 financial crisis, highlighting the important role played by Bair before, during and after the event. …
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Sheila Bairs Bank Shot essay example
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