Ways We Can Fix This Giant Mess

Robert Rubin
Chair of Executive Committee of the Board of Citigroup and Former Clinton Administration Treasury Secretary

Although I and others saw financial excesses developing, hardly anyone anticipated the full combination of factors that has now led us into uncharted waters. You had the underweighting of risk, low interest rates, the faulty AAA ratings of some subprime-mortgage-backed securities, extended good times—which led to a loss of caution—and "financial engineering," the creation of complex instruments that even many sophisticated investors didn't fully understand. It's unclear how serious the resulting economic strains will be, but I think the risks are high enough that we should be highly proactive.

On the whole, the Fed has done a good job. The stimulus package was the right thing to do. But we should also see what further measures we might take in the mortgage area. There is a risk of rapid declines in housing prices, more large losses on mortgages for financial institutions and widespread foreclosures that would damage neighborhoods. There are a lot of proposals around for the government to write down existing mortgages for borrowers, with the original lenders taking some loss. If the Federal Housing Administration charged realistic insurance premiums for guaranteeing new loans, you should be able to do something that doesn't involve a loss of public money. The harder question is whether you should use some public money to aid borrowers and lenders who made poor decisions. I understand the moral hazard problems of bailing them out, but the pros and cons of these proposals should be studied.

We should also take a look at financial-engineering products like collateralized debt obligations and collateralized loan obligations. These securities offer investors a wider menu of choices; but they may also encourage excessive risk-taking. We should consider higher capital requirements for banks and investment banks, plus higher margin requirements for other investors. Putting up more of their own money would make people focus on the risks. Of course, if we did it and the rest of the world didn't, this activity might move offshore.

Carly Fiorina
Chairperson of Republican victory '08, Chair/CEO of Carly Fiorina Enterprises and former CEO of Hewlett-Packard

We have two problems. In the short term, an economy that is no longer growing robustly, as it needs to, and in the long term, a challenge to the competitiveness of our nation. We have, of course, a housing bubble, which was created by the same kinds of factors that created the technology bubble. In both cases, the bursting of the bubble hurt some investors and speculators—and for them I have no sympathy—but it also hurt some real businesses, job creation and ordinary American workers and families.

We ought to do what we can to help those families and small businesses—which are the engine of growth in this country—and let the chips fall where they may for the investors and speculators. All of the things that have been done to date—the Federal Reserve stepping in to put money into the system, for instance—have been positive. I personally would go one step further, and I'll take a page from the technology industry. When the technology industry puts a product out that they believe might harm their customer, the company bears the burden of recalling that product. I think the mortgage companies and the banks should step to the plate and say, "We have put products out there that have harmed our customers, either because we didn't explain them well, or because we pushed them into homes or mortgages that they couldn't afford." And those lenders need to sit down with their creditworthy but cash-strapped customers and say, "How do we help you?"