‘It’s Going To Be Bumpy’

Would there be a reasonable proposal that executives receiving tarp money should be capped at what the secretary of the treasury makes?
No, I don't think our government should set caps on compensation. We need to make sure we put in place some broad constraints on the incentives that compensation systems create. You had a crisis magnified by the fact that people were paid to take a huge amount of short-term risk at the expense of their firm and the system as a whole.

Would you anticipate more populist politics coming?
You see a completely understandable and, in many ways, justifiable level of anger and frustration. Financial crises are indiscriminate in the damage they cause. In some ways, you could say the people who are most responsible suffer the most damage because of the choices made by the less responsible, and that produces a huge sense of unfairness.

What is this crisis most like in your view? You're a student of these things. Is this 1907 plus? Is it 1933 minus?
It has most attributes of any crisis. You go from excessive confidence about the future to a period where pessimism generates a contraction of activity. This one is more damaging than anything we've been through, really, in two generations. It's also true this is happening globally.

Do you think the consumer credit-card debt is the next bubble?
I wouldn't think of it that way. Americans are going to be reducing how much they borrow, improving their balance sheets, saving more. It might make recovery slower, but that's a healthy process of adjustment for us to go through.

The regulations on derivatives you announced last week—if they had been in place, would we still be in this mess today?
They would have helped, but they would not have been decisive. Again, like in any financial crisis, this was a crisis where people borrowed too much, and they took on too much risk—in simple ways, not in fancy ways.

How do you manage incentives to make sure you aren't driving folks right back—to a different part of the cliff but looking over the same abyss?
Presidents for a long time were submitting to their shareholders for their approval. That kind of disclosure can help a lot.

© 2009