Question: What is your advice to the next administration?
Lewis: I think, look, the Obama administration is going to do something whether I tell them to do it or not, but the first thing they will almost certainly do is endorse a huge fiscal stimulus package because the Federal Reserve has done all that it can do. Interest rates are basically at zero. Consumer demand is plummeting. There’s going to be a need to boost demand and really the only way they can do it is government spending right now, so that’s the first thing. The second thing is don’t be afraid to completely refrain the bailout, completely rethink the approach to the bailout. The basic approach has been top-down so far. First step, it would be the Treasury to ask for $700 billion from the Congress and got it to buy troubled mortgage bonds, troubled mortgage-related assets. As soon as they got $700 billion, they basically said, “No, we’re not going to do this.” Instead, and it didn’t completely explain why but the truth is that they figured out in between that the problem was too big. It end up buying 700 mortgage bonds and it wouldn’t have made that much difference. So, they then said, we’re going to identify these troubled financial institutions that need support and we’re going to inject capital into them with the idea that they will then relend, you know, use that capital to make smart loans. Now, the chief qualification for getting that capital for a bank was to have made lots of stupid loans, so many stupid loans that you are in the verge of bankruptcy. So, this is one of those simple questions. If you want to give money to someone to make smart loans, who do you give it to? A bank that has been making smart loans or a bank that has been making stupid loans? All right. That’s a simple way of putting it but I’d like an answer to that question. The approach is let’s preserve the existing institutions and strengthen them so they may then strengthen America. This approach does not deal directly with the problem, and the problem is that in the first place, there has been a collapse in the real estate market, in a financial environment that was completely premised on rising real estate prices. That collapse is still going on. It’s getting worse. There are millions of homeowners right now who have mortgages in excess of the value of their homes and are quite likely to walk over the bank and say, “Here, it’s your house now.” What does that do? It creates the spiral downwards. It brings more real estate unto the market, causes real estate prices to plummet. The problem gets worse and worse, and no matter how much money you’re injecting into the top, you’re not dealing with the problem on the bottom. I think, I’m not smart enough to design the exact solution but the broad solution is to address those homeowners directly who were in that situation and keep them in their homes. You then, obviously, put in a lot of human misery and just dislocation. But you also strengthen the institutions at the top that are dependent on those people being credit-worthy of paying off their loans. So, I think there’s got to be a messy micro-solution and yet it is ignored and whatever, I think they are ignoring the top. I think they ought to say to the top, “We’re going to do our best to sort of solidify the foundations here by keeping people in their homes.” It is grotesquely unfair to give money to people who borrowed money they shouldn’t borrow, but we would rather do that than give it to Goldman Sachs who’s going to use it to pay their traders’ $10-million bonuses. But we’re going to say to the big institutions that we’re going to do our best to make this economy sound again and you guys sort out who exists and who doesn’t exist. You know, we can live with Citigroup being taken over or Citigroup not existing. So I’d say that. Finally, I’d say, financial regulation is a joke. It’s a joke for lots of reasons but it’s porous and too many different entities that do it. They did a horrible job of it, anyway. It needs to be consolidated and simplified. People need to understand it and do a single entity, and that entity has to have a couple of very important powers. One is the power to control the leverage that big financial institutions are able to run. Now that they do already to some extent but they did a very bad job with controlling the leverage in investment banks [right now]. And two, they need to oversee the ratings agencies because the market has proven incapable of being responsible in rating securities. So Moody’s and SMP, they need to answer to a regulator going forward. So that’s what I would say.