Gregg: The Case Against Monetary Populism

The lame duck session of Congress that began on Monday will be the last Capitol Hill performance of one long-time deficit hawk, said Senator Judd Gregg of New Hampshire.


There will be plenty for Gregg to tackle in his last few weeks in the Senate: the battle over extending or ending the Bush tax cuts, a fight over earmarks, and attempts to reign in the Federal Reserve. We hit on all of this and more in our conversation.

LL: Do you think its time the Federal Reserve should clarify its mandate?

JG: I happen to agree with Senator Corker's idea theoretically. But the problem is if you open the door to reorganizing, the Fed's responsibility, you are stepping down a slippery slope considering how the Congress is made up now. There is a large populist movement in the Congress which wants to basically have the Congress take control over monetary —which would be disastrous—through controlling and auditing the open market activities and the Fed.

This was a fight we had in the Financial Reform Bill, it is of course the position of Congressman Ron Paul who wants to eliminate the Fed and he is potentially going to be the Chairman of the subcommittee that has jurisdiction over the Fed. So I am concerned if we get into the issue of redefining the Fed's mandate, we will open the door to people who want to dramatically undermine the independence of the Fed. And I genuinely believe. That it is absolutely critical you do not allow political institutions like the Congress to influence money supply.

LL: Exactly. Many were surprised last week when Geithner and President Obama formally made comments backing QE2 (Quantitative Easing). What did you think of that public display of formal support?

JG: The Fed's decision to move into QE2 I think opened the door to second guessing from the political community because, to a large degree, this was a very political act. And it appears to me the statements were made not so much for the purposes to stabilize the currency, which is in my opinion their number one priority, and eliminating inflation, but primarily for stimulating the economy and addressing the second part of their responsibility, under the terms of their charter, which is for employment. It really does—regrettably in my opinion—put them in the position of much more aggressive and probably legitimate criticism from elected officials or support for that matter, when they get into the business of printing money in a very open way like they are in the QE2.

LL: But there are doubters when it come to QE2. The banks are sitting on a trillion dollars. Do you think QE2 will entice them to lend even though QE1 didn't?

JG: The bond market is pretty doubtful from Tuesday's actions.

LL: There is some concern this flood of cash is devaluing the dollar even more and the dollar might lose its position as the world's reserve currency in the next five years. Do you think that's possible?

Senator Judd Gregg
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Senator Judd Gregg

JG: The primary reason why the dollar will not lose its position as the primary position in the world's reserve is there is nothing to replace it.

The Euro is clearly event at more risk than the dollar especially when you've got Ireland, and potentially Spain, Italy, Portugal at risk of needing support.

You've got the Chinese obviously pegging their currency to the dollar, so clearly their currency is not an option. So it's possible that over time major reserve countries like China and Russia will insist that some other basket of goods be used as a way to set a currency reserves, but right now, other than gold there truly is no currency reserve for anybody in this world except for the dollar.

LL: You mention one of the mandates of the Fed is jobs. When you look at QE2, low interest rates are not going to be a huge jobs generator. What needs to get done?

JG: The way you generate jobs is when you give the markets confidence in a number of areas.

First, in the short term, businesses need confidence that there won't be tax increases, which stifle productivity and disincentivize people from going and taking risk.

Second, in the short term, you don't over regulate the markets, especially small business, and you allow people who are creative and who want to take risk to go out and do so without having to pay exuberant costs.

And thirdly, over the long-term, and this is equally important to the two short term things, is to maintain an environment for investment.

You have to put in place a long-term program that gets the deficits and debt of this country under control. That way, Americans and the markets can believe in the program and have confidence that there will be stability in this nation.

The currency will then be stable and the nation's finances will be stable and affordable over the long run.

LL: Your message of stop spending has be loud and true for years. You are on the President's bipartisan deficit commission.

My sources inside the committee are telling me the members are far apart in coming into an agreement. Are you confident the commission will all agree on something come December first?

JG: The chairman's mark was a serious effort. The fact that it received so many attacks on the right and the left, and primarily on the left for spending cuts, reflects how difficult it is to do what we need to do.

The chairman's mark doesn't get us to balance, it just gets us to debt levels which would be deemed historically inappropriate—60 percent of GDP. We're headed towards 100 percent and then that curves down to 60 percent over the next ten to fifteen years. This just shows how difficult this effort is going to be, both politically and substantively difficult.

The bottom line is this—the government has grown from 20 percent of GDP to 24 percent and its headed toward 28 percent and we can't afford that. We are going to have to make some tough calls to straighten this out. Now is there going to be an agreement coming out of this commission? I really don't know.

You listen to Speaker Pelosi and she pans it right out of the box because it cuts too much spending. Some of the members of the commission have been really rather negative about their willingness to make these difficult decisions on cuts on the spending side, so I do not know if we can get the fourteen votes. And even if we do get the fourteen votes, if we can carry this across the finish line both in the Senate and in the House, the jury's out.

It's an effort that has to be made, and I tell you, if we don't succeed in doing something really aggressive and significant, the commission doesn't succeed. I do think the markets are going to react in a very negative way because they are going to say this was sort of our last best hope and it failed.

LL: Let's talk about social security. It's a black hole and needs to be addressed. What should be done here?

JG: Social Security is a very solvable problem. It just takes political courage to do it. There are only four or five moving parts and we know what they all are. They all have to be adjusted at some level, and you can make Social Security solvent for the next 75 years. The proposal from the (fiscal) commission was very responsible, although I disagree with parts of it, especially the tax part, I think its on track to reaching a consensus.

The bigger issue is health care. Of the $88 trillion in unfunded liability this country has today, which is driving our debt problem, probably $70, $75 trillion of that is health care driven.

We need to get back into the issue of health care and be honest with the fact that we can not afford the system we have and we certainly can not afford the system that was recently passed.

There are ways which are much more effective in delivering health care and unfortunately, none of those initiatives were under taken in this bill. It has added $2.5 trillion to the size of the government, but didn't really do the substantive reform that needed to be done in a lot of areas. Especially in tort reform.

LL: Some say the President needs to have more outsiders in his inner circle and to move center. Who would you like to see take Summers' job?

JG: Ken Conrad.

LL: Would he be considered an outsider?

JG: No, I don't think so but he understands the problems and he would be good at it.

LL: Have you recently spoken with the President. Do you think he is capable of moving center? A lot of my contacts who know the President say it is not in his makeup to move center. What do you think?

JG: I don't know, I have not spoken to him. I think there is very fertile ground to reach agreement with Republicans on very big public policy issues thta we need to address: energy, immigration, tax reform, education. If he wants to sit down with Republicans, I think an agreement could be reached on many of these issues.

LL: Obama tapped Elizabeth Warren to form the the Consumer Finance Protection Agency.

In an earlier interview, Congressman Scott Garrett told me he would like to see the CFPB done away with. Do you think Warren should be made the permanent director of the CFPB?

JG: No. The Consumer Protection board is a disastrous idea. It should be repealed. It creates this independent agency and decouples consumer protection from safety and soundness so you'll end up with major agencies competing over the issue of how do you do banking in this country and regulating small banks and middle size banks. Large banks won't know what to do because of these two competing agencies.

The Consumer Protection board does not have safety and soundness as their charge, they basically undertake whatever social justice cause of the day in the area of "consumer protection." In my opinion, this agency is not accountable to the Congress and it has a stream of revenue which is not overseen by the Congress.

So it's totally idependent of the Congress. It has a Chairman whose appointed for five years without any review, I would describe the head of this agency as the most powerful person to come to Washington since J. Edgar Hoover! And that's the facts. And unfortunately, you are going to quickly set up a confrontation between that agency I believe and things like the OCC, and the FDIC who do have the responsibility for safety and soundness.

LL: Looking back at the regulations that been passed on financial reform, how would you grade the bill since Fannie and Freddie were never a part of it?

JG: There is a variety of grades. The TARP did what it was suppose to do. It did well and the taxpayers are going to get their money back. The financial system was made solvent and stabilized.

The failure to pick up Fannie and Freddie and address that, and real estate underwriting has been a huge mistake I think and will harm us again undoubtedly. The recent regulatory reform bill I believe will end up contracting credit on main street significantly for a lot of reasons, and making it much more difficult for the people who are the job creators in our society to get credit.

LL: The put-back tsunami is just the beginning and we have foreclosures rising at an alarming rate, What do you think needs to get done in terms of helping the mortgage industry get through this?

JG: Go back to a system we had in the mid-nineties where underwriting loans gets back to the traditional responsibility that you don't lend 100 percent or 105 percent. You lend 80 percent or 85 percent. There is recourse. And to the extent people can't cover the entire 100 percent with their income, the 15 or 20 percent that's not lent has to be insured over.

That way, the lender has actual skin in the game and you also don't decouple the underwriting from the people who were responsible for holding the loans. That way you don't end up with people who are just interested in getting the servicing and sales fee doing the lending because you don't get good underwriting.

LL: Speaking of decoupling, what do you think about the Bush Tax cuts?

JG: I believe they will all be extended and they should all be extended. Whether it will be permanent or temporary, I don't know. They should not be decoupled.

LL: How would you like to see the U.S. tax system overhauled?

JG: There is great advantage of having permanent tax cut policy in place. But, I also think we should look at a Reagan/Bradley type of tax initiative, which Ron Wyden and I put on the table, which fundamentally re-writes the tax laws eliminating deductions and exemptions, reducing the rates for everybody—bringing the corporate rates down—making the law more simpler, fairer, keeping them progressive, but recognizing that they are counter-productive now because they're so complex and inefficient.


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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."