Mark Hamrick: From Bankrate.com this is Special Report: Five Years After The Financial Crisis. Hello, I'm Mark Hamrick, Washington bureau chief for Bankrate. Five years has now passed since the collapse of the Wall Street investment bank, Lehman Brothers. That failure cascaded into a larger crisis, which threatened the nation's financial system. Indeed, the responses by the federal government, including regulators, are still reverberating. Interest rates remain at record lows. For many Americans credit is still hard to come by and unemployment remains persistently high. In the minutes ahead we'll speak with expert guests about the lessons that have been learned and the work that still lies ahead. Bankrate's own personal finance expert, Greg McBride, checks in on the unintended consequences of reform and what we can expect in the months and years ahead, all of that and more on "Special Report."
Our first guest is a surprisingly frank financial regulator. Commissioner Bart Chilton serves on the U.S. Commodity Futures Trading Commission. He is author of the book, "Ponzimonium: How Scam Artists are Ripping Off America."A former member of Congress, he was nominated by President George W. Bush, and renominated to the CFTC by President Barack Obama. One gets a sense of a nonpartisan approach in Chilton's work, something rare in government as we know. He gave a remarkable speech recently likening the financial markets to the Wild West. As I began, I asked Bart Chilton what he thinks about the anniversary of the financial crisis and what is his single biggest concern.
Bart Chilton: Well thanks for the question and just real quick on the partisan part of your question, for a long time financial markets were not partisan. They weren't very political. It's not like financial markets are abortion or gun control. But as a result of the financial crisis in 2008 it has become an issue of more partisanship. Basically there's a debate out there between the free marketeers -- those who want totally free markets -- and then folks on the other side, the very progressive side who want overzealous regulation. And where I like to think of myself Mark, and that is sort of in the middle. What do we need to do that won't hinder business but adds appropriate transparency so we don't find ourselves in another debacle in the future?
To get to your question about what really needs to be done and what concerns me, they're sort of the same thing. It concerns me that we've lost sight of why we are involved in this epic endeavor to regulate markets, some of which had never ever been regulated before. That's what has got us into the problems of 2008. Markets were not regulated at all. So, I'm worried that people will sort of over time if the economy improves, that they'll go back to this totally free market mantra and try to say, "What do we need the stinking government for messing around in our business? Just let us go out and compete." And, that's a very dangerous and slippery slope to get up on because we need to remember those lessons. Sure we can't develop our policies only looking backward. We need to go forward. But we need to be cognizant of what happened and why it happened as we put these policies and procedures into place for the future.
Mark Hamrick: Is there a biggest sort of looming black hole out there right now that you see that as, let's say, the area that needs the most attention? I realize it's very complicated and there's a lot of different problems.
Bart Chilton: Yeah, there are hundreds of rules. So, it's difficult to put your finger on one or two, although I will. But you know people can take their pick. In general though, since 2010, which is when the Regulatory Reform Bill passed, the Dodd-Frank law, here's only about 37 percent of those rules that have actually been implemented. The law gets passed, but then the regulators -- people like me and the others at the FDIC and the FCC and the Federal Reserve, they actually have to put sort of the meat on the bone for how those laws are implemented through what we call the rule-writing process. Only 37 (percent), 38 percent of those rules have been completed. Our agency has done a lot better actually. We've got around 70 percent. That's not a feather in our cap. That's only relative to what others have done.
But with regard to what needs to be done that's sort of a black hole, as you asked about. One, the Volcker rule -- that is changing fundamentally how banks operate in this economy. Back in 1999 Congress taking a bow from the free marketeers changed really a depression era of laws that curtailed what banks could do. They couldn't invest for themselves. They couldn't go into the market for themselves, for their own book, as it were. They were doing the bidding up until 1999 for their customers only. That's created a big, huge problem where sometimes they actually even bet against -- the banks -- their own customers. The second issue is with regard to manipulation of markets and excessive speculation. That's something that's in our bailiwick and that's with the imposition of position limits to control the amount of concentration any one trader may have, which can contort markets and impact the prices that consumers pay for just about everything that they purchase.
Mark Hamrick: You talk a lot in your speech about a decision by the Federal Reserve to allow banks to own unrelated businesses and assets, such as businesses related to commodities and how that has unintended consequences, not the least of which might be affecting the price of these commodities. How big of a problem is that?
Bart Chilton: I think it's a huge, honking problem, Mark. I mean, first of all, we don't even know what the banks own. This is also one of these free marketeer approaches that the Federal Reserve shifted their policy on and they now approve what banks can own outside of what they invest upon or what they're supposed to be doing just by being banks. But finding out what those things are that the banks own has been a big black box. Even me, as a regulator, you'd think I'd be able to get that information but it's been very difficult. Finally some of that is seeping in. But one of the things I've not talked about before and I've just found out in the last several days -- I'll be speaking about it on the 13th in some remarks. But, there's an exemption in the law for a couple of the banks that says they don't even have to get approval from the Federal Reserve.
So, there are problems out there that need to be addressed by Congress, Sen. Sherrod Brown and Sen. (David) Vitter are working on this issue of ownership by the banks, but I think we need to take a step back and realize that the same people who trade in these markets shouldn't probably be owning the actual commodities that they can then use to impact the price of markets. There are obvious conflicts of interest. I'm not suggesting the law has been violated but we don't know enough … we don't know at this point, Mark. So, it's very problematic and I think Congress needs to take a good, hard look at it. If it was all based upon me, I don't want banks owning the delivery mechanism, the warehousing of anything whether or not it's soybeans or whether or not it's a power plant or whether or not it's a warehouse holding precious metals. Just get back to banking for gosh sakes. Focus on that. You've been very good at it -- the banks have been very good at it over the years. Let's have them get back to being banks.
Mark Hamrick: So you talked at the outset about the lack of ability of essentially government staffers to come up with sufficient rules in orderly fashion as mandated by the likes of Dodd-Frank and perhaps other laws. Is that a question of resources as well as, let's say, obfuscation on the part of industry, which obviously likes to try to step in and delay implementation?
Bart Chilton: It's both, Mark. It's sort of a muddled mess. Definitely regulators are under-resourced and you know people don't like to hear about how the government needs more money and I understand that and I'm with them most of the time. In our case, we're regulating, as I noted earlier, markets that totally hadn't been regulated before. We're talking about hundreds of trillions of dollars and Congress has not saw fit to give us any resources to do that. So they say on the one hand, here's a new law, here's hundreds of trillions of dollars that you need to regulate, but then there's no new staff or new computer systems to do that. Now, part of the reason that's happened is because some of the lawmakers on Capitol Hill, while they couldn't stop the Regulatory Reform Law from being passed, they can control the purse strings. They've been able to not allow us to have the funds. Therefore, it has slowed implementation.
With regard to people that are actually being regulated, the lobbyists, etc. and there's lots of them. There's 10 financial service sector lobbyists for every single member of Congress. So, they descend upon regulators, too. The process has slowed down from some of that lobbying. Not all of it is bad. We're learning a lot. We've put out proposals and rules that we've discovered through these lobbyists who have come in and explained things to us that maybe we didn't get them correct. Maybe we need to tweak them a little bit. So, I don't have any problem with that. As a matter of fact, I'm thankful for it.
On the other hand, there are some that are simply trying to run out the clock on regulation and try to procrastinate and go and do what I think rather, I mentioned earlier in one of my responses, is sort of wait until the public isn't so concerned. Wait till the economy improves. Wait until people forget about the calamity of 2008. Then maybe they'll get a lighter touch with the rules and regulations. For the people that have that modus operandi, I have no sympathy whatsoever, and trying to sniff out those cats is something I do pretty much every single day.
Mark Hamrick: Well, we appreciate you helping to pull back the curtain on this entire process commissioner and we really appreciate your time. Thanks so much.
Bart Chilton: Thank you for the coverage of this stuff, Mark. Take care.
Mark Hamrick: Commissioner Bart Chilton with the Commodity Futures Trading Commission. He spoke with us from Washington.
Mark Hamrick: Next up, a look inside the banking industry. After all, it was the risk of collapse of the banking system that took the nation to the very brink during the crisis. Our guest Bert Ely, a well-known banking consultant. I asked Bert with so many reforms put in place based on some of the lessons supposedly learned from the crisis, whether he thinks we're really better off now.
Bert Ely: Well, the financial system is certainly stronger than it was five years ago. While the economy has gone through a very severe recession, the economy has continued to improve slowly. So overall, we're better off. But on the other hand, we still have a lot of unemployment in the economy and further improvement is needed there. And, while the financial system is stronger, I don't believe that a lot of the so-called reforms put in place will protect us from another financial crisis. It's just a matter of when the next one will occur and what the specific causes will be.
Mark Hamrick: Well sure. It seems as if very often after we experience a financial crisis the response is really one that's aimed at protecting us from a crisis just like the last one. And, a lot of people do complain about the complexity of some of these reforms, including the major law that was passed -- Dodd-Frank -- in the sense that it takes a long time to get rules in place and sometimes even then, the rules that are enacted aren't easily understood, right?
Bert Ely: Well, not only are they not easily understood but they add a lot of expense to the financial system. And they can have their own perverse consequences, which usually are not fully understood until after the next crisis.
Mark Hamrick: Could you give us an example of a negative consequence perhaps affecting consumers from a financial reform since the crisis?
Bert Ely: Well, I would say first of all at least in recent years it's been much tougher for people, particularly those with less-than-perfect credit records, to obtain loans and specifically mortgage loans. The mortgage regulations being put in place at this time are going to continue to make it difficult for people to get mortgages. Yet, we may still see the emergence of a new housing bubble that will cause its own problems some years in the future.
Mark Hamrick: How healthy are the banks now?
Bert Ely: The banking industry is really quite healthy. There're still some weak banks out there, but one indication of the growing strength of the banking system is the fact the number of bank failures has dropped significantly over the last year and I think that will continue to be the case. So the banks are healthier but their expenses are still much higher because of all the new regulation and credit for many borrowers is still pretty tight.
Mark Hamrick: Some people worry that banks are allowed to essentially do too much with depositors' money, whether it's engaging in certain kinds of trades that by some measure got us in trouble in the first place. How much of that has been stopped?
Bert Ely: Well, first of all it's important to realize that a lot of the trading and the exotic investment activity is primarily carried out by the largest banks. Community banks by and large aren't big enough to engage in those activities and don't. They of course can blow themselves up just through basic bad lending. The concern that I have is that in these efforts to crank down the supposedly risky activities of the highly regulated banks, that financial engineers will find new ways outside of the highly regulated institutions to conduct a lot of these same transactions. It's what we call shadow banking. While shadow banking shrank in the aftermath of the last crisis, we're starting to see signs that it's beginning to reemerge in new forms. And, to the extent that … at this point in time as we do have the next financial crisis, I believe that its roots will be outside of the highly regulated banks and in the shadow financial system.
Mark Hamrick: Finally Bert, the Fed as we know is trying to wind down its program of asset purchases and some people fear that alone could set off another crisis. Certainly just the discussion of it has led to increased volatility in the financial markets. What do you think the impact of that is going to be?
Bert Ely: Well, first of all it has to happen at some point in time, that the Fed will wind things down by basically shrinking its own balance sheet and bringing an end to what is known as quantitative easing. One aspect of that will be higher interest rates and more volatile interest rates. I think that that is inevitable. In other words, we're going to return back to a more normal condition in the financial markets. It's inevitable. It needs to happen. The problem is, what kind of distortions and volatilities will take place while we're getting back to a more normal circumstance. And, we're in uncharted waters. You know, there are lots of understandable concerns about it, but it's a process that the financial system and the economy as a whole need to go through and it's not going to happen overnight.
Mark Hamrick: Bert Ely, thanks so much for your time.
Bert Ely: Glad to be of help.
Mark Hamrick: Banking consultant Bert Ely, he spoke with us from Camden, Maine.
Mark Hamrick: For our final segment, we want to take these complicated subjects and talk about what they mean to our daily financial lives. And for that, we turn as we often do, to the man in the know, Bankrate's Senior Financial Analyst Greg McBride, who is a chartered financial analyst.
Greg McBride: For individuals it's the lasting risk aversion that they have. The unwillingness to embrace the volatility in the equity markets I think has the potential to leave millions of people well short of where they need to be for their long-term financial goals. In July, Bankrate found that only 14 percent of Americans think the stock market is the best investment over the next 10 years. And in each of the last two years we found 76 percent of Americans say they're not more inclined to invest in the stock market despite record-low interest rates.
Mark Hamrick: We know that there's been a large regulatory response, whether it's the passage of law, etc. Is there something that stands out there in your mind that actually helps people?
Greg McBride: There are a couple that really quickly come to mind. The opt-in requirement for overdraft when using a debit card I think is a good one. After all, nobody is going to willingly incur a $35 overdraft just so they can grab a soda and a bag of chips at lunch. So that's a good one. You know, another one that I think was beneficial to consumers was the requirement in the CARD Act that payments on your credit card be applied to the highest rate balance first. This alleviates the possibility where you're actually paying down the low-rate balance and racking up a higher rate balance through additional purchases. I think that's a win for consumers also.
Mark Hamrick: And then what about the unintended consequences of reform that haven't worked out so well?
Greg McBride: There are plenty of those. In the Dodd-Frank Act and in particularly the Durbin Amendment, this cut in half the revenue that card issuers get when consumers swipe the debit card. Well, that's led to a plunge in the availability of free checking accounts, which has been basically cut in half over the last few years. We're seeing higher and more bank fees. We've seen the disappearance of debit reward programs. In terms of the CARD Act, the real game-changer there was the provision that card issuers could only raise the rate on an existing balance once the cardholder went 60 days delinquent. Well, that's like telling an auto insurance company they can only raise the premiums after the car gets totaled. If that's the case, we'd all pay higher auto insurance premiums immediately. That's really what we've seen in the credit card arena. Consumers that have less-than-perfect credit are finding lower credit limits and higher interest rates. It's just tougher for them to get credit.
Mark Hamrick: Truly a mixed bag. Greg McBride, always a pleasure. Thanks for taking time to speak with us today.
Greg McBride: Thank you, Mark.
Mark Hamrick: Bankrate.com Senior Financial Analyst Greg McBride. He was speaking from our office in North Palm Beach, Fla.
Mark Hamrick: You've been listening to Special Report from Bankrate. Our editor-in-chief is Julie Bandy; managing editor is Katie Doyle; senior editor is Steve Pounds, and thanks to Producer Lucas Wysocki for his work in the studio. For more on this and other issues relating to personal finance, visit Bankrate.com and you can follow us at Twitter @Bankrate. Also, catch our weekly podcast, "Your Money This Week," just like Special Report also available in iTunes. That's it for now. I'm Mark Hamrick, thanks for listening.