NEW YORK (Reuters) - Sheila Bair, former chair of the Federal Deposit Insurance Corporation, on Thursday warned that the economic recovery since the 2008 financial crisis has been largely driven by ballooning consumer and corporate debt, fueled by low interest rates.
“It has been a very uneven recovery,” Bair told Yahoo Finance’s second annual “All Markets Summit” in New York. She said that although real wages have grown recently, the recovery has been overly focused on asset inflation.
Bair was chair of the FDIC from 2006 to 2011 and played a major role in the government’s response to the financial crisis of 2008.
U.S. corporate debt this summer reached a record $6.3 trillion, according to S&P Global, as accommodative monetary policy and cheap borrowing costs have encouraged companies to increase their leverage. At the same time, lower- and middle-income consumers are driving the majority of U.S. spending, largely supported by debt, not wage growth, Bair said.
Economic growth fueled by rising corporate profits is an unstable foundation for the American economy, Bair argued, when those profits are so reliant on debt. The Fed’s choice to lower interest rates to stimulate borrowing, she said, may not have been the right solution to a credit crisis.
Although the Fed should not slow its pace of rate hikes, Bair said, the central bank should not respond to the growth in wages by increasing the pace either. “We should be celebrating that real wages are finally growing,” she said.
In hindsight, Bair said she wished the United States had taken more “radical” action to deal with the underlying mortgage problem following the 2008 crisis and bailed out homeowners by forcing lenders to accept losses.
“We certainly did that for the banks; we should have done it for homeowners,” she said.
U.S. President Donald Trump in May signed into law a bill that eases post-crisis regulation on banks established by the 2010 Dodd-Frank Act. The legislation raised the threshold for banks to qualify as “systemically important” from $50 billion to $250 billion, loosening capital requirements and eliminating stress tests for many banks.
When Washington begins to roll back financial regulations, said Bair, that signals a coming downturn in the credit cycle.
Bair serves as an independent director on the boards of multiple companies, including Thomson Reuters Corp (TRI.TO), the parent of the Reuters news agency.
Reporting by Kate Duguid; Editing by Jennifer Ablan and Dan Grebler