WASHINGTON — Say what you want for Newt Gingrich, the Georgia Republican still knows how to make a stir.
Famous for hs battles with President Clinton in the 1990s, Gingrich has become just as notorious for the rocky start to his presidential campaign. In an interview at his Washington office, Gingrich showed he hasn't lost his touch for a barbed one-liner as he attacked the Dodd-Frank law from every angle. Following is an edited transcript.
Q: Is there anything about the Dodd-Frank law that you liked?
Gingrich: I think there are maybe things worth capturing in a new bill. There are other things — such as dealing with Fannie Mae and Freddie Mac — that should have been in the original bill. I think the direction should be different.
Dodd-Frank essentially socializes risk by putting the bureaucracy in charge, which in many ways is the end of free-market capitalism.
Q: How does it put the bureaucracy in charge?
Gingrich: Well, I'll give you an example. I was just talking last night with someone who represents an international bank, which is trying to get permission to do something and basically being told by the Federal Reserve, that 'We are not going to take the risk of approving this because if it ever goes bad, we would be the ones that allowed it to go bad. Therefore, we aren't going to give you permission to do it.'
If you end up with bureaucrats in the government what is a reasonable risk based on their potential embarrassment, you are not going to get any kind of entrepreneurial capitalism. What it is going to do is it's going to drive entrepreneurial capitalism out of the United States.
I talked to a couple people at the Texas Community Bankers, who said they believe that the regulatory burden for small banks will kill one-third of all the independent banks in Texas over the next decade. I talked to two different small banks in Iowa, both of whom said the regulatory burden will probably drive them out of business before this is over. I talked with a bank board member who was the CEO of a manufacturing company in New Hampshire, who said that his judgment was that this bill had killed lending to small business and that this bill would kill small banks.
We had a crisis in 2008 because there were banks that were too big to fail. They are now bigger. How could the United States adopt a reaction to banks being too big to fail by making them bigger? They have a larger market share today, which is the opposite of rational behavior. You would ideally like to have a policy that maximized the growth of small banks that were small enough that they could fail without risk to the general economy.
Capitalism has to rely on the ability to fail. If you had said to the Wright Brothers — this is the whole problem with NASA — if you said to the Wright Brothers you can only try to fly once you are sure you'll fly, you would never have had flight.
You have another factor just be to be aware of. The game is rigged against small banks at two levels. One is that the aggregated marginal advantage of borrowing money that is set up here by the Fed is profitable if you are a very, very large bank. It's not nearly as profitable if you are a small bank. You have that disadvantage. The regulatory burden can be handled by a large multinational bank as part of their general management process. It kills a small bank.
Q: When you talk about repealing Dodd-Frank, President Obama has said the creation of the Consumer Financial Protection Bureau is a landmark part of the law. If you repealed the law, would you replace the CFPB?
Gingrich: I'm not sure. I don't think Washington bureaucrats micromanaging agencies is a very good idea. I understand that the president believes in giant government and would like to socialize everything in the bureaucracy in Washington.
But what I would propose is we go back and look at the kind of reforms we need. You will notice that he's had very great controversy over the kind of people he wants to appoint to that bureau. I think that's because they'd be so interventionist.
The question you have to ask yourself is: why do you trust one person picked by politicians to supervise entire industries? How much are you centralizing power in the bureaucracy? What does that do to our job creating capacity in the world market?
Q: But during the financial crisis, many say the government didn't do enough to stop the proliferation of products that were not only bad for the consumer, but ultimately for the banks themselves when they blew up. That's the kind of thing a CFPB is designed to put a stop to. Isn't that a good idea?
Gingrich: Let me give you a simple example. By any plausible standard, [Bernie] Madoff was a sufficiently grotesque example of total fraud that people kept telling the SEC was going on. Now, the SEC paid no attention until it blew up.
So now you are going to have a new agency. You already have a whole series of agencies that if they had done their job, it would have worked. We are now going to add more layers of agencies on top of the agencies we already have with the premise that the next one is going to be smarter and better. The answer to most of this stuff is transparency. I am for pretty aggressive pursuit of people who lied.
I'm amazed that the three ratings agencies have not been more thoroughly investigated. How can they claim products were AAA when in fact they had lots of material in the products that were not AAA? The level of misinformation that the ratings agencies created was a significant part of what happened in 2007 and 2008.
Q: Doesn't that apply to some banks too? Goldman Sachs was taking bets against some of the products they were selling to customers. Should they be pursued as well?
Gingrich: First of all, the people who lost money should be able to sue Goldman Sachs over it. That clearly is a conflict of interest in which one side of Goldman Sachs is betting against another side of Goldman Sachs. I am for punishing people who break the law. I am for people at equity losing money if they violate basic rules of honesty.
I am not for trying to find a way to create a 100% mistake-proof future based on bureaucrats. That's both an invitation to corruption and it's an invitation to destroy the entire free market system by drowning it in petty regulations.
Q: It sounds like you don't think the CFPB will make consumers or the system any safer?
Gingrich: It may in fact end up costing the consumers a great deal of money because it makes it more expensive for institutions to offer them services, and institutions just quit offering the services.
How many lobbyists have been hired to work on the regulations? How many law firms have been hired? And how much does that add to the cost of the American economy. How much more expensive does that make the financial services industry? You've had these layers.
How many regulations are already behind schedule? So, you are a business, you are trying to make a decision about whether or not to invest, and they say, 'What are the ground rules?' Well, we don't know. When are we going to know? Well, we don't even know when we're going to know. When we do know, how long will it take our lawyers to figure out exactly what they mean?
What you've done is add an entire layer of Washington-centered bureaucratic micromanagement, most of it incompetent — and you can tell it's incompetent because they can't even get the regulations out on time.
Q: Some would argue the deadlines were too strict.
Gingrich: Of course. It's the same thing with Obamacare, because every deadline is too strict because if you are a bureaucrat, that means you have to make a decision. Henry Kissinger once said to me that every major decision he made in his career he made in 48 hours, he just didn't know when the 48 hours began.
Q: One of the things that Dodd-Frank is touted for, including Republicans like former FDIC Chairman Sheila Bair, is that too big to fail was effectively ended by the law. That's not your position.
Gingrich: How was it effectively ended?
Q: She says that it gave the FDIC the power to take down a large bank or a large nonbank if the Treasury and the Fed and a council of regulators determine that it poses a threat to the economy.
Gingrich: (Stares at reporter in disbelief) So the way we've ended too big to fail is we preempt failure by having you fail.
Q: The idea of too big to fail is that an institution is so large it can't be taken down without damaging the economy.
Gingrich: So we could apply that to Fannie and Freddie.
Q: Yes, they were certainly too big to fail.
Gingrich: So we could apply that now. So this new agency, as a theory, could meet and say, 'Let's take down Fannie and Freddie.' What does that mean?
Q: Presumably, it would mean unwinding it, selling off its parts.
Gingrich: So you are now going to replace classic bankruptcy, which occurs in the market, under the rule of law, with a group of bureaucrats appointed by the president, sitting in a room, deciding to preempt the market by being so wise that they are going to bankrupt a company before it goes bankrupt. But they are going to bankrupt it so intelligently that none of us won't notice that they just bankrupted a company and, by the way, that won't raise a marginal risk of every other system that's too big to fail because everybody on the planet is going to say, 'Who's next?'
Q: I see your point, but we saw an institution that was allowed to go into bankruptcy and that was Lehman Brothers. The consequences of that were such that the government decided to bail out the large banks. Isn't creating a system where the FDIC takes someone down in the same method that it takes down a small bank a better system than bankruptcy?
Gingrich: You could pass a law that allows bankruptcy courts to have this option. You could create a method for unwinding a large bank if the large bank applied to be unwound.
Q: Doesn't it make sense to act to shut down that bank before its collapse posed a risk to the economy?
Gingrich: How would you know? That's my whole point. A handful of people… Go back and look at the whole fiasco of [former Treasury Secretary Henry] Paulson, who clearly had a vested interest at Goldman Sachs, taking out one of Goldman's competitors. I think there is a lot of stuff that has to be asked about every decision that was made in 2007 and 2008. I think the role that [Federal Reserve Board Chairman Ben] Bernanke and [Treasury Secretary Tim] Geithner and Paulson played was very dubious. That's why I've said we should audit the Fed, we should see the decision memos. We should know what they were thinking. I think it is a scandal that you have this many hundreds of billions of dollars of your money spent, and nobody has ever had this kind of accountability.
Q: Was TARP a mistake?
Gingrich: In retrospect, yes. At the time, I would have voted for it because you can't have the Treasury and Federal Reserve saying to you, 'We are at the edge of total collapse.' I think it's irresponsible to say, 'I'm so smart that I'm going to reject all the experts at Treasury and the Federal Reserve.' But I look at it now-the whole thing is a mess.
It's a mess in the sense that because it has not been audited, you have no idea who made money and why. You have no idea who was bailed out and why. Some of the things they were doing, some of the things that showed up, if it wasn't so tragic, it would be a comedy. So the Libyan National Bank I think indirectly got $5 billion. Doesn't that strike you as slightly weird? Goldman got, I think, $13 billion through the back door without having to acknowledge it because they got it through AIG.
If you are a normal American citizen and you look at this stuff and you look at your mortgage and you look at your job, and you look at your brother who is unemployed and you look at your town's problems, you look at the amount of money the banks now have and you say to yourself, 'How come the fix is in for the big boys and against everybody else in America?' And Dodd-Frank is part of that fix.
Q: What would you have done differently if you were president at the time?
Gingrich: I would have had AIG go through bankruptcy.
Q: You aren't concerned about the massive counterparty risk?
Gingrich: You know what capitalism is? Taking risk. You know what all those guys who are rich and made all that money and had all those neat places out in the Hamptons? That's what you get for taking risk. You know what happens when the risk fails? You lose the plane, you lose the mansion. That's what capitalism is. What we've invented is socialism on the way down and capitalism on the way up.
Q: So we were right to let Lehman fail but we should have…
Gingrich: We should have been much tougher about it. We would be a healthier society today if more of these guys — who clearly were lying — clearly were drawing a salary of enormous amounts while not doing their job. This is why I'm for repealing Sarbanes-Oxley. Tell me what Sarbanes-Oxley taught us in this entire crisis. Wasn't the theory of Sarbanes-Oxley that if a CEO of a big bank signed the document, they were responsible? Have any of them been held accountable? Any of them?
Q: Is it a problem that no one has been criminally prosecuted for the financial crisis?
Gingrich: Yes. If the amount of theft that seems to have taken place, took place, there is something profoundly wrong.
Q: Whose fault is that, the government?
Gingrich: The system. The system decided that it was better to sweep everything under the rug. I don't understand. You would have to ask this administration. This administration hates the rich in general but protects them in particular.
Q: You've said that too big to fail is solidified by Dodd Frank because it designates systemically important financial institutions. Yet Bernanke testified that no one wants to be considered systemically important. They are more worried about the oversight they will receive as a part of it. If it was really solidifying too big to fail, wouldn't institutions want to be considered systemically important?
Gingrich: No, because they are going to have some bureaucrat looking over their shoulder every morning. They are going to find it impossible to compete in the world market because they are going to have a risk-adverse, politically-inspired bureaucrat telling them what not to do, and in some cases, telling them what to do. So you are asking someone who has never made any money to supervise somebody who has made a lot of money in order to make sure the person who has made a lot of money makes the wise decision. As a historian, I have never seen that work.
Q: You seem particularly worried about FSOC, the whole idea of a Treasury-led council.
Gingrich: I think when you have a handful of people that have the power to intervene in institutions that have billions of dollars, you have an invitation to corruption on a grand scale. All you have to do is read the Federalist Papers and ask yourself, would any of the Founding Fathers thought to have a government-centered supervisory agency with that power dealing with that amount of money without corruption, and they would have all thought it was absurd. It is an invitation to corruption.
Q: What do you think should happen with Fannie and Freddie?
Gingrich: They need to be broken up. They are too big.
Q: Privatized? Totally eliminated?
Gingrich: Privatized. Broken up and privatized. You have to go through a cycle of getting the system back to — For capitalism to work, institutions can't be too big to fail. Otherwise, it's not capitalism.
Q: The solution then is to let them fail, through bankruptcy.
Gingrich: In the case of Fannie and Freddie, yes. Places that fail, fail. Look at the airline industry. Airlines have gone through failure and we still fly. Nobody said that an airline was too big to fail.
Q: You are the only presidential candidate that has talked in detail about Dodd-Frank and its effect on community banking. Why is that?
Gingrich: Beats me, go ask the rest of them (laughs). I have a particular passion for getting back to a community-based, small business based, local entrepreneurial system. I wrote a book called, "A Nation Like No Other" that really gets at this. The whole base of the American model is local citizens with local resources providing local leadership. When you get to huge bureaucratic institutions, so you are branch #643, you have no capacity to provide local leadership anymore.
