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'Debt will cause another crisis'

Henry Blodget

TEXT OF INTERVIEW

Bill Radke: Congressional overhaul of financial regulation is up in the air because of death of West Virginia Sen. Robert Byrd. His loss means one less Democratic vote, and now Massachusetts Republican Scott Brown is backing away from his support of the bill.

One of the criticisms of the financial reform measure has been that it will not prevent the next meltdown. I wanted to know, what might cause that meltdown? So I called Henry Blodget, editor-in-chief of The Business Insider. Good morning.

Henry Blodget: Good morning.

Radke: You are one of those observers who believes that even with these new rules, we are at risk of another global crisis. What might that crisis look like?

Blodget: I think the reason that people are saying that is that if you took this legislation and you enacted in 2005, it would not have prevented the crisis that we just had. But hopefully this is just a first step and we will continue to get more reform over the next couple of years.

Radke: Is the biggest danger a crisis that looks similar to the one we just had, or are you seeing other fault lines out there that could be the next problem?

Blodget: Well, over history, we have gotten actually pretty good at preventing the last crisis. Unfortunately, what happens is the next one will look somewhat different. But it will be based on the same accumulation of debt, which got us into this one.

Radke: OK. So you put your finger on a problem there -- debt. Is that all we can really know -- maybe all we need to know -- about the next crisis? Is that there should have been limits on debt, on leverage, and there weren't?

Blodget: The one key component that is similar in just about every financial crisis is too much leverage. And leverage in this case is debt. And my hope is that we will have been so scared by what just happened that we really... it will be many decades before we get into another crisis like that.

Radke: But Henry, this legislation creates a new systemic risk council. Why wouldn't that council not be able to prevent systemic risk?

Blodget: I'll tell you why. For the same reason that the SEC and other regulators completely missed the systemic risk in our system in 2005-2007. It was not that nobody on earth saw it. Many economists were screaming from the rooftops. The problem is that a systemic risk council, 10 to 20 years from now, will be lulled into the same sort of sense of, "Well, this is working fine," as all of our regulators were in 2000-2005.

Radke: Henry Blodget, editor-in-chief of The Business Insider. Thanks.

Blodget: Thanks for having me.

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I love the vocabulary of business. I borrow money for the craps table in Vegas and it's called a "loan". A fortune 500 company borrows money to place some bets and it's called "leverage". Here's a suggestion: why don't we all use the casino terms from now on? If you want to exercise an option, you just say "hit me"; if you want to declare bankruptcy, you say "fold"; and if you talk about Goldman Sachs' profits, you should say "the house always wins".

Debt/leverage is not just "a problem". It is the problem.

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