Remarks by
FDIC Chairman Sheila C. Bair
to the
National Press Club,
Washington, D.C.
June 24, 2011
Video of Remarks by FDIC Chairman Sheila C. Bair to the National Press Club
(Courtesy of C-SPAN.org)
Thank you, and good afternoon. I'm deeply honored that you invited me here to the
National Press Club to deliver my last speech as FDIC Chairman.
As I prepare to close out my term, I cannot help reflect on the challenges we have faced
over the past five years and some of the lessons we have learned in the process. Our
nation has suffered its most serious financial crisis and economic downturn since the
Great Depression. The aftereffects will be felt for years to come.
There are many causes of this crisis, some of which I will address in my remarks today.
But, in my opinion, the overarching lesson of the crisis is the pervasive short-term
thinking that helped to bring it about. Short-termism is a serious and growing problem in
both business and government. I would like to devote my remarks to explaining what I
mean by this, and discussing how I think it plays into the policy challenges arising from
the crisis.
The Challenge Posed by Short-Termism
What is short-termism, and why does it arise? Short-termism refers to the long-
observed tendency – which we all share, to one degree or another – to unduly discount
outcomes that occur far in the future.
Myopic decision making is a familiar concept. The emerging field of behavioral
economics delves further into patterns of inconsistency in economic decision-making.
Investors systematically over-value short-term payoffs and pass up investment
opportunities that could leave them much better off in the longer term. Too much short-
term thinking can be very costly. It is a market failure that leads to underinvestment in
valuable projects with long payoff periods.
Part of our tendency toward short-termism appears to be biological. While the
mathematical side of our brain makes careful calculations of risk and reward over time,
the more primal, emotional parts of our brain tend to focus on the here and now. Which
part of the brain do you think becomes active when research subjects are presented
with real-life decisions involving risk and reward? You guessed it: The more primitive
system, which understands greed and fear, but is less focused on long-term
consequences.1
FDIC Chairman Sheila C. Bair
to the
National Press Club,
Washington, D.C.
June 24, 2011
Video of Remarks by FDIC Chairman Sheila C. Bair to the National Press Club
(Courtesy of C-SPAN.org)
Thank you, and good afternoon. I'm deeply honored that you invited me here to the
National Press Club to deliver my last speech as FDIC Chairman.
As I prepare to close out my term, I cannot help reflect on the challenges we have faced
over the past five years and some of the lessons we have learned in the process. Our
nation has suffered its most serious financial crisis and economic downturn since the
Great Depression. The aftereffects will be felt for years to come.
There are many causes of this crisis, some of which I will address in my remarks today.
But, in my opinion, the overarching lesson of the crisis is the pervasive short-term
thinking that helped to bring it about. Short-termism is a serious and growing problem in
both business and government. I would like to devote my remarks to explaining what I
mean by this, and discussing how I think it plays into the policy challenges arising from
the crisis.
The Challenge Posed by Short-Termism
What is short-termism, and why does it arise? Short-termism refers to the long-
observed tendency – which we all share, to one degree or another – to unduly discount
outcomes that occur far in the future.
Myopic decision making is a familiar concept. The emerging field of behavioral
economics delves further into patterns of inconsistency in economic decision-making.
Investors systematically over-value short-term payoffs and pass up investment
opportunities that could leave them much better off in the longer term. Too much short-
term thinking can be very costly. It is a market failure that leads to underinvestment in
valuable projects with long payoff periods.
Part of our tendency toward short-termism appears to be biological. While the
mathematical side of our brain makes careful calculations of risk and reward over time,
the more primal, emotional parts of our brain tend to focus on the here and now. Which
part of the brain do you think becomes active when research subjects are presented
with real-life decisions involving risk and reward? You guessed it: The more primitive
system, which understands greed and fear, but is less focused on long-term
consequences.1
Short-termism also grows out of the institutional rules that govern our behavior. When
executive compensation varies according to current-year earnings or stock prices, it
creates incentives to maximize short-term results even at the expense of longer-term
considerations. Short-term incentives tend to feed on each other through the chain of
accountability. If an investment fund earns fees based on volume, and if volume varies
– as it often does – with current performance, then the path of least resistance is to
compensate fund managers based on current results. But ask yourself: If this
investment fund is part of your 401(k), wouldn't you prefer that your fund manager be
compensated at least in part based on long-term performance?
I probably don't need to tell you that short-termism also holds sway in the realm of
politics. The virtue of our electoral process is that the incumbents face market discipline
at regular intervals. The drawback is that those facing re-election have little incentive to
take a longer view of the issues than their constituents do. If the voting public doesn't
regard the runaway federal debt as their highest concern, then elected leaders probably
won't either. It's a particular challenge under our system to find leaders who will commit
to projects that will pay off long after they have left office.
Americans are naturally cautious when it comes to the ability of government to direct
capital to long-term investments with uncertain outcomes. Yet we can easily think of
many examples where far-sighted government investments have yielded large returns
for generations to come. Think of the set-aside of land for national parks that
permanently preserves the beauty and grandeur of our natural landscape. Government
investments have linked our country through the interstate highway system and the
internet. As a nation, we have made investments that have allowed us to defend the
peace, explore the moon, eradicate disease, and decode the human genome.
While we can clearly see the wisdom of those investments in retrospect, there are many
areas of our national life, both public and private, where short-termism appears to be on
the rise. The average holding period of an equity share traded on the New York Stock
Exchange fell from seven years in 1940 to just seven months by 2007. The average
tenure of departing CEOs declined by nearly 30 percent between 1995 and 2009.2 Not
surprisingly, CEO turnover was found to be highest among companies whose stock-
price performance lagged their industry.3
One powerful force behind the rise in short-termism is technology. We may simply have
more latitude to express our innate short-term preferences than we once did. For
example, a well-developed consumer debt market provides more options for
households to act on their inclination to borrow from the future to meet short-term
needs. As we know, credit cards can be either extremely useful or highly destructive
tools, depending on how they're used. Well-developed capital markets have expanded
the opportunities for financial companies to earn returns from transaction fees and
trading activities, as opposed to the patient work of lending and long-term investing. The
term "patient capital" seems quaint in the era of hedge funds and high-frequency
trading.
executive compensation varies according to current-year earnings or stock prices, it
creates incentives to maximize short-term results even at the expense of longer-term
considerations. Short-term incentives tend to feed on each other through the chain of
accountability. If an investment fund earns fees based on volume, and if volume varies
– as it often does – with current performance, then the path of least resistance is to
compensate fund managers based on current results. But ask yourself: If this
investment fund is part of your 401(k), wouldn't you prefer that your fund manager be
compensated at least in part based on long-term performance?
I probably don't need to tell you that short-termism also holds sway in the realm of
politics. The virtue of our electoral process is that the incumbents face market discipline
at regular intervals. The drawback is that those facing re-election have little incentive to
take a longer view of the issues than their constituents do. If the voting public doesn't
regard the runaway federal debt as their highest concern, then elected leaders probably
won't either. It's a particular challenge under our system to find leaders who will commit
to projects that will pay off long after they have left office.
Americans are naturally cautious when it comes to the ability of government to direct
capital to long-term investments with uncertain outcomes. Yet we can easily think of
many examples where far-sighted government investments have yielded large returns
for generations to come. Think of the set-aside of land for national parks that
permanently preserves the beauty and grandeur of our natural landscape. Government
investments have linked our country through the interstate highway system and the
internet. As a nation, we have made investments that have allowed us to defend the
peace, explore the moon, eradicate disease, and decode the human genome.
While we can clearly see the wisdom of those investments in retrospect, there are many
areas of our national life, both public and private, where short-termism appears to be on
the rise. The average holding period of an equity share traded on the New York Stock
Exchange fell from seven years in 1940 to just seven months by 2007. The average
tenure of departing CEOs declined by nearly 30 percent between 1995 and 2009.2 Not
surprisingly, CEO turnover was found to be highest among companies whose stock-
price performance lagged their industry.3
One powerful force behind the rise in short-termism is technology. We may simply have
more latitude to express our innate short-term preferences than we once did. For
example, a well-developed consumer debt market provides more options for
households to act on their inclination to borrow from the future to meet short-term
needs. As we know, credit cards can be either extremely useful or highly destructive
tools, depending on how they're used. Well-developed capital markets have expanded
the opportunities for financial companies to earn returns from transaction fees and
trading activities, as opposed to the patient work of lending and long-term investing. The
term "patient capital" seems quaint in the era of hedge funds and high-frequency
trading.