Skip to main content

tv   After Words  CSPAN  March 28, 2015 10:04pm-11:01pm EDT

10:04 pm
er will take your money and put it someplace safe. that is a lot of what private banking is. and that is we will help to hide resource folks. so why do the small caribbean islands host trillions of dollars of deposits? because of their innate great banking sector's? no. why do some of the world's largest multinational companies collect their profits in bermuda bermuda? did sergei brin and larry page really do their greatest google research in bermuda? no, they did it at stanford so why are the taxes or why you're the international profits going to bermuda? because the irs gave them a free pass. this is what has to stop. come on. how were we going to get through if we give away everything to
10:05 pm
powerful interests? >> we are going to be concluded by reading just two sentences from the book. i have explained that historical or geographical burdens are not fate. they are not destiny. they are reasons for action. it is our job to understand how the end of poverty can be achieved and then act to make it happen. jeff, thank you. [applause] [inaudible conversations] him booktv continues now with
10:06 pm
"after words." this week peter wallison a fellow at the american enterprise institute discusses his book, "hidden in plain sight"." in the book mr. wallison argues that government housing policies caused the 2008 financial crisis. he is in conversation with sudeep reddy deputy global economics editor at "the wall street journal." >> host: peter wallison your new book is called "hidden in plain sight" what really caused the world's worst financial crisis and why it could happen again. you are a member of the financial crisis inquiry commission which was investigating the causes of the 07/08 financial crisis. he descended not only from the democrats on the committee but also the republican appointees. what did you see that they didn't? >> guest: i had been looking
10:07 pm
at the housing system in the united states and dodd-frank i'm sorry fannie mae and freddie mac for quite a while before i got on the commission. so i had quite a lot of background about what was actually happening in the housing there. i was looking for the commission to look into what happened with fannie mae and freddie mac, what role they might've played in the housing crisis and ultimately the financial crisis and i found that the commission was not interested in that. and they wouldn't look at it and to the degree that i tried to interest them i felt i was given all kinds of signals that was not something they were going to do. so i decided that i would dissent. my differences with the republicans i think the fact that my view was that our responsibility on the commission was to make sure the american people understood that during
10:08 pm
the crisis i was outside i thought the partisan differences between the differences between republicans and the democrats. i'm afraid the republicans just would not agree with anything the democrats said and they didn't want to indict the bush administration. some of them had been in the bush administration so i felt that i had to speak with an independent voice and that's why i dissented. >> host: you wrote a lengthy dissent before that commission and the late stages of that inquiry that of course grew into your book and you have a lot of unconventional views in this book which we will get into. but for people who don't understand this focuses on the mortgage markets in the united states and the governments role in it. when and why did the u.s. government gets a heavily involved in the housing market? >> guest: actually began in the new deal back in the 30s when the government attempted to
10:09 pm
assist banks in making loans by guaranteeing those loans and ensuring those loans and fannie mae was established in late 1938 1938, also part of the new deal to provide liquidity to banks when they made and marketed to get liquidity for that mortgage and make more mortgages. in inducing more home sales in the united states. that was the beginning. the government got much more involved in the 50s when they actually started adjusting the fha, the federal housing administration's standards in order to improve housing or increase the amount of housing in the united states and a desire to help the economy. that is when we got off the rails because once the government started using housing as a way to improve the economy
10:10 pm
in other words to improve the american people's view of their government and how successful it is then it became a political issue instead of what it had been before which was simply a question and making sure that the market function well. this. >> host: this stretches across democratic and republican administrations, the interest in housing and encouraging housing activity. where do you see the more recent turning points in this development? >> guest: well i think a key turning point here at least from my perspective was 1992 when congress adopted something called the affordable housing goals. they were under great deal of pressure at the time to make sure that the borrowers below median income or below income far worse had credit for mortgages and many activists in support of those are a worse in communities pressured congress to do something that would
10:11 pm
provide much more credit to those groups. congress then adopted the affordable housing goals which required fannie mae and freddie mac. these goals were only applicable to danny and freddie and required them when they bought mortgages from banks and other originators to make sure of the mortgages they bought, 30% had been made to people at or below the median income. the authority to require a certain quota was given to the department of housing and urban development at that point and over time between 1992 and 2008, they gradually ratcheted up these requirements and added new ones so that for example by the year 2000, 50% of all mortgages that fannie and freddie bought in any gear had to be made people that made at or below the median income and by 2008 it was
10:12 pm
56% in the bush administration. this is not a partisan gain. it was done under clinton first but then under bush the whole idea was carried through by head. >> host: the theory behind this is designed to encourage americans to save money to development to build equity in their homes. obviously part of this is to ensure lower income and middle income people can have an asset of this kind. is there something wrong with this idea in general that people should be able to buy a home and find a home in america? >> guest: absolutely nothing wrong with that. that there are lots of good reasons why homeownership should be encouraged but the problem with this system was that it forced fannie mae and freddie mac overtime to reduce their underwriting standards. in that way they lured a number of people into buying homes who could not actually sustain the mortgages over time. in fact by the year 2008, and
10:13 pm
this is really important, by the year 2008 more than half of all mortgages in the united states were what you would call sub prime mortgages. about 31 million sub-prime or other weak week mortgages by 2008 and of those 76 print --% from the books of government agencies which to me shows clearly that it was the government that created the demand for these mortgages. now what happens when underwriting standards decline is not simply that the people who have bought homes are unable to carry those homes. what also happens is when those homes fail and their mortgages fail they affect all of the people around them all the neighborhoods. the values of homes and all those neighborhoods go down to what the american people should understand after the financial crisis and which i don't think they really understand today is that they are all hurt. underwriting standards are reduced so that other people who
10:14 pm
can't necessarily sustain the standards don't have the proper credit for relationships don't have the down payment or are unable to keep their mortgages. >> host: we have a couple of separate issues that intersect in this period. one was the existence of fannie and freddie and what they did what they had done for a while and the other was the congressional and political push to encourage more homeownership. when these two combined of course fannie and freddie was there as the vehicle to do all of this. what happened then in fannie and freddie and its existence and its relationship with lawmakers that led to where we had gotten the crisis? >> guest: it's really quite interesting because the person who ultimately became the president of fannie mae jim johnson what's his name, realized he was a political operative before that but he realized fannie mae was under
10:15 pm
stress because it had a very strong government franchise that would have to sustain over time and i think you recognize that if fannie mae and freddie mac of course but if fannie mae and freddie mac actually became kind of supporters of low-income housing that would give them a strong backing in congress that would keep them in their superior franchise position where they would get all kinds of support for the government and make quite a lot of money. both of those institutions. >> host: fannie and freddie even though they were essentially started by the government they became private entities? >> guest: well they were privatized in 1968 and 1970 they were given authority to go from where they originally were which was government-backed into the conventional market where they could begin to buy regular
10:16 pm
mortgages. that made them very important profit-making institutions. >> host: and they became publicly traded companies. guess that they were both on the new york stock -- stock exchange and the largest financial institutions the united states at the time all the way up until they became sultan in 2008. the political relationships became extremely important because as they grew and got bigger dangers were always that somehow the government would move against them, would regulate the more strictly and there was a great deal of push in the bush administration are much more regulation of fannie mae and freddie mac and from their point of view especially fannie which was much more political from their point of view to avoid more regulation they had to rely on the democrats in congress. the democrats in congress were very focused on making sure that fannie and freddie supported low income housing.
10:17 pm
and so even though they were beginning in the 2000's to find that they were buying mortgages that would ultimately cause them to suffer tremendous losses, they couldn't go to congress or go to bed and say we won't comply with these quotas anymore because it's driving us out of business. we are going to fail. they couldn't do that because if they did that the democrats in congress would no longer support them and the effort of the bush administration to place them under much greater regulation this is in 2003, 2004, 2005 would have become successful and they would have been so profitable. so they were caught in the spice between on the one hand having to keep the democrats on their side and on the other hand having to comply with the affordable housing requirements that would gradually drive into insolvency. >> host: i don't know if of many areas in the financial
10:18 pm
crisis in the lead-up to the financial crisis that are more hotly-debated and have generated more political sparring been the role of fannie and freddie. there a lot of different views on exactly what happened in the relationships they are and if you look at the clinton administration there were people in the administration who said we also tried to do a fannie and freddie. they sought getting out of control and they wanted to do something about it but couldn't get support from congress. the bush administration even though there were people he wanted to push fannie and freddie in a certain direction was pushing its homeownership goals in the same time which in some ways conflicted with other pieces of the administration moving in this direction. there is culpability throughout congress at different stages. democrats who were at times pushing for it instead they weren't in the majority when they were pushing for it. the republicans of course have another view of putting the blame on democrats there. is there any particular moment in the fannie/freddie
10:19 pm
relationship with either the white house or with congress for a truly got out of hand or was this a slow development over 15 or 20 years? >> guest: i see it as a slow development. at least from fannie and freddie's point it got out of hand pretty quickly. if they recognized what they were doing and i think many of them with the mouse organizations must have realized it, because up until 1992 they would only make prime loans. they were famous brawl may making prime loans and after the affordable housing requirements were put in place and they had to buy loans from people who are below the median income 50% or 56% of those loans to people whose credit relationships were not particularly good they began to reduce their underwriting standards and realized they were taking huge risks in doing so. by 1995 for example they were
10:20 pm
accepting mortgages the 3% down payment and by 2000 they were accepting mortgages with no down payment at all. so they knew what was happening but they were caught i think in a serious political difficulty. i actually do not lame danny and freddie so much in the book as a blame hud because fannie and freddie were implements. they were tools in the hands of congress and the administration. though the clinton and the bush administration and it was hud. >> host: hud is the housing urban development agency which is it cabinet agency. >> guest: they were caring for the mandates of the of audible housing requirements and they were being very tough about them because there was a lot of very good political juice in their for the administrations they were serving. in the case of the bush administration yes bush was very
10:21 pm
favorable to the idea of homeownership and indeed in his memoirs wash said i was delighted with the way that low-income people were able to buy homes and homeownership in the united states was rising that what i didn't realize was the risks that we were undertaking at the same time. so he kind of apologize in and that way for what his administration did and i think that was the right way to do it. they did not realize what they were introducing into the housing system and ultimately the entire financial system but forcing fannie and freddie to buy mortgages that were not well grounded. >> host: there are couple of core areas of dispute about the housing crisis. one is really about regulation and should there have been more regulation or less regulation?
10:22 pm
you are obviously arguing that it was the regulation itself and the way it was promulgated that led to this. the thought experiment, what if there were different kind of regulation? there were some kind of pushed on homeownership but not with as weak underwriting standards as we saw. clearly stories drop the housing boom about ninjas loans no job no assets need to get along. what do you think might've happened if there were actually standards around that and that's part of what came into the financial crisis inquiry commission. if the government had set proper standards for people to get these loans then maybe we would not have gotten to that point. do you think that would have made some difference? >> guest: yes yes actually if the government were to set underwriting standards that would be very helpful. in fact at the base of all of these problems was the fact that the government had allowed
10:23 pm
underwriting standards to decline so substantially because of other political interest that they had. yes, so the government could have done this in a number of different ways. assuring that underwriting standards were maintained perhaps helping low income people to get down payment would be one way to help them to become homeowners but we have to stop for a moment and think about whether homeownership is in fact the best thing that it has been cracked up to be. that's something americans mostly believe is true and i think there are a lot of benefits of homeownership. people cut the grass and keep the place in good shape and it's like nobody ever washes a rented car. they are very good reasons to maintain our housing stock through ownership. on the other hand homeownership is not and has not been over
10:24 pm
time as good an investment as the stock market. i think the numbers are about one or 2% growth in homeownership whereas the stock market over period of time is about 7%. so we shouldn't force people to be owning homes. we should make it possible for them to own homes that will sustain their value but the government sometimes goes overboard in the hope of supporting particular constituencies rather than homeownership in general. >> host: in another big area of dispute is whether the crisis was driven by public-sector actions like what we sought saw in the gses with government housing policy or private sector activities. there are a lot of forces that were coming into shape in the private sector in the housing market, and creating securities. tell us what was happening in the private market first and then let's cannot back to what
10:25 pm
happened in the public. >> guest: as i mentioned before by 2008 76% of all of these very weak mortgages were on the books of government agencies and that means 24% were on someone else's books and that was the private sector. the trouble with what the narrative has been about the financial crisis since 2008 is that it has focused entirely on the private sector and on wall street and so forth. i have course have been accused of backing wall street or favoring wall street. not at all. what i'm trying to do is point out where the real liability or responsibility for what happened in the financial crisis occurred and that was with the governments policies. but wall street had a very important private sector in general had a 24% a very important role in this. the trouble with putting all the blame on wall street and the
10:26 pm
private sector is that in many ways they were lured into the position they were in by the fact that fannie and freddie were saying to them we needed need these mortgages. we are not going to be too concerned about who the borrowers were and what kind of credit score they have and whether they had a down payment. those things are not going to worry us. we have to meet a quota so over period of time wall street and other originators, countrywide for example a california company that countrywide became very powerful because they were able to assemble all of these low-quality mortgages the sub-prime mortgages, put them into pools and sell them to fannie and freddie and fannie and freddie got credit on the affordable housing goals for buying securities backed by these eligible mortgages.
10:27 pm
so a lot of what the private sector did was defeat mortgages through mortgage-backed securities to fannie and freddie and during the mid-2000, about 2003, four and five fannie and freddie were the biggest buyers of mortgage-backed securities from the private sector. but then housing prices continue to rise. people began to look at housing and is a really good investment. maybe one of the best investments and so the wall street banks and others had that many of the mortgage-backed securities that they created. many were sold to fannie and freddie but they kept the respirator that that's why they got into so much trouble because they actually believed it seems that these mortgages are mortgage-backed securities were really good investments. so i think we have to look at both sides of this equation. the private sector responding to
10:28 pm
the incentives that were created by the government send us more of these mortgages because we needed to meet the hud quotas and then the governments role especially hud in enforcing freddie and fannie to continue on this course even though by the late 2000 they were beginning to see fannie and freddie were on their way to insolvency if they continue to follow this course. >> host: there's an earlier issue in the private sector that generated a lot of private sector interest in creating these mortgages. of course interest rates were at the time at record lows coming out of the 2001 recession. investors weren't able to get the same kind of returns that they had long expected on bonds. they were looking for a way to draw higher interest rates and that is seems like one of the causes of this security generation, mortgage securities being generated by private firms. take us through that and the
10:29 pm
private sector because there was a fair amount of demand not just in the u.s. but globally, but it's called the global savings glut theory, one thing there were several officials point to allow but they were so much money sloshing around the world looking for a place to invest that generated a reasonable return that it created the demand for these private securities. >> guest: maybe so. i take that issue on in the book along with a whole lot of other issues, eight or nine major issues that then cited glass-steagall and credit default swaps and all those things that the question of why we had this mobile and housing prices is one i looked at. economists are very favorable to the idea that it was the fed's monetary policy and other people including the fdic took the position that it was all this money sloshing around in the markets looking for place to
10:30 pm
invest. i'm skeptical about both of those. you can't prove that they weren't important but the bubble that we were having and housing began in 1997. you see it very clearly in the data and by 2003 which is the time when the fed's monetary policy was such that interest rates were actually negative on the real basis, by that time we are to have a bubble that was three times the size of any bubble we ever had post-war. in addition, the idea that money was sloshing around we really were not able to see that in longer-term rates. in 10 year note or a 30-year on we didn't see huge declines in interest rates on those instruments which you would see if there was a lot of demand for them. so i'm skeptical about that idea. i continue to believe that the housing bubble was caused by all
10:31 pm
kinds of new buying coming into the market with government credit through fannie mae and freddie mac. and at least i look at it not being an economist i look at it as a minsky moment. there was a famous economist named minsky that talked about the fact that these bubbles occur when there are strange events in the economy that hadn't occurred before. some major changes in the relationships in the economy and i think this was exactly one of those cases were all of a sudden a whole lot of people who had not been able to buy homes before were able to come in and begin to buy homes. that started the bubble growing in 1997 and it continued to grow 10 years until it topped out at about 2007. so that was a very important thing and i think it came from
10:32 pm
u.s. government housing policy and not from anything else. >> host: as you know there are quite a few of these about what created the housing crisis. a couple more items want to run through and you do address these in the book trade one is the global issue. why did so many other countries also have housing bubbles and they obviously weren't following u.s. housing policy. we have housing bubbles in ireland and spain and the u.k. australia and canada. many of them had banking crises in recent years in dealing with that. they didn't have fannie mae and freddie mac. what happened in those countries versus what happened in the united states? >> guest: that's been one of the major criticisms and i've always found it relatively easy to address because it's been looked at by a number of people. one is a professor at berkeley by the name of dwight jaffe who has done quite a study of what happened in other countries
10:33 pm
particularly spain, ireland and the u.k.. his conclusion was yes they have bubbles they are. i can't say why they had doubles. they have bubbles they are but minor bubbles collapsed the country with the greatest losses at that point were in the u.k. and they had losses of about 3%. in the united states fannie and freddie which had up all the layers had the fewest bad mortgages. they had many, enough to drive them in solvent that they didn't have the worst of the worst their losses were between 13 and 17%. and for other firms banks and so forth that were holding these bad mortgages their losses went up to 35 and 40%. the fact is then that in the united states the bubble was filled with or suffused with sub-prime and other weak mortgages whereas in other
10:34 pm
countries where there were bubbles the losses were at most 3% which meant their financial crises were not the result of losses in their housing system. the reason why the united states was worse than others was because the u.s. government was promoting the acquisition of sub-prime and other weak loans and other countries didn't do that. they continue to insist all along even while the bubbles were growing they continue to insist on prime mortgages. when their bubbles collapsed there weren't as many losses in the housing system. >> host: most people have heard the term sub-prime loan we give him. but he did in the book was to actually try to develop a broader measure. you preferred a non-traditional mortgage and you have table upon table of trying to tally the broader measures here which is certainly different from what other people had done. walk us through why you decided
10:35 pm
to do those calculations and where those figures came from and when you came upon them. guess who i used the term mortgages because it was so much easier to refer into ntn rather then i sub-prime mortgage and an alt-as mortgage and there are distinctions between those two. the sub prime mortgage is very simple because it was defined by the bank regulators in 2001 and what they said is any mortgage made to a person who has a credit score of less than 660, it's called a fico score but if you're fico score is 660 or less that is the sub-prime mortgage no matter what else you might say about the mortgage what kind of house that is, how big the down payment wasn't so forth forth, it's a sub-prime mortgage if it's above 60. the data shows again and again
10:36 pm
that mortgages below 660 have a much higher rate of default than any other kind of mortgage and so that is the defining element of sub-prime mortgage. and there were something called and alt-as mortgage in that phrase come -- came from the fact that the agencies which were fannie mae and freddie mac called the market agencies would not accept mortgages that had low down payments below 10% for example were not mortgages that only required interest payments. they didn't decline, they didn't make any principle payments as part of these mortgages. those kinds of mortgages they would not accept before 1992. it was only after 1992 that they had to accept those mortgages. so i've loved them both together
10:37 pm
and the fci ceded the same. they call them nontraditional mortgages because a traditional mortgage in the united states was a prime mortgage which over time in normal times, this is what i showed some of these tables, in normal times the traditional mortgage, that is the prime mortgage had a default rate of less than 1%. when we gave up on prime mortgages and began to accept mortgages that were alt-as or sub-prime come in other words and nontraditional mortgages that is where we went wrong and why we put our financial system and a serious way or. as soon as we started having a lot of defaults we began to weaken our entire financial system and had a financial crisis. >> host: usada book that you are essentially trying to provide a broader view than what
10:38 pm
members of the commission were able to see and some of the information that was out at the time. what do you know now that either wasn't known then there were some public? >> is really interesting because one of the reasons i wrote the book is that i found in going through a lot of the data that the commission had accumulated lot of material that supported the position that i took when i dissented originally and i was quite upset that this information was never made available to the commissioners. i should've seen this and i would have said doesn't this support my position? i won't say it's suppressed that they collected a tremendous amount of information which they didn't use and a lot of that information with data that supported my position. there is for example in the book a table that had been disclosed by fannie mae in this case. freddie had the same general kinds of tables but fannies
10:39 pm
table was particularly good because it showed how sub prime mortgages that their affordable housing requirements over time starting in 1996 until 2004 2005. it showed an increase in the purchase of sub-prime mortgages and then it showed that they met the requirements under the affordable housing goals for loans to people who were below the median income in each case. as those goals went up so did the purchase of sub-prime mortgages. out one piece of data, that one table that was supplied by fannie would have made my case to the entire as cic but it was never disclosed to me and never disclosed as far as i could tell to any of the other commissioners. >> host: let's go into the financial crisis. you have made the case on housing leading up to the financial crisis. when we think of the financial crisis we think of bear stearns,
10:40 pm
we think of lehman brothers investment banks. we think of aig big insurance company and its collapse. we don't necessarily think about countrywide is much even though there was quite a bit of attention on countrywide in the lead-up to the financial crisis. tell us about how old the housing piece of this collided with everything else so we get to a point where the government is bailing out a big insurance company that obviously was not directly involved in the housing market. >> this is a story of increasingly significant government blunders i'm afraid and i have to blame the people who were in office at the time and to some extent even into the obama administration. that there was the thought apparently in looking at the memoir of the secretary of the
10:41 pm
treasury of the time, hank paulson, there was the thought that a large financial institution failed. he would drag down a lot of creditors and what was happening beginning in 2007 and then into 2008 is that as these mortgages began to fail financial institutions that were holding mortgages and mortgage-backed securities had to write down their assets very substantially and when you write down your assets your capital declines. then there was uncertainty whether in fact they had done enough writing down and whether they were not in fact solving. investors were very worried about this. and as we approached the first few months of 20081 institution in particular who had done a lot of investing in the housing business, bear stearns which was an investment bank and still is in fact an investment bank
10:42 pm
looked like he was going to fail. the government stepped in and rescued it by providing $29 billion in risksharing funds that were provided by the fed to jpmorgan chase and buried large bank that bought bear stearns and rescued it rescued their shareholders. their rescue -- shareholders got pay. this is a really unusual thing because the government had never before step to not cash and rescued an institution that was not an insured bank. so, right then the market.well we now have a policy. they are not going to allow any of these large financial institutions to fail. then we came to lehman brothers and lehman brothers was 50% larger than bear stearns. everyone expected the government to save lehman brothers. it didn't. it allowed lehman brothers to
10:43 pm
fail. that was a huge mistake and i think it was a mistake in the first place to rescue bear stearns because that created a lot of what we call moral hazard hazard. people assume it knows what the government is going to do and the government is going to protect them so they make different decisions as a result of that. but having created all of this moral hazard they been allowed to lehman brothers to fail, shocking everyone in the market. people at that point did not know who is going to fail, who was not going to fail. people began to withdraw their funds from banks and other financial institutions. the credit markets dried up and banks refuse to lend to one another. these were insured banks the largest in the country refused to lend to one another. even overnight and almost no one would who follow the financial markets for your servers or saw anything like that so i think
10:44 pm
this was a result of some serious mistakes by government officials. first in rescuing bear stearns and then and not rescuing lehman brothers and then in the same week aig became, was unable to meet its financial obligations and after letting lehman brothers failed they went and rescued aig. they try to make a distinction. the secretary of the treasury and bernanke try to make a distinction between aig and lehman brothers. not a very good distinction that they rescued aig and so many people in the market said these guys have no idea what they are doing. they are playing with our money. they are making all kinds of decisions and we are out here at sea not knowing at all what the government is going to do the day after tomorrow.
10:45 pm
that made the financial crisis much worse i believe. >> host: when you were called the segments in real time, covering it we remember in the summer of 2007 there were credit tensions and credit markets globally and we saw that develop into bear stearns in march of 2008 and of course the rescue of fannie and freddie in the summer of 2008 and lehman brothers the bankruptcy of lehman brothers in mid-2008 in a few days later the rescue of aig. one of the things that was occurring throughout this period and following in real time i remember even the officials who were involved, they couldn't get their head around what was actually happening in these financial institutions. ..
10:46 pm
>> >> la first thing you have to recognize is that fannie and freddie were reviewing the quality of the loans so they were taking on. as i said at the beginning fannie and freddie always
10:47 pm
brought to -- bought prime loans nobody knew that they were reducing underwriting standards buying sub-prime loans. so with 6.846 transeven and sub-prime loans. so regulators say investors and risk managers and banks had no idea how risky that market was. and also the rating agencies. but if you fed into the model of 80 million subprimal ounces 76 million the model would spit out a much different set of risks. so people really did not understand at the time how bad the market was.
10:48 pm
which is important for everyone to a understand. wall street regulated heavily buying the government with the larger banks there our examiners seven days a week and they did not recognize the risks. because as they grow they become more and more valuable. with very few defaults. if it cannot meet their obligations. isn't this amazing? we're not seeing a lot of defaults. so to go into this business to invest with a sub-par mortgages is what the people
10:49 pm
on wall street did. by the accounting rules because it was growing at wed to the bottom line by what happened is when everything reversed in then began to lose monday and the capital declined. all the things happen that the town and. with that insufficient information about what is really going on. and people assume the lot about public policy they did not realize what fannie and freddie redd actually doing. to figure out why things are
10:50 pm
so bad in the market bet there is better information than any of their financial institutions are regulator or government agency whole in the world. and then went bam bernanke was testifying to say we're having a little trouble as a prime market but it doesn't look like chitterlings so large even with a larger number of failures. >> said he was saying in 2007 when only fannie and freddie the market was infused with these very weak mortgages. so if he did not know that certainly they don't share
10:51 pm
information. they did not know either. so i have a little bit a trouble to blame them for that financial crisis. >> but house prices were not going to decline. with the national drop could be a great understatement of 30 or 40 percent. but there was also a few within the bank's with highly paid executives said are responsible to understand the risks they have on their balance sheets and the risks from other counterparties and how would a for they have cut affects
10:52 pm
them is that not a failure? >> guest: risk management is only as good as the data and if you don't understand the quality of the mortgages or whole many subprimal or non-traditional of are up there then you can give the analysis to the management of the bank to say we are in trouble there will be a crash because the way the market has developed. it is now available in this book but it wasn't at the time. so i think we have to understand the position the rich and at the time for example, i enjoyed this reading the book with michael lewis about the big
10:53 pm
short that talks about there will be a collapse in the market and if you bought the right credit defaults swap you could make a fortune on $0.20 you could make $1,000. he went around on wall street and could not find any buyers because they sat idle see it happening. where are all the defaults? we have had years of growth the housing market in the united states didn't decline were then three year 4% so why would it be worse now? this points as the factor that there is always uncertainty. a lot of people say everything will continue to grow then some say it will collapse. we have to stop the change
10:54 pm
it is hard to persuade people including people like congress if they are not seeing any evidence that problems were occurring so we were led down the passage of the leading things would be fine but in the end we had a collapse that no one could proceed because the absence of data at. >> host: the dodd/frank act head new regulation non-financial firms with the problem is too big to fail banks to create other entities or rules better still developed. buddies think would be different if people followed your view? >> guest: i think it would have been the outcome because when you blame the
10:55 pm
private sector for what happened aha with insufficient regulation we could have stopped this regulators didn't have enough power then you get dodd/frank and that is the reason why we have had such a slow recovery from the financial crisis because it is the slowest recovery since the mid-60s by a wide margin. what has happened that made such a difference? rabil have a big drop as a recovery in net debt not happen because of dodd/frank because they spent a lot of time to blame the private sector for what happened into a from imposing regulations is creating uncertainty forcing them to reduce risk and that has all cause the economy to grow much more slowly than it
10:56 pm
normally would after a recession but if we actually understood what happened we would have said wait we should have looked at what the government was doing that they cause those underwriting standards to decline as the book points out then changed the government's policies but they ignore the government completely blended to regulate the private sector and that is the reason why we have the dodd/frank act so one of my purpose is with the book is to show that actually it is a legitimate bedded was ideologically pointing to the private sector because many people support whenever the government does into this
10:57 pm
case they did not want to live mitt the government was responsible for this crisis. >> host: and why have we had a slow recovery? and others say there is no austerity refunding back, and you is with over the average consumer debt taking on too much debt to reduce leverage to reduce that they are slow to spend. dodd/frank is another with a regulation. but one piece of dodd/frank is about providing information whether consumer or banks providing a clear picture to provide that information is their value in that for the governor in
10:58 pm
knowing what is happening? and. >> guest: the government always knew that there is nothing that is completely do in terms of regulating the financial institutions. the only areas that are is that financial stability oversight council to designate institutions as systemically important to have them regulated by the fed the matter their regulator before that is one but then the regulators of the futures business of credit defaults swaps is another but they always had tremendous power about what was happening in the baking or financial system. >> can now housing sector of
10:59 pm
what was going on? >> if you looked you will find if we have a situation as we had the floor with a government agency in charge of the housing business as the one responsible with department of housing and urban development people said this is moral hazard we don't have to do any more information because the government is protecting us and behind us so nothing will be allowed to occur that the government is the added charge of so that is the danger and one of the reasons that we should turn
11:00 pm
the housing business back to the private sector to let them run it because the mortgages that are made would be private mortgages as a business matter it is not a good idea of less you are a specialist is you know how to deal with the people who are capable to borrow that some five basis. but if they turned over to the private sector we see a stable system where the information is available for what is out there without any with taking the governing is behind all this am protecting as one of the reasons why rehash the crisis in the first place. >> host: where six years


info Stream Only

Uploaded by TV Archive on