Transcripts For CSPAN2 After Words 20150405

After words. This week Peter Wallison commit all of the the American Enterprise institute, discusses his book hidden in plain sight. In the book he argues that Government Housing policies cause the 2008 financial crisis. He is in conversation with sudeep reddy deputy Global Economics editor at the wall street journal. Deputy Global Economics editor at the wall street journal. Host your new book is called hidden in plain sight what really caused the worlds worst financial crisis and why it could happen again. You were a member of the Financial Crisis Inquiry Commission which was investigating the causes of the financial crisis. You dissented not only from the democrats on the committee but also from the republican appointees. What did you see that they didnt . Guest i had been looking at the housing system in the United States and doddfrank, im 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 has actually been happening in the housing sector. So i was looking for the commission to look into what happened with fannie mae and freddie mac, what will they might have played in the housing crisis, and ultimately the financial crisis. And i found that the commission was not interested in that. And they wouldnt look at it and to the degree that i tried to interest them i was just told that, i was given all kinds of signals that was not something theyre going to do. So i decided that it would dissent. Now, my differences with the of the republicans i think came from the fact that my view was that our responsibly on the commission was to make sure that the American People understood what happened in the crisis that i was outside i thought the partisan differences between the republicans and the democrats. Im afraid the republicans felt like they just would not agree with anything the democrats said, and they didnt want to indict the Bush Administration. Some of them had been in the Bush Administration, so i felt that they had to speak with an independent voice and thats why i dissented. Host you wrote a lengthy dissent right before the commission and in 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 well get into. But for people who dont understand, this focus on the housing and Mortgage Markets in the United States and the governments role. When and why did the u. S. Government get someone involved in the Housing Market . Guest actual it became in the new deal back in the 30s when the government attempted to assist banks in making loans by guaranteeing those loans ensuring those loans, and then fannie mae was discovered in late 1930 also part of the new deal, to provide liquidity to banks when they made a mortgage. They could then sell the mortgage to fannie mae, get liquidity for the mortgage and to make more mortgages. It was all very helpful in inducing more home sales in the United States. That was the beginning. The government really got much more involved in the 50s when they actually started adjusting the fha the federal housing administrations standards in order to improve housing in the United States, or increase the amount of housing sold in the United States in a desire to help the economy. Thats when we sort of got off the rails because once the government started using housing as a way to improve the economy in other words, to improve the American Peoples view of their government and how successful it is, then it became a political issue. Instead of what it had been before which is simply a question of making sure that the market function well. Host this stretches across democratic and republican administrations, the interest in housing and encouraging housing activity. We are do you see the more recent turning point in this development . Guest well i think the key turning point here at least from my perspective, was 1992 when congress adopted something called the Affordable Housing goals. They were under a great deal of pressure at the time to make sure that the borrowers who were below the Median Income or low income borrowers had credit for mortgages, and many activists in support of those borrowers in those communities pressured congress to do something that would provide much more credit to those groups. Congress adopted the Affordable Housing goals which required fannie mae and freddie mac the schools were old applicable to any and pretty and require them when they buy mortgages from franks banks and other originators to make sure of the mortgages they bought, 30 have 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 19922008 they gradually ratcheted up with 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 year had to be made for people who are at or below the Median Income. I 2008 it was 56 that wouldve been in the Bush Administration. So this is not a partisan thing. Its done under clinton first but then under bush the whole idea was carried through by had. Host the theory behind this is it was designed to encourage americans to save money, to develop to build equity in their homes. Obviously, part of this is to ensure that lower income and middle income people can have a home and an asset of this kind. Is there something wrong with this idea in general about people should be able to buy home and find a home in america . Guest out fully nothing wrong with it. In fact, 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. And then that way they lowered a number of people into buying homes who could not actually sustain the mortgages over time. In fact, by the year 2008, and this is really an important date in the book, by the year 2008 more than half of all mortgages in the United States are what you would call subprime mortgages, about 31 million subprime are of the week mortgages by 2008. And of those 76 on the books of Government Agencies, which to me shows clearly that was a government that created the demand for these mortgages. Now what happens when underwriting standards decline is not something that the people who bought homes are unable to carry those homes what also happens is when those homes fail, when the mortgages fail they affect all of the people around them, all the neighborhoods. The values of homes and all of those neighbors go down. So what the American People should understand after the financial crisis and which i dont think they really understand today is that they are all hurt. When underwriting standards are reduced so that other people who cant necessarily sustain the standards dont have the proper credit relationships, dont have the down payments or are unable to keep the mortgages. Host we have a couple of separate issues that intersected in the period. One was the existence of fannie mae and freddie mac and what they did and what theyve done for a while. The other was the congressional and political push to encourage more homeownership. When these two combined, of course fannie and freddie was there as a vehicle to do all of this. What happened then in fannie and freddie and its existence, in its relationship with lawmakers that led to where we got in the crisis . Guest is really quite interesting because the person who ultimately became the president of Fannie Mae Jim Johnson was his name realize, he was a political operative before that, but he realized that fannie mae was under stress because of that a very strong government franchise that it would have to sustained over time. And i think he recognized that the 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 were getting all kinds of support for the government and making quite a lot of money both of those institutions post that fannie and freddie even though they were essentially started by the government, they became like private entities . Guest they were privatized in 1968 eight in 1970 they were given authority to go from where they originally were which was only buying Government Back into the conventional market where they could begin to buy regular mortgages. That made them very important profitmaking institutions. Host and they became publicly traded companies. Guest they were both on the New York Stock Exchange at some of the largest Financial Institutions in the United States at that time. All the way up until the time they became insolvent in 2008. But the political relationships became extremely important for them because as they grew and got bigger and bigger, the dangers were always that some of the government would move against them, would regulate the more strictly. And there was a great deal of pushed in the Bush Administration for 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 the have to rely on the democrats in congress. The democrats were very focused on making sure that fannie and freddie supportive of income housing. And so even though they were beginning in the 2000s to find that they were going mortgages that would ultimately cause them to suffer tremendous losses they couldnt go to congress or go to hud and say we wont comply with these quotas anymore because its driving us out of business. We are going to fail. They couldnt get it 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 was in 2003 2004 2005 wouldve become successful and then it wouldnt have been so profitable. So they were caught in this vice 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 were gradually going to drive them to insolvent the. Host i dont know of any many areas in the financial crisis that are hotly debated and the generated more political sparring than the rule of fannie and freddie. There are a lot of different views on what exactly happened in the relationships of there. If you look at the Clinton Administration there are people in the administration is said we also tried deal with fannie and freddie. They saw a getting a little out of control. They wanted to do something about it but couldnt get support from congress. The Bush Administration, even those were people who wanted to push an effort in a certain direction, was also pushing its homeownership goals at the same time which in some ways conflicted with other pieces of the administration that was moving in this direction. Theres culpability throughout congress at different stages. Democrats who were at times pushing for the said they were in the matured when youre pushing for. And republicans of course have another view of putting the blame on democrats of there. Is there any particular moment in the fanniefreddie relationship with either the white house or with congress where italy got out of hand, or was this a slow development over 15 or 20 years . Guest i see it as a slow development. Alleys, and and freddies point that it got out of hand pretty quickly. If they recognize what youre doing, and i think many of them within those organizations must have realized it because up until 1992 they would only make prime loans. They were famous for only making prime loans and after the afford the housing requirements were put in place and they had to buy loans from people who were below the Median Income 50 or 56 of those loans had to be the people whose credit relationships were not particularly good. They begin to reduce their underwriting standards and realized they were taking huge risks in doing so. By 1995 for example, there except in mortgages with 3 down payment. By 2000 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 did not to blame fannie and freddie so much in the book as i blame hud. Because fannie and freddie more implements. They were tools in the hands of congress and the administration both lytton and Bush Administration, and it was hud that was the department of housing and urban development was carrying through the mandates of the Affordable Housing requirements, and they were being very tough about them. Because there was a lot of very good political in their for the administrations they were surfing. And in the case of the Bush Administration, yes, he wanted, bush was very favorable to the idea of homeownership. And, indeed, in his memoirs bush said i was delighted with the way that lowincome people were able to buy homes and the homeownership rate in the United States was rising, but what i didnt realize was the risks that we are undertaking at the same time. So we kind of apologized in that way for what his administration did, and i think that was the right way to do it. They did not realize the risks they were introducing into the housing system and ultimately to the entire Financial System by forcing fannie and freddie to buy mortgages that were not well grounded. Host the are a couple of core areas of dispute about the housing crisis. One is really about regulation and should have been more regulation or less regulation to you are obviously arguing that it was the regulation itself and the way it was promulgated that led to this. A thought experiment. What if there were a different kind of regulation, there werent, there were some kind of push on homeownership but not with as weak underwriting standards as we saw under, clearly stores throughout the housing boom about ninja loans no income, no job, no assets. Anybody could get along without anything. What you think might happen if they were actually standards around to that . Thats part of what came into the Financial Crisis Inquiry Commission is if the government had a proper stance for people to get these loans, then maybe we would not have gotten to the point. Do you think that wouldve made some difference . Guest yes. Action if the government would use it under Living Standards, that would be very helpful. Because, in fact, at the base of all of these problems was the fact that the government had allowed underwriting standards to decline so substantially because of other political interests that they had. Yes, so the government could have done this in a number of different ways. Assuring that under Living Standards were maintained but perhaps helping lowincome people to get down payments 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 had been cracked up to be. Thats something that 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 its like nobody ever washes a rented car. There are very good reasons to maintain our Housing Stock through ownership. On the other hand, homeownership is not and has not been overcome overtime come as good an investment as the stock market. I think the numbers are about one or 2 growth in homeownership, whereas the stockbroker over the good of time is about 7 . So we shouldnt force people to be in to own homes. We should make it possible for them to own homes that will sustain their values but the government sometimes goes overboard in the hope of supporting particular constituencies rather than homeownership and general. Host and another big area of dispute is whether this crisis was driven by Public Sector actions like what we saw in the gses with the Government Housing policy, or private sector activities to there are a lot of forces that were coming into shape in the private sector in the Housing Market, in creating Mortgage Securities. Tell us about what was happening in the private market first and then lets connect that to what happened in the public. Guest as i mentioned before by 2008 76 of all these very weak mortgages while the books of Government Agencies and that means 24 were on someone elses books and that was the private sector. The trouble with the what the narrative has been about the financial crisis since 2008 is that it is focused entirely on the private sector and on wall street and so forth. I of course have been accused of backing wall street or favorite wall street. Not at all. What im trying to do is point out where the real liability for, 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, added 24 and a very Important Role in this. The trouble with putting all the blame on wall street and the 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 need these mortgages. We are not going to be too concerned about who the borrowers were and what kind of credit score they had and whether that a down payment. Those things are not going to worry us. We have to meet a quota. And so over a period of time wall street and other originators, countrywide for example, you wouldnt say that it was a California Company but countrywide became very powerful because theyre able to assemble all of these lowquality mortgages, these subprime mortgages, put them into pools and sell them to fannie and freddie. Fannie and freddie got credit on the Affordable Housing goal for buying securities back by these eligible mortgages. So a lot of what the private sector did was to feed the mortgages through mortgagebacked securities, to fannie and freddie and during the mid2000, about 2003 four and five, fannie and freddie with the biggest buyers of mortgagebacked securities from the private sector. But then housing prices continue to rise. People begin to look at housing as a really good investment. May be one of the best investments. And so the wall street banks and others kept many of the mortgagebacked securities that they created. Many were salty fannie and freddie, but they kept the wrist. Thats why they got thank you so much trouble because they believed it seems that these mortgages or mortgagebacked security were really good investment. So i think we have to look at both sides of this equation. The private sector responding to the incentives that were created by the government, send us more of these mortgages because we need them to meet the hud quotas, and then the governments role, especially hud, and forcing fannie and freddie to continue on this course, even though by the late 2000s, they would be getting to see that fannie and freddie were on their way to insolvency if they continued to follow this course. Host theres an earlier issue in the private sector that generated a lot of private sector interest in creating these mortgages. Interest rates were at the time at record lows coming out of the 2001 recession. The fed had lowest lowered Interest Rates. They could get the same kind of returns a long a long expected on bonds. They were looking for a way to draw higher Interest Rates. That is seen as one of the causes of this security generation, these Mortgage Securities being a generated by private firms. What happened there . Take us to that end of the private sector, because there was a fair about it even not just in the u. S. But globally was called the global savings glut theory, one thing Federal Reserve officials point to a lot that there was so much money sloshing around the world looking for a place to invest that actually generated a reasonable return that it created the demand for these private securities. Guest may be so. I take that issue on in the book along with a whole lot of other issues, eight or nine major issues that have been cited, glasssteagall and credit default swaps and all those things, but the question of why we had this bubble in housing prices is one i looked at. Economists are very favorable to the idea that it was the feds Monetary Policy and then other people including the fdic took a position that was all this money sloshing around in the markets looking for place to invest. Im skeptical about both of those. You cant prove that they were not important but the bubble that we are having in housing began in 1997 to you see very clearly in the data. And by 2003 which is the time when the feds Monetary Policy was such that Interest Rates were actually negative on a real basis id have done we already had a bubble that was three times the size of any public weve ever had postwar. In addition the idea that money was sloshing around, you really were not able to see that in longerterm rates. In the 10 year note or in the 30 year on. You didnt see huge declines in the Interest Rates on those instruments, which you would see if there was a lot of demand for them. So im skeptical about that idea, too. I continue to believe that the housing bubble was caused by all kinds of new buying coming into the market with Government Credit through fannie mae and freddie mac. 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 had not occurred before. Some major changes in the relationships in the economy and i they think this is exactly one of those cases where all of a sudden a whole lot of people who have not been able to buy homes before were able to come in and begin to buy homes. And that started the bubble growing in 1997, and they continued to grow 10 years until it popped out in about 2007. So that was a very important thing, and i think it came from u. S. Government housing policy and not from anything else. Host as you know there are quite a few views about what created the housing crisis. A couple more i just want to run it through, and you do address these in the book. One is a global issue. Why did so many other countries also have housing bubbles . It wasnt just, they werent following u. S. Housing policy. We have housing bubbles in ireland, in spain, in the uk australia and canada. Many of them have banking crises in recent years in dealing with that. They did have fannie mae and freddie mac. What happened in those countries versus what happened in the United States and why do you think the u. S. Guest thats been one of the major criticisms and ive always found it relatively easy to address because its been looked at by a number of people. Want is a professor at berkeley by the name of Dwight Jaffee was done quite a study of what happened in other countries particularly spain, ireland and the uk. And his conclusion was yes they have the bubbles of air. I cant say why they have bubbles. They have bubbles of there. But when theyre bubbles collapse, a country with the greatest losses at that point were in the uk and the losses of about 3 . In the United States, fannie mae and freddie mac which had of all the players had the fewest bad mortgages. They have many, many, enough to drive them in solvent but they didnt have the worst of the worst. Their losses were between 1317 , and for other firms banks and so forth, that were holding the bad mortgages their losses went up to 35 and 40 . The fact is then that in the United States, the bubble was filled with over such used with subprime and other week mortgages whereas in other countries, where there were bubbles the losses were at most 3 , which meant that the 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 subprime and other week alone, and other countries didnt do that. They continued to insist all a long even while the bubbles were growing, they continue to insist on prime mortgages and so when theyre bubbles collapse, there were so many losses in the housing system. There are distinctions between those two appeared a subprime mortgage with simple because it was defined by Bank Regulators in 2001 and what they said its any mortgage made to a person who has a credit score of less than 660 its called a franco scored. If it is 66 to your last that is a subprime mortgage no matter what else you might say, how big the down payment was and so forth. It is a subprime are gauged below 660. The data shows again and again that mortgages below 660 on a much higher rate of default than any other mortgage. That is a defining element of a subprime mortgage and something called an allday mortgage and that came from the fact and where they called it to market agencies would not accept mortgages that had low down payment below 10 , for example were not mortgages that only required interest payments. They didnt decline they didnt make any principal payments as part of these mortgages. Those kinds of mortgages would not ask that before 1992. It was only after 1982 they begin to accept the mortgages spirit and launch them both together and they called the nontraditional mortgages because the traditional mortgages was a prime mortgage, which over time and this is what i show in some of those tables, in normal times the traditional mortgage that is the prime mortgage at a default rate of less than 1 . When we gave up on prime mortgages and began to accept mortgages that were all today or subprime in other words nontraditional, that is where we went wrong and why we really put our Financial System a serious position for as soon as we started having default we began to weaken our entire Financial System. You see in the book you essentially trying to provide a broader view than what members of the commission were able to see in some of the information out at the time. What do you know now that wasnt known then quiet guest it is interesting because one of the reasons i wrote the book is that i found in going through the data the commission had accumulated a lot of material supported the position i took when i dissented originally and it was quite said the information was never made available to the commissioners spirit ib one. I wouldve seen us and said this support my position. I wont say to suppress, but they collected a tremendous amount of information which they didnt use a lot of that was data that supported my position. There is for an example in the book a table disclosed by fannie mae and freddie mac. It was particularly good because it showed how subprime mortgages that their Affordable Housing requirements starting about 1996 until 2004 2005 showed their increase in the purchase of subprime mortgages and it showed they met the requirements under the Affordable Housing goals for loans to people below the Median Income in each case. As the senate so did the purchase or subprime mortgages. That one piece of data the one table made my case to the entire fdic but it was never disclosed to me or as far as i can tell the other commissioners. Lets go into the financial crisis. Youve made the case leading up to financial crisis. We think of bear Stearns Lehman brothers, Investment Banks. We think of aig a Big Insurance Company and its collapse. We dont necessarily think about countrywide is much even though there is quite a bit of attention on countrywide in the lead up to the crisis. Tell us how the housing piece collided with Everything Else until he gets to appoint with 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 wonders and im afraid i have to blame the people in office at the time and to some extent into the obama administration. There was the thought apparently looking not at no more of the secretary of the treasury at the time, hank paulson. If a large finance bill institution would drag down a lot of others. Both happening in 2008 2007 into 2008 it says these mortgages began to fail Financial Institutions Holding Mortgages and mortgagebacked securities had to write down their assets vary substantially. When you write down your assets, your capital declines. Another declines. Another is uncertainty whether they had done enough writing down and they were not in fact insolvent. They certainly looked weak over the insolvent. Investors are worried about this. As we approach the first few months of 2008 one institution in particular had done a lot of investing in the housing Business Bear stearns which was an Investment Bank and still lives an Investment Bank looked like it was going to fail in the government stepped in and rescued it by providing 29 billion in risksharing funds provided by the fed to jpmorgan chase, and very large bank to buy bear stearns and saved it, rescued it. Rescue their shareholders after they got a payout of 10 a share. Okay. This is an unusual thing. Had never stepped in with cash and rescued an institution so right then they thought we had a policy government. They will not allow any induced large Financial Institutions to fail and then we came to Lehman Brothers and Lehman Brothers was about 50 larger. Everyone expected the government would save Lehman Brothers. It didnt. On Lehman Brothers to fail. That was a huge mistake in the first place to rescue bear stearns because that created a lot of moral hazard that as people assume they know what the government is going to do and protect them so they make different decisions. Having created the moral hazard, they been allowed to Lehman Brothers to fail, shocking everyone in the market. People at that point did not know who was going to fail who is not going to fail. People began to withdraw funds from banks and other financial is to shun spirit the credit card gets dried up and banks refused to lend to one another. The largest in the country refused even overnight and almost no one who would follow the Financial Markets for years ever saw anything like that. I think this was the result is some serious states that government officials in rescuing bear stearns and not rescuing Lehman Brothers. And then in the same week aig was unable to meet its financial obligations and after letting Lehman Brothers fail, they went and rescued aig. They try to make a distinction and bernanke made a distinction between aig and Lehman Brothers. But they rescued aig. Many people 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 is not knowing at all with the government is going to do the day after tomorrow. That made the financial crisis much worse i believe. When you recall these events in real time we remember in the summer of 2007 there were some credit tension on credit arcade globally and we saw that develop into bear stearns in march of 2008 and of course the rescue of fannie and freddie and Lehman Brothers and the bankruptcy of Lehman Brothers in 2008 in a few days later the rescue of aig. One of the things occurring throughout this following in real time i remember the officials involved couldnt get their head around what was happening in these Financial Institutions. They looked like these are out of control banks. Outofcontrol finance geeks and acting president bush used the phrase of 2008 wall street got drunk on Financial Instruments and that is what he said behind closed doors that this was a wall street problem. There is clearly extreme leverage in some of these banks, too. You werent sure how much they were able to absorb, how much capital they should have had otherwise. The competing view is the wall street banks are entirely out of control. Regulators responsible werent sure what was on the books. What was happening on the wall street end of this for a situation to get out of control that much without government regulators who should have known what was happening. The first thing you have to recognize that this point was fannie and freddie were not revealing the quality of the loans they were taking on. As i sat at the beginning of our discussion, no one theyll but they were reducing the underwriting standards substantially and died a prime lens. As far as the market now, they had about 6. 8, 6. 7 subprime loans website is probably had about 18. Regulators and investors and risk managers and other banks had no idea how risky the market was they were playing in. That was one of the major problems. I dont know how their modules work, but if you have fed into the model that they were 18 million subprime loans instead of 6 billion, the model wouldve spit out a much different set of risks. People didnt understand at the time how risky the market was. That is a really important thing for everyone to understand about the market. Wall street regulated insured banks are heavily regulated by the government. In the larger banks there are examiners 24 hours a day seven days a week all the time and they didnt recognize the risks these institutions were taking because the institutions themselves did not. As the bubble grows, the mortgages become more and more valuable. There are very few defaults. When a bubble is growing, people can refinance if they cant meet obligations. People look and say if this amazing. We always thought that the subprime mortgages are risky but we are not seeing a lot of default so that can go into this business and invest in subprime mortgages, which is what people in wall street day. There also helped by the accounting rules at the time because if your portfolio is growing, and went to your bottom line. What happened of course has been everything reverse and mortgages started to fall in value and you begin to lose money. They began to look risky. The capital declined. So all of these things that happen at the time were the result of insufficient information about what was really going on in the market and one of the reasons is people assumed a lot about government policy. They didnt realize that fannie and freddie were actually doing and what howard was forcing fannie and freddie to do. People were surprised. That is why people in the government could not understand why things are so bad in the market. The Federal Reserve has more information and better information and better than any Financial Institution the regulator or Government Agency in the world. I have a huge economist that follow markets carefully. When ben bernanke was testifying in congress, he would say i think were having a little trouble in the subprime market that it doesnt look to me as though the subprime market is really so large that they cant overcome that even if we had a large number of failures in the market. It was amazing that he was saying these things to congress in 2000 when in fact fan and freddie were on their way to install the lead in the market was suffused with these very weak mortgages. He did not know that. So if he didnt know, certainly the bank they dont share information about buddies in the the market among themselves. They didnt know it either. So i have a little bit of trouble with people who turn on the banks immediate needs and blamed them for what happened in the financial crisis when it was so much the responsibility of the government. There was a widespread assumption that house prices were going to decline. Weve never seen a generalized national drought. Obvious that turned out to be a great understatement we saw declines of dirty to 40 even more in the country. There is also a view within the bank. They have enormous Risk Management teams. They have very highly paid executives responsible for trying to understand the risk on their Balance Sheet and how the risk from counterparties from other banks could affect them and how whatever they have on their own Balance Sheet could affect them. Was there not a failure there to understand what was going on in their own firms quite Risk Management is only as good as the data you have. If you dont understand the quality of the mortgages in the market, if you dont understand how many subprime mortgages for nontraditional mortgages were out there, then you cant actually cares and analysis to the management of the bank saying we are in trouble here. There is going to be a crash because of the way the market has developed over the years. It is now available in this book but it wasnt available at the time. And again, i think we have to understand the position that people were and at the time. There were for example i enjoyed this quite a lot reading the book by Michael Lewis about the big shortcoming which talked about the fact these people thought well there is a collapse in this market and if you bought the right credit default swaps, you could make a fortune on now for 20 cents you could make 1000 the way it was set up. He went around in the skies went around on wall street. They couldnt find any buyers because people thought i just dont see it happening. Where are all these defaults clerks weve had years and years of growth in the market. The Housing Market in the United States as you suggest never declined by more than 3 to 4 . Why is it any worse now collects this point that another or that there is always insurgency here. A lot of people say everything will continue to grow some people say things are going to collapse. We have to stop what we are doing, change, do something else. It is hard to persuade people to do that, including people in congress if they are not seen any evidence that problems were occurring until 2007. We were led down a path into believing things are going to be fine but in the end of course we had a collapse that no one could foresee because of the absence of sufficient amount of data. Host let the outcomes of the crisis was the dog for a fact which built up new regulation on Financial Firms attempting to do with the problem of too big to fail created a whole lot of other entities are rules still being developed. What do you think would be different about trade doddfrank if people are followed your spirits he wouldnt have been a doddfrank wouldve been the outcome. When you blame the private sector for what happened in states and sufficient regulation, we could have stopped this from happening but the regulators didnt have enough power, things like that. Then you get doddfrank. It is the reason we have such a crisis that has been the slowest recovery from the mid1960s by a wide margin. What has happened that has made such a different. It didnt happen this time. The reason i think its doddfrank. We have spent a lot of time trying to blame the private sector for what happened here. Creating a lot of uncertainty for a time forcing them to reduce risktaking. All of those things that cause our economy to grow much more slowly than it really went after recession. The problem if we actually get the financial crisis we wouldve said wait a minute, we have to reform of the government was doing. If we understood the government had caused underwriting standards to decline as the book points out, but change the governments policies. They ignore the government completely focused entirely on regulating more stringently the private sector and that i think is the reason why we have the act. One of my purposes with the book is to show it is actually a legitimate. It was based on the wrong target. It was ideologically pointed towards the private sector because many people support whatever it is the government does and in this case they did not want to admit that the government had been responsible for this crisis. Host are their number of views on why we had a slow recovery. One is of course government on saturday while we couldve had more government spending. That is certainly a common view. Another view is we had overleveraged consumers that are taken on by too much debt because of housing and deleveraging and reducing the debt theyve been owed to spend. Doddfrank is another one about regulation. Restraining business this is a common view for people on the right. One piece is about providing information. Whether its whats happening on the consumer front and actually providing a clearer picture through regulators to people on the ground watching the blood is happening, providing information. Do you think theres value in the government knowing what is cap named in these institutions quiets there is nothing in doddfrank that is new. The one area there are two areas that are new. One is the ability of the Oversight Council to designate certain institutions as systemically important and regulated by the fed no matter who it was before. That is one. The regulation of the features business especially socalled credit default swaps is another. That is new. Other than that, the regulators have tremendous power over a knowledge about what was happening in the banking or Financial System. They missed a lot of details in the house and victor. There was some information about what was going on. Do you think theres tools to get that now people are looking quite well, if you look you will find. If we have a situation as we have before where there is a Government Agency in charge of the house and is a and people look to that agency as the one that was responsible and that wouldve been the department of housing and urban development and fannie mae and freddie mac and people say this is another form of moral hazard. We dont really have to know any more information because the government is protecting us. The government is behind us. Nothing is allowed to record the government does not charge of in some way. So we really dont have to worry about this. That is a real danger. That is one of the reasons in my view we have to turn our housing business to the private sector again. But the private sector run it because under those circumstances the mortgages made would be prime mortgages. People do not want to make as a business matter it is not a good idea to make a subprime loan unless you are a specialist in that area and know how to price them and deal with the people who are only capable of byron on a subprime basis. But if we turned it over to the air, what we see is a much more stable system with the information would be available to all about what is out there and all kinds of anyone thinking the government is behind all of this and is protecting us. Its one of the reasons we had the crisis in the first place. The next six years after the financial crisis in the Housing Market is recovering slowly. What is your view of the health of the Housing Market quiet i have a negative have a negative view and not us by the subtitle of the book is what caused a financial crisis and why could happen again. If you point the finger at the private sector and use ac with the doddfrank act would have regulated the private sector so we have nothing to worry about anymore. There will not be another financial crisis. Meanwhile, the government has gone back to doing exactly the same thing he was doing before the regulator of fannie mae and freddie mac with the Housing Finance agency. A few weeks ago fannie mae and freddie mac were not taking enough risk on mortgages. But what not to expect 3 down payment. You have been insisting up to now that things make 5 down payment. Even that is weak. Now unable to stimulate the Housing Market, the government through the regulator is saying we want you to accept 3 down payment. Thisll lead over time to exactly the same problem for a whole lot of people of mortgages that they cannot sustain when the cycle turns and we have something of a downturn. We will have another crash in the Mortgage Business which will have the same effect on financial is the tuition will have something close to if not again a financial crisis. We shouldve understood from the beginning it was the governments role that put us in this position and then we could have effectively reforms the government rather than trying to impose more restrictions on the private sector. You think the next crisis looks different in any way quiet there will always be some differences. If we keep going this way with the government in charge of mortgage standards we are bound to have Something Like a financial crisis again. The import thing to understand is that theres not something irrelevant to them because those who own homes, a while back if mortgages in your neighborhood scale, the value of your home is forced to decline. He wrote investments are expected to vary directly by whether your neighbors are people who actually can sustain the mortgages they are holding. White is bad for the American People not only us taxpayers because we had to bail out people when these governmentbacked organizations fail but also directly on the American People themselves whose homeowners have something i dont think people recognize. Who had to be insisting on solid underwriting standards to keep a stable market and stable housing value. Thank you. You are welcome. Pleasure. Biographies and prominent political figures like laura bush and joseph kennedy. He will be answering your calls and tweets until 3 00 p. M. Eastern. Host we have author ron kessler with desperate is the system broken . Guest not necessarily with the agents come of age and have been very dedicated and they would take a bullet for the president. But there is a retaliation against those who point out problems or threats, punishing agents who question really anything and on the other hand promoting