obama's shameless scandal and bloodiest cover up. >> bad history, "bad history, worse policy," peter wallace and looks at the wall street reform and consumer protection act and argues that it is based on a false narrative of what led to the 20008 collapse, he spoke at the american enterprise institute in washington d.c.. this is just over 90 minutes. [inaudible conversations] >> good afternoon and welcome to our discussion of my distinguished colleague peter wallace history, worse policy: how a false narrative about the financial crisis led to the dodd-frank act". ..

>> president bush's prediction was, of course, a very bad one, as we know, and needless to say similar and, no doubt, equally bad predictions have been made about the effects of the dodd-frank act which we'll be discussing today. such predictions highlight a predictable cycle in the wake of a financial crisis. there is an inevitable political reaction based on political, not necessarily economic or financial logic, and the political logic goes something like this. i as a politician must do something, what could i possibly do? well, i could always expand and reorganize regulatory

bureaucracies even if viewed over time it doesn't work or, indeed, is perverse to do so. a famous be military theorist talked about the fog of war in a financial crisis we have the fog of the crisis followed by the fog of legislation. but it's even worse if the voluminous legislation not only reflects the fog, but is based on a wrong idea, a faulty understanding, or as peter persuasively argues, a flawed ideological narrative. peter wallison is the arthur f. burns fellow on financial policy studies at aei. his latest insightful book, "bad history, worse policy: how a false narrative about the

financial crisis led to the dodd-frank act," is what we're here to discuss. inin addition to his constant fw of instructive commentary on financial issues and regulation, peter is also the author of "ronald reagan: the power of conviction and the success of his presidency," a great book which should be read by every student of the u.s. presidency. of "competitive equity: a better way to organize mutual funds." "privatizing fannie may, freddie mac and the home loan banks," we're still working on that, and "the gap gap." here's our book. i hope you read this whole book, but in case you're intimidated by the thickness of it, please in any case read the closing chapter on the burdens and blunders of the dodd-frank act.

it is a succinct, compelling case for the prosecution with dodd-frank in the doc to which the jury of time will surely respond guilty and the judge pronounce sentence, string 'em up. peter will present his book. in about 25 minutes we'll have three discussants, we'll give peter a chance to respond and some discussion among the panel, then we'll open the floor to your questions. and at 1:45, unless we run out of questions sooner, we'll adjourn to a coffee reception. copies of peter's book are available at no cost. should we run out and you don't have one yet, you can sign up to get a free copy, and peter will be glad to sign books during the reception. thanks to you all for being with

us today and, peter, we're looking forward to your comments. >> thanks an awful lot, alex. um, the reason for the free books, incidentally, is i thought i might explain this. this book was written with a grant which we received, a generous grant to publish my financial services outlooks, the ones that i had written over a period of about eight years. and when it was published, we learned that the actual publisher had placed a very high price on the book of $90. i generally refused to speak at a conference where they were going to sell a book for $90. [laughter] it's not worth it. [laughter] but we thought, well, okay, we can buy the books from the

printer as part of our arrangement, and we can buy them for much less, and so we might as well give them away. we did not advertise, incidentally, that free books were going to be given away, because i was afraid that would draw the crowd. i'm happy to see that, actually, people came not knowing that. so i appreciate all of that. thank you. now, "bad history, worse policy" makes a very simple point, that every major public policy is based on a narrative, a description of how a problem came about and what changes are necessary to resolve it or prevent a recurrence. in cases involving major national issues, there's a debate usually about the substance of the narrative in which differing views are heard and evaluated. an example of this process is the current debate about whether human activity is causing global warming. there is an ongoing controversy

about the facts in which each side understands but disputes the arguments of the other. eventually, a decision will be made. not everyone will be reconciled, but everyone who wanted to have a chance to speak or to express an opinion will have had that opportunity. other examples that are in a similar process of resolution are immigration, gun control and entitlement spending. in these cases the issues have been joined, and the debate will eventually produce an outcome. the abortion issue is an example of what happens when this process is not followed. there the matter was decided by the supreme court before any kind of public debate, and the result has been continuing turmoil and even violence. in the book i argue that there was never any significant debate about the causes of the 2008 financial crisis. although there were two

narratives about why it happened, only one of them was accepted and propagated by the media. in effect, the necessary competition and ideas never occurred. as a result, the policy that was adopted -- the dodd-frank act -- is not soundly based in any political consensus. this will leave the legitimacy of the act in question for the foreseeable future. the dodd-frank act is based on a narrative developed entirely by the left. it places responsibility for the financial crisis wholly on the private sector and particularly on the large wall street commercial and investment banks. to the extent that the government had any role in the financial crisis, it was in failing to regulate adequately either those institutions or the mortgage originators who profited by selling mortgages to

people who couldn't afford them. the book traces the influence of this narrative into the specific provisions of the dodd-frank act. i argue in the book that this narrative is false. it was bad history, and it produced worse policy. it is certainly true that the private sector had some role in the financial crisis, but this was relatively minor when compared to the government's effort throughout the clinton and in part of the bush administrations to degrade mortgage standards in order to increase home ownership. this contrary view was never put before the american people in time for its implications to be considered in the debate over dodd-frank. if that debate had occurred, it's unlikely that the dodd-frank act would have been enacted in anything like its current form. now, why did this debate not

occur? why was there no competition in ideas on this matter? that is what i'll largely talk about today. for those not familiar with the argument that the financial crisis was caused by government policy, let me state it as succinctly as i can. before 1992 the vast majority of mortgages in the united states were prime mortgages with down payments of 10 to 20% and made to people with good credit records. fannie mae and freddie mac were the principal enforcers of these rules. delinquencies and defaults were few. in 1992 congress adopted legislation that required fannie and freddie to meet what were called affordable housing goals. the legislation initially required that at least 30% of the mortgages fannie and freddy made had to be made to people who were at or below the median

income in the places where they lived. hud was given the authority to increase that quota, and it did so. raising the quota to 50% by the end of the clinton administration and to 55% in the bush administration. statements by hud throughout this period made clear that the agency's intention was to reduce the underwriting standards that were prevail anything the market -- prevailing in the market in order to make mortgage credit available to a larger number of borrowers. there is no ambiguity about issue. it was difficult for fannie and freddie to find prime quality mortgages among borrowers who were at or below the median income, especially when the quota had been raised to 50%. is so in the mid 1990s, they began to reduce their underwriting standards, accepting 3% down payments by

1995 and zero down payments by the year 2000. acceptable borrower fico scores, credit scores, were also reduced. because fannie and freddie were the dominant players in a largely -- and largely set the standards for the housing market and the mortgage market, these lower underwriting requirements spread throughout the market, not just to those mortgages that qualified for the affordable housing goals. the availability of government support for low quality mortgages and the easy availability of mortgage credit substantially increased demand for housing and built an enormous bubble, nine times larger than any previous bubble between 1997 and 2007. by 2008 half, half of all mortgages in this bubble -- that was 28 million mortgages -- were

subprime or otherwise low quality. of these three-quarters were on the books of government agencies such as fha or other entities controlled by the government such as fannie and freddie. shows incon incontrovertibly, iy view, where command for these -- where demand for these loans came from and why these mortgages proliferated. when the bubble finally deflated in 2007 and 2008, these loans defaulted in unprecedented numbers. driving down housing values and weakening financial institutions in the u.s. and around the world. when lehman brothers collapsed, a financial panic ensued with banks and other financial institutions hording cash and refusing to lend to each other, and that was what we know as the financial crisis.

it's not as though these facts were unknown or unknowable. fannie and freddie were two of the largest financial institutions in the world and were taken over by the government before lehman brothers failed. you don't become insolvent by acquiring and guaranteeing prime mortgages. included in this book is an essay that charlie, a professor at columbia business school you probably all know, that he and i wrote in september 2008, the same month that lehman failed outlining fannie and freddie's role in the crisis. republican members of congress and conservatives inherently skeptical of what they were told by the news media were able eventually to put facts together. so it is now widely believed by policy-conscious republicans and

conservatives that the financial crisis was caused by the government's housing policies. every major republican candidate for president in 2012 said during the primary debates that this was the cause of the financial crisis. and marco rubio repeated in his response to the president's state of the union message that in one sentence, that this was the cause of the financial crisis. even george w. bush in his memoirs admitted that he'd made a mistake in giving excessive support to increase home ownership. the left seems desperately afraid that this idea will gain wide currency. although there was only one sentence on the subject in senator rubio's speech last week, the left's blogosphere from paul krugman on down exploded with rage. idiotic!

thoroughly refuted, and the perennial favorite, it's a lie, was the way rubio's comment was characterized. my aei colleague, ed pinto -- who's right here in front of me -- and i were once accused by joe nocera in his new york times column of using the big lie tech meek for suggesting that the government -- technique for suggesting that the government had a major role in the financial crisis. it doesn't get much worse than being compared to joseph goebbels. [laughter] most americans have no idea that there is an alternative view of what caused the financial crisis. the result is an odd gap in public discourse on this issue. as an illustration, when i am interviewed about the financial crisis, i am often asked why no bankers have been sued personally or tried criminally for causing the crisis. i usually respond by saying i don't think that the bankers

actually caused the crisis. this appears to interviewers -- to leave these interviewers dumbfounded. they have no frame of reference with which to interpret this response. i then have to explain my views about what were the actual causes of the financial crisis, and they have, and they and other listeners perhaps have to take it in, take in this rather complicated description of an event that in many cases they have heard for the first time. this would not happen, for example, in an interview about climate change. if i were asked whether the u.s. should reduce its reliance on fossil fuels in order to prevent climate change, listeners would understand that there are two views of the subject; those who believe human activity is causing climate change and those who are skeptical about it. if i respond that i think we need more study of this issue before we take steps that will seriously hinter economic growth -- hinder economic

growth, most listeners will understand the views underlying my remarks even if they disagree. they have heard the narrative that if we reduce fossil fuel use, we will suppress economic growth. however, because most americans have not heard anything about an alternative explanation for the financial crisis, they have no frame of reference for it other than as a disaster that caused, that was caused by the wall street banks. now, why do we have this unusual gap between public knowledge about one of the most significant economic events of the last 100 years? obviously, there was a major flaw in media coverage, and the reasons for that are not hard to discern. it is no secret that the media is dominated by the left, and the left has always had suspicions about capitalism as an economic system. not only is capitalism regarded as darwinian, as an enemy of

equality, but it is also seen as inherently unstable and prone to crashes. that's why immediately after the lehman default and the resulting chaos, the media were full of commentary that this was the end of capitalism. it had finally revealed itself as too dangerous to be allowed to function without firm government control. the fact that lehman's default and the ensuing chaos agreed to completely with the left's view of the u.s. economic system allowed many on the left and in the media to view it as a confirmation of something that they had always believed and not a debate bl issue. in thisceps to this group -- in this sense to this group, other explanations were dell story and a waste of time. the crisis also served the interests of another group with a loud voice in this subject, financial regulators. we're all familiar with the remarkable fact that

regulators -- alex was talking about this before -- get more power when they fail. witness sarbanes-oxley,fyrrhea, i won't go into what these names mean. many of you who study banking law, financial law will know it. each was a new set of powers for regulatory, for regulators who had recently failed. in the case of the financial crisis, financial regulators were quick on the draw with new regulations that would impose more controls on the financial industry. the fed, which arguably was most at fault for failing to see the crisis coming, got the most new powers, becoming in effect the uberregulater of the financial system with the potential eventually to regulate large insurance companies, finance companies, hedge funds and money market mutual funds as well as banks. this is truly a case of not letting a good crisis go to

waste. nor has the steam gone out of the regulatory engine yet. if you read the speeches of fed officials and other bank regulators from around the world, you'll find that they are eager to somehow get control of the securities market. the code words here are "shadow banking." a clever suggestion that the securities industry is engaged in banking on the sly without the necessary regulation. the reality is that the securities industry is a more efficient supplier of funds to the real economy than banks. it is simply less costly to sell bonds, notes and commercial paper to investors than to borrow from a bank. finish since the mid 1980s by intermediating these transactions, the securities industry has supplied 15 times more financing to the real economy than banking. and it has done so without government prudential

regulation. when the financial crisis came, lightly-regulated investment bank withs like bear stearns, lehman brothers and merrill lynch did no worse than heavily-regulated fdic-insured commercial banks like wachovia, washington mutual and indy mac. so it's hard to see that more and titled regulation is really the answer. what we are watching in the name of prudential regulation is the government gradually squeezing the life out of the banking industry the way the interstate commerce commission gradually squeezed the life out of the railroads. if we let the government insure and provide prudential regulation to the securities business as some regulators have now proposed, we'll pay a heavy price in lost economic growth. finally, even natural supporters of free markets and members of

the financial industry were shaken by the crisis. and were slow to resist the tide of adverse commentary in the media. without an alternative explanation for what happened, officials at banks and other financial institutions had to admit that they did many of the things that were now being cited as the causes of the crisis. these uncoerced confessions came because they had no idea that while they had bought, held and securitized subprime mortgages, the government had done the same thing with three times as many. that was not reported in the media, and without this information it was plausible that private actions could have been spend for the financial -- could have been responsible for the financial crisis that they saw all around them. a good example of this phenomenon is the chief investment officer at jpmorgan

chase. he circulates a newsletter to friends and clients, and in 2009 he used it to blame banks like husband -- like his own for making the irresponsible and risky mortgage underwriting decisions that brought on the financial crisis. this was to be expected. the only information he had was what he had read in the newspapers or saw on television. he knew, certainly, what chase had done, but he did not know what the government role had been. then one day he ran across my dissent from the majority report of the financial crisis inquiry commission in which i argued that it was the government's housing policy and particularly the affordable housing requirements that were imposed on fannie mae and freddie mac that drove down underwriting standards, built an enormous bubble and caused the financial crisis. he then looked further at the data assembled by ed pinto and concluded that he had been wrong. it's not that jp morgan had not done the things that he had

initially cited, it was just that the contributions of the banks and the private sector institutions generally were only a small part of a much larger picture. once he was aware of the larger or picture, he used his newsletter to issue a retraction of his earlier judgment. with the left, the media and the regulatory apparatus all singing from the same hymnal and the private sector unaware of what really happened, very few people were willing to question the claim that the financial crisis was not caused by -- was caused by the private sector. even if there were voices in defense of capitalism, their views were seldom given attention in the media. i had a particularly remarkable experience with this problem while a member of the financial crisis inquiry commission. the commission scheduled several public hearings which were televised on c-span.

the media were almost always present as observers or were watching the proceeds, proceedings on television. in several of the hearings, i asked witnesses whether they were aware that there were 25 million and other low -- subprime and other low quality mortgages in the financial system in 2008 before the financial crisis. that was the number i had at the time. since then ed pinto's work has shown that there were, in fact, 28 million low quality lobe -- loans in 2008. all the witnesses were asked this and all of them said they had never heard of such a thing. the fact that 28 million subprime mortgages were in the financial system in 2008 -- again, almost half of all mortgages -- was undoubtedly news. i might have been wrong, but it was news that i said it. it had never been reported before, and it is a shocking

number. yet i have never found a single reference to it in any major media report on the fcic hearings where i made the statement. and i never recall receiving from a reporter, receiving a call from a reporter asking me where i'd come up with that number. publication of the 25 million number would have led immediately to questions about how so many of these weak more gamings got into the financial -- mortgages got into the financial system in the first place and where they were located. i would have been able to show that only a minority of these nonprime mortgages were on the books of banks or other private financial institutions and that most of them were on the books of government agencies. yet my statement never evoked the slightest media interest, and, of course, was never covered in the fcic report. in addition, at the time the fcic's report was published, i issued a 43,000-word dissent

with a great deal of data showing that the housing policies of the government and not the private sector, the greed or the irresponsibility of the private sector had caused the crisis. the substance of the dissent got no more than a sentence in any major newspaper and was not covered at all in any of the major broadcast or cable media. in the months that followed, only fox news interviewed me about my view of the financial crisis, and that was part of a program that, to fox's credit, included a lot of material that also pointed to private sector responsibility. but i was never interviewed at all about my dissent on abc, nbc, cbs, msnbc -- that goes without saying -- cnn and the pbs "newshour". despite the fact that the same data i had included in the dissent had persuaded republican senators and minutes of congress

to vote -- members of congress to vote virtually unanimously against the dodd-frank act. it's no wonder then that the american people still believe that the banks and other financial institutions were the sole cause of the financial cry cry -- crisis. the polls all show this. there still has been no competition in ideas. if it does nothing else through its collected essays, "bad history, worse policy" shows that from the beginning there was a competitive and a competing narrative. but before the opening bell had sounded for this prize fight, the referee had declared a winner. thanks very much for your attention. [applause] >> thank you, peter. now i have three expert

discussants who are going to address this book in various way, i'm sure. let me introduce them. first will be john allison who is president and ceo of the cato institute. before joining cato, he was chairman and ceo of bb and t corporation, the tenth largest u.s. financial services holding company which during his two-decade ten your as ceo -- tenure as ceo grew from $4 billion to $153 billion in assets. john has been recognized as one of the top 100 most successful ceos in the world over the last decade. he also serves on the board of visitors at the business schools of wake forest university, duke university and the university of north carolina at chapel hill. ..

vice president for financial institutions, policy and regulatory affairs at the american bankers association where he oversees policy development, regulatory and compliance issues, securities and investments, derivatives policy and risk-management. he was previously assistant secretary of the treasury for financial institutions, a member

of the board's investor protection corp. and staff director of the senate banking committee. needless to say, he was not staff director of the senate banking committee when dodd-frank was enacted. we are looking forward to your comments and john, you have the floor. >> good afternoon. pleasure to be with you. i want to begin by congratulating peter on an outstanding book. i think his theme is very important, an unbelievable job creating a myth that peter describes which is the financial crisis was caused by deregulation of the banking industry and greed on wall street when the banking industry was not deregulated. we had a massive increase of regulation under george bush, privacy act, patriot act, sarbanes oxley and the whole

idea there was a plague of greed on wall street i find strange. in my 40 year career there was plenty of greed on wall street but no evidence that there was more greed than usual. that was made about of coleslaw. i have to acknowledge a real debt to peter and alex and also wrote a book called the financial crisis and a free-market cure and use a lot of research that peter had done in my book and i owe him a big debt, and one person seriously put together the numbers some of us in the industry intuitively saw was happening. his work was very valuable to me. and the arguments presented in these individual papers but reading peter's book was easy, and when i was running bb entity we ran good decisions. we intuitively knew something

was borrowing but was very helpful to have facts to encourage us not to do the kind of things. my company did better than a huge financial institution for a variety of reasons but one reason was the argument that peter was presenting the were influencing and reinforcing what we intuitively knew was happening. some of his themes are particularly important, the role of the housing policy going back a long time but particularly the >> host: 90s and its impact on the economy that role for andymac and freddie mae and in the book deals with things that are nontrivial federal little academic but important, things like the very destructive nature of fairview county, the myths created by the so-called shadow banking system, nothing shatter we about it. and the myth of derivatives and credit default swaps, looks and

all those things and destroys one by one those myths as causes of the financial crisis. and talk about the role of regulators and the destructive nature of the regulation and when they were neutral in this crisis, they were huge incentives for destructive activity and very negative. in all of these themes, peter's work is important. is more convincing if you think about the fact he was writing this when this was happening and in many cases, where he was projecting and projected forward turned out to be true but makes a more powerful argument. end this kind of feedback, i don't know that we disagree, the things that are not focused on in the book. and the real fundamental cause of the financial crisis, we

don't have a private banking system in the united states and the monetary system in the united states and the government monetary system and the monetary system by definition, the government owns the monetary system. and very creative economic cycles and in this case. very bad mistakes in the early 2,000s. we were doing a bad economic correction, created negative interest rates. when house prices were appreciating, and ben bernanke created a yield curve which banking business was a disaster and short and long and we had negative spreads. and this is one reason this bubble went exponential last several years. so the contact in which these mistakes were made were really federal reserve policy and got reflected primarily in the housing market because of the government housing policy

specifically freddie mac and fannie mae and overinvestment in housing is destructive which is why this was an unusually big bubble. pushed further, to see housing is consumption. you consume a house, we in sending a massive overconsumption which is analogous in agriculture to eating see corn. which is why we had a hard time getting the production process going again and when this process was exponential we taught millions of people how to build houses or be real-estate brokers or mortgage bankers and learning new jobs and housing in the context of government, federal reserve monetary policy was particularly destructive. and i am for a more radical solution. and as long as it is naive to

believe the risk isn't created by the system itself. is not big banks that create risk in the financial system but the federal reserve, but it is incredibly risky to the economy. i don't care how good a bank you run it is leveraging itself, and it may or may not have that regard but the institution can't manage risk in the context of a bigger system, systematic risk. i'm going to a private banking system using the market based standard mica gold standard but if we are doing that my own recommendation is at least a step to require banks to ruth have more capital than they do today than when we had a private banking system. and repeal 90% of the

regulation, and let the market take care of allocation of capital and a better solution than we are working on today. i would share peter's enthusiasm. and repealing dodd-frank. i am still on the board of bb&t. tied for the average person to realize the banking system and united states is very much controlled by the government today and if you want to control an economy control the allocation of capital and particularly if you don't get blamed when you blow things up which is exactly what happened with some prime lending so they could dictate and allocate capital in a rational fashion and it doesn't work. it is far more powerful than -- a more status solution and the reason the left jumped on this issue is gave justification to do something they could never get justified. and the reason they have so much

intent, they are really scared about any attack on this myth. they really depend on this smith. i have had interviews with numerous reporters some of which claim to the economists and one of the bring up an alternative solution is not that they just argue with you. they get the emotional intensity because if you undermine this myth, everything that happened since this crisis started doesn't make any sense. it is a real threat and they wanted to make sense because they want to control the system so peter is right. this is a big important issue about the future of our country because controlling capitol controls and economy. i congratulate peter on a job well done. thanks. [applause] >> thanks for the chance to be here to discuss peter's book

which was excellent. it differs from dodd-frank in several ways. is well written, cogently argued and doesn't attempt to deal with issues that are totally unrelated to the issue at hand. but there are some similarities between peter's book and dodd-frank. they are both really long, they are both i would categorize as curator years, meaning that they make me cry at the state of our financial regulations. the third similarity is neither of them would have been written or put together if we had listened to peter earlier. peter was one of the first voices and first people to shine a light on the g s es which were so central to the crisis and in the book he talks about the rise of the g s cs, the incredible power they exerted, the ability they had to shut dissenting voices down. the fall of the g s cs and their

attempt to stave off the political consequences of that. he talked about the early republican senate efforts and the bush administration efforts to rain in the gee as thes and talk about the situation now where the g s es would not dealt with in dodd-frank and in fact dodd-frank took under attack for a private securitization market and as a result we end up with a much more heavily concentrated government presence in housing finance with fha rising as the next bailout candidate to be and the private securitization market unable to restart. starting the book in this way was very helpful because it lays out a model for what we are going to see with dodd-frank. the future dodd-frank has created for us which is the

future of gsts. the g s es in dodd-frank are systemically important financial institutions which include banks designated under dodd-frank and any additional entities that the financial stability oversight council designates as g s es so these institutions will have an implicit guarantee from the government. they will be in partnership with the government. the government will tell them what to do and they will respond and as peter points out this leads to a funding advantage that will then drive competitors out of the market. if there are problems at these entities, regulators will have a real incentive to come in and rescue them probably in a behind-the-scenes rescue because of failure of one of these entities would reflect failure of the regulators. peter points out all of these problems that we can expect.

peter's book explains why we're ending up with a new set of the s es when the last ones were the cause of the crisis and he focuses on the importance of narrative. if you kelly story often enough it becomes true and that happened with dodd-frank. the congressional inquiry into the causes of the crisis and solutions for those, the underlying problems was a first. hearings were held for the sake of having hearings and the hearings were also held for the sake of fortified in an already existing narrative. that narrative was one that set into the wish list as peter point out, regulators eager for more power and folks who ultimately believed, market discipline and regulatory

solutions. the narrative plays into the role of regulators are lots of information and discretion and enabling them to keep the market safe and sound and as a result of that to control competition. peter's book talks about aig and the role it played in the narrative and once to talk about that for a minute. he is absolutely right that aig was central to the narrative. people pointing to a ig and said derivatives caused the crisis. in doing that they ignored the fact that some of the problems, many of the problems aig had nothing to do with derivatives. subsidiaries had themselves invested in residential mortgage-backed securities and that also pose a problem. the aig narrative didn't talk about that because it wasn't convenient for the end bowl they wanted which was to regulate

derivatives. the aig narrative also didn't talk about the fact that aig was likely insolvent because it wasn't convenient. the government needed to distinguish a ig from lehman. lehman was solvent and aig wasn't. the private -- would have taken a different view of that and concluded aig wasn't solvent but these things were left out because they were not convenient to the narrative. it was used by regulators to increase their authority. a catch phrase gary densely uses, chairman of commodities interest trading commission is aig, aig f p, unregulated london subsidiary almost brought down our entire economy and he uses that, maybe the cftc should regulate activity in london as

well as new york. this book is very effective at challenging the narrative and he is right to point out we need to challenge that narrative to make changes to dodd-frank. and to prevent the further acquisition of power by regulators who have gotten a fair amount of power in dodd-frank. he is willing to take on issues no one else is willing to take on. that the fdic became the entity that will be in charge of the orderly liquidation authority. why is it that the fed which has no authority, no experience in regulating insurance or hedge funds can suddenly become an insurance or hedge fund regulator? he asks the hard questions. i do have a few questions after reading the book that remain open. one of those is could the orderly liquidation the force for good if used properly for the first time? to pick a name out of the hat,

citibank has problems. would regulators perhaps use the orderly liquidation authority to wind down city and sent a message to a market that actually there will be consequences for failure and would that be effective at changing the tone? another question is peter and tim geithner agree can't be systemic until circumstances are heard until it is systemic. to indict her's responses let regulators do what we want when we are in that situation. we will figure out the right thing. trust us. what is peter's solution? what would he do during the crisis? what actions by the government are appropriate during the crisis. i look forward to discussion of these issues and congratulate

you on your book. [applause] >> wayne abernathy. >> it is an honor to be with you particularly to comment on peter's book. in the mid 1916s milton friedman and anna schwartz set out to do a difficult thing. a herculean task to challenge the prevailing narrative of what caused the great depression. in so doing they friend the underlying rationale for a whole system of major laws, federal agencies, and the very way that policymakers looked at the world. they were not immediately successful but because they were right, and because they were meticulous and careful in their reasoning and because they were relentless and didn't shy away from controversy, they had success.

the role of the federal reserve and its confectionery monetary policy at the heart of the depression is now well recognized, so much so it was a guide later to chairman of the federal reserve 40 years later when he faced when he saw as a similar type of crisis and recognized the role of the federal reserve and avoiding confectionary monetary policy. of course that also shows that avoiding one major mistake is not insurance against committing others. hence the importance of peter wallison's book. as he said himself, it is no less daunting than that faced by friedman and schwartz to turn around the prevailing narrative of the financial and economic disasters we recently faced and the wrong lessons learned that led to policies and institutions that unless change will bring on further calamity. i greatly applaud the efforts, i

greatly appreciate the format of the book. when i first got the book i fought all right, several hundred pages of new ridings from peter. this is stuff i already read. then this new stuff too. these essays as the point has been a are important because they were written when the crisis was unfolding and in fact they begin when the kindling was set to the striking of the match, to the fanning of the flames, and to the continuing willingness to allow the embers to smolder rather than putting them out. wouldn't we have loved to have similar essays by friedman and schwartz during the depression? but their time came after that and they were looking backwards. we had the opportunity to have lived with essays that talk about and comment on the situation as it unfolds.

i am struck by the breadth of the issues that are covered, the striking insights and the remarkable consistency throughout the book and throughout the period when the essays were written to be the book as mentioned adds new commentary and i agree with the suggestion, first chapter to read is the last chapter that pulls it all together. is a long book, but one that can be taken topical byte by byte because of the weight is organized and it is still shorter than the dodd-frank act by several hundred pages and costs a lot less. even if you pay the advertised price. like all good books peter's book stimulates thinking. for a few minutes that remain to me i want to touch on a few thoughts that have come to my mind as i have gone through the book and reread the things i've read before and read the new items. the premise of the book is bad history yields bad policy results. the dodd-frank act has succeeded

in replacing the financial crisis with a regulatory crisis. government accountability office report that came out last week revealed ten of the federal agencies tasked with dodd-frank, not all of them but 10 of them had hired or reassigned 2,541 people to work on dodd-frank as a comparison, the office of the comptroller of currency only had 2700 people in all its offices nationwide. in addition to three brand new agencies with sweeping new powers every financial regulator is coping with changes and mandates and structures and duties under dodd-frank and some of the same people involved in the musical shares are the same people given the task to write regulations and oversees the industry of all that is going on. we are extremely fortunate that while dodd-frank has been unfolding we have not had another financial crisis because

the people that would have dealt with are distracted doing dodd-frank during that time. but i would say the preoccupation with the regulatory crisis is probably the reason we have heard nothing from the regulatory agencies and nothing from given this responsibility about the ongoing bubble and treasury debt securities or a fact of the wall of new causing and mortgage regulations that our industry is about to hit just as the housing markets are starting to recover. one of my favorite essays in the collection is peter wallison's paper on deregulation in the financial crisis and others in -- urban myths. i lived through the legislative efforts of the 90s as did mr. allison and i must say it did not feel like the regulation. many new regulatory mandates were imposed. industry and in the markets and new broad discretionary authority was given to the

regulators. each of these new efforts, with each of them some would characterize as the regulation, each of these came with some kind of additional price tag for new regulatory burden. the one i was most familiar with was for example the law that created a whole new regime of privacy regulation subject in the new bank -- the banking industry and other financial services to this new regime and in addition the banking industry for the first time had been subjected to fcc supervision for all their new security activities. that is something glass-steagall didn't even do for the banking industry. peter emphasizes as the obama administration has as well that the 1999 legislation enabled banks during the recent recession to play a major role in taking up and taking on the failing nonbanks and to ensure that the more important

functions continue to operate in an uninterrupted fashion. i do however believe that i take issue with peter wallison's paper on the 2009 stress test mandated by treasury and administered by bank regulators. peter correctly demonstrates the stress tests were very rigorous, plenty rigorous. they assumed the obama administration's recovery program would fail. that was not only going to fail but make things far worse which is curious given the entity that created those stress tests was the treasury department given the task of promoting and carrying out the president's recovery program. it is not the rigor of the test that i question but rather in the necessity. peter accepts the treasury assumption that they were needed in order to restore investor confidence in banks. peter is correct that the stress tests were something of a gamble by secretary to indict airbus to

perhaps an unnecessary one. investors were already beginning to return to banks long before the results of the stress test were reported. i do agree, though, with the assessment of the outcome peter makes. exposed the alarm is above the experts for the 12 that it was. one other important conclusion of the stress test that peter evaporates is that they show how far off base mark to market accounting is for evaluating assets banks hold. banks hold their assets, these assets into the put the cash flow, not their fire sale value and the cash flow of these assets performed far better than the mark to market estimates reveal. one more thing. peter explained in the paper that the stress tests demonstrated that banks suffered through their losses on swaps, derivatives and other so-called exotics. reasonably tolerably well, they

absorb those losses. what caused the bank's third great challenge for losses in very traditional banking activities such as retail and commercial lending. people who made the legislative and regulatory mistakes might not have known better. but the record of this book and the fact that it was written as things were evolving throughout the process demonstrates that they had no excuse for for not knowing better. for political or ideological reasons they were locked into a view of the world that was disconnected from reality. a reality that was daily not being held by the helper's who had the task of improving things. peter wallison's book will help us identify the mistakes and lead to solutions. what to do about it. right now the current effort, bipartisan and even non partisan, focusing on a very dispassionate way in a review of

the dodd-frank act, what is working, what is not working and how to reform what was done. must of that second thinking might have been avoided had there been a bipartisan approach throughout. how to look issues more broadly. reform will be welcome on time or late. and more herculean task, avoid reform too long, continue down the destructive line too far and the task may evoke comparisons with hercules's stiff labor, cleaning out the unstable. thank you. a [applause] >> thanks to the whole panel, for a very articulate, focused, and helpful remarks. i want to give peter a chance to respond to any of the ideas that

came out of the comments and give the panel a similar chance in the second round. peter? >> i was shocked that there was criticism coming but that wasn't the arrangement. i thought john allison's point was important about the federal reserve's role in creating at least the bubble. i have looked at this because many many people, economists who i respect have taken this position. i don't have a chart here that shows this, but if you look in some other stuff that is around, maybe it is in the book, there is a chart that shows the growth of the bubble that began in 1997. by the year 2000, that bubble was already larger than any bubble we had.

it was already above 10% in size, probably 12% or 15% by that time. by 2003 it was ten times the size of any bubble we had. the reason i mentioned 2003 is the major proponent of the idea that the fed caused the financial crisis with its lower interest rates is john taylor who you all know probably and he is a professor at stanford. and he has -- monetary economist at very well respected. i talked to him at length about this subject and he agrees, at least he agreed with me, that the bubble was initially begun by the government housing

policies. the housing policies created huge growth in housing values, housing prices through 2003. it was between 2003, and 2005, he argues, that he said's activities did accelerate the bubble that was already created. i think i am going to rest in the shadow of john d. taylor here and say that i don't have any better opinions than that. what happened was the bubble was begun by housing policy, created much more demand for housing, the bubble grew to very large size by 2003, john b. taylor picked up at that point and argues that that is when the acceleration occurred as a result of the fed's lower interest rates. i think i will stick with that.

my view is without the housing problem that was created by the government's housing policy we would not ever have been in a position where the lower interest rates between 2003 conlan 2005 would have caused any kind of financial crisis. ones thing i would like to mention that john touched on, the importance of dodd-frank, legislation that takes over an industry, the book covers this but people have not noticed this is very much like obamacare. obamacare, the same thing was done and that is the industry is left in private hands. the shareholders were still in

charge theoretically but the industry is so heavily regulated that it has become basically a ward of the government's. these two major provisions were passed under the obama administration both have the same characteristics. hester pierce talked-about the biggest issue, i believe that is true. that is the thing we have to look at most carefully. that is the area that gets the greatest danger, and i spend a lot of time on it in the book. as a foundation for crony capitalism, there is nothing better, nothing more dangerous than what has been done with the financial stability oversight council. it will now have the opportunity

to declare certain non-bank financial institutions are dangers to the financial system and have to be stringently regulated. what that will mean over time as more and more of those institutions pull in to their select category that the fed will have an opportunity to control what those institutions say on all matters of public policy. if one of those institutions should suggest the administration on some issue weather is the trade issue, it will be discreet warning, and tone that down and we don't have to have this controversy. that message is the essence of crony capitalism and will be made possible by the fed's control over other large institutions just as it has that kind of control over the banking

industry. i don't want to take too much time. i am doubtful that the o l a could be used, the orderly acquisition could be used to wind down city as soon as the fdic makes moves towards city. everyone would run from city and the institution would become a shell. quite doubtful that the o l a works. my own view is we have to beef up the bankruptcy law in order to deal with failing financial institutions and in terms of wayne. if i could respond to all the things wayne abernathy said which were very insightful, the 2009 stress tests, i was very skeptical about those tests but i had to admit after the fed

reported on the stress test and reported none of the 19 financial institutions were in fact insolvent even after the stress tests were done and there was more capital none was insolvent, that seemed to me to ease the concerns in the market and that fit together perfectly well in my mind with the problems of mark to market accounting, mark to market accounting caused a panic among investors all over the world. once the fed came in and looked at the men said they were not insolvent, the anxiety that was created by mark to market accounting was relieved. at that point, the stock price, the equity price of those 19 institutions began to rise.

although i was skeptical of its in the beginning, i came to support it and said so in one of the essays. the important thing is it was an antidote to a terrible policy. mark to market is a ridiculous policy for banks, one of the major causes of the financial crisis. this will be covered in detail in the book i am now writing about what caused the financial crisis and it is the new york times, an article in the business section about the fact that the one who makes the rules on things like mark to market accounting has rethought the whole question of mark to market accounting and taken the position that banks should be able to treat their assets

according to how they use them. if they use them to produce cash flow they should value them that way, which could be panicked in any given time might treat them. >> thanks. each of the panelists another one or two minutes if you would like to add something. >> want to act, looking on words, the housing bubble. >> i want to react to the federal reserve issue. if you look at the numbers we had a betting housing bubble but in 2000, the housing bubble would have gone ahead and it would have been radically less destructive than it turned out to be. the numbers were exponential after 2005. went off the chart exponentially. we would have had a correction but it would be a healthy

necessary correction. and in greenspan wanted to go out a hero not understanding the motivation of these people, very interesting kind of thing because they have their own personal agenda. he wanted to go out a hero and couldn't pull it back in. there was a budding bubble but it was exponential fed policy. >> having stepped on the gas in previous times made him a hero. the same thing will be wrong. >> push your button to turn it off. >> i wanted to highlight something peter mentioned which was potential for i would call crony status rather than crony capitalism. it means bank will pay more attention to what regulators and politicians think is important than what their customers think is important and that is a sad

change and not beneficial for the average consumer and that could cost dodd-frank, sometimes get lost when we think about costs. >> i would echo that point that hester pierce made. dodd-frank is changing the nature of where banks look. prior to dodd-frank thanks looked to their customers to drive products, prices and all the other things they did. now they look to the washington bureaucracies first, look how the banks were waiting with bated breath to see what the consumer bureau would do, it would guide how they could interact with their customers. a real serious problem, gives so much power to the federal reserve that i fear it has turned the federal reserve into another political player in washington and in doing so undermines the independence of the fed. >> thank you very much. we are about to come to your

questions, ladies and gentlemen. we talked about the federal reserve and systemically important financial institutions. i have a favorite line some of you will have heard. the biggest city of the mall is the federal reserve. has the biggest possibility to create risk and create booms and busts in the economy and to get a quick advertisement, a month from now in the same place we are going to have another book event, a book written by a friend of mine, brendan brown entitled the global curse of the federal reserve. if this is interesting to you come back to our next book event. all right. as we go to your questions let me remind you please wait for the microphone so we get you properly recorded so they can hear you, tell us your name and

affiliation. if we put a statement first in the form of a question that is okay as long as it is brief, and if it isn't the chair will remind you your statement time is over. questions? up here in front. >> i have a question. mr peter wallison, it is one thing to say i told you so after the fact and i realize you have been riding along and looking for opportunities to be exposed with a variety of broadcast media. but i wanted to ask you what would have been your solutions legislatively and if in fact you have an opportunity to speak directly with alan greenspan who by the way mentions that he

didn't publicly think dodd-frank would be strong enough for effective enough nor would it have been implemented to the fullest extent and only a third of the acts of dodd-frank have been utilized. it didn't really reach its full strength and to more recently so my question is what would have been your predictions and how would you have solved the problem four years ago if you had brought the book out then, would have been more than $90? >> if i were right it would have been worth a lot more than $90. that was a question that came up from some of the commentators and it is very difficult, it seems to me, to put myself in a position where i could provide any kind of alternative solution because things had gotten to a point by the time the financial crisis came about, that there was almost nothing that could be

done that could have prevented it from running its course. and i think probably my solution, it is not a solution but my preference would have been to allow the financial crisis to run its course. we had financial crises that are something like this. in 1907 there was a financial crisis. the panic of 1907 and a very similar drop in equity prices and a panic throughout the market, according of cash and a year later it had come back, the entire market had come back, the economy had come back and people function about as well as they had before. the fact that the government has tried so many nostrums of various kinds to prevent things from happening when we have a panic like this has caused more uncertainty for many of the players and as a result of that

it has taken much longer to come back. obviously if you believe that the cause of the crisis was the government housing policy, the first thing you would do is to say we are changing our housing policy but that wouldn't have solved the problem because bad mortgages were already out there and causing tremendous losses so we should have a system for resolving these large financial institutions that gorge themselves on these mortgages. a good bankruptcy system would have done that and once we resolve those issues, is over. and the economy would begin to come back. but putting in place a new law that causes as much uncertainty as this one has in all different areas of the economy, guaranteed to make the recovery much slower.

>> i don't know if public policy in baltimore county -- i have three questions but i guess i will ask -- part of -- part of the arguments for too big to fail that financial institutions would need that bailout because there is going to be a crisis so big that in the short run it is not going to be functional to go through, has to be sacrificed such as much slower economic growth. what is your reaction to that? i read a little of what you

about, the volcker rule. as far as i read from somewhere. i might be wrong. i am not familiar with financial policy at but the volcker rule prohibits trading as long as it the financial institutions proof customers are going to get benefits out of it, they can do frustrating. am i mistaken on that? >> we have too big to fail, the volcker rule question. >> too big to fail. i have written a lot about this. we don't have a really good way of evaluating whether institution is too big to fail. but what we do know now after

lehman's failure is that an institution that is $600 billion in size, that was lehman, is not too big to fail because lehman actually drag no other institution down with it and that is the whole idea about too big to fail. the theory is that a large institution fails, the losses that are suffered by all others who have lent money to that institution will be so large that they will all be dragged down. that is why the f stock is given the authority to make a decision about what institutions are interconnected. when lehman failed, no other institution failed as a result of that with the one exception of one money market funds that held lehman paper, commercial paper, and broke the buck as a result of losses on that paper.

that is one example of it but you have for an institution to be too big to fail you would have to have many other firms failing and we have no record of any other firms failing when a $600 billion firm failed. what would happen if a very large banks like jpmorgan chase failed? we don't know but what we do know is almost everyone keeps track of their exposure to everyone else. that is part of the business of being in the financial area. you do not get too exposed to any one of your counterparts. as a result of that the likelihood is even a large bank could probably fail, could be taken over by the government or the fdic or bankruptcy. it could be taken, it could be resolved without too big to fail, the issue of too big to fail being raise. on the question of the volcker

rule by don't think you have it quite right. the danger of the fault rule is connected -- to trade financial instruments to their accounts. they can trade with customers and also hedge for and be engaged in marketmaking an diffusion tell the difference between trading for your own account and hedging or marketmaking you are better than all the regulators who have been trying to settle on language for that rule. i don't know what to say about the volcker rule except was badly conceived and almost impossible to implement. >> i want to ask about too big to fail. i was in the largest financial

institution in the back room when this was going on looking at the trading pattern and making decisions who to fund and who not to fund. first when lehman brothers failed we didn't lose a penny because of what peter said, we manage the risk. if there stearns failed we lost a tiny bit of money. the losses would have been trivial compared to the losses we took with residential builders. if you want -- if that is what you are worried about you would have kept a lot of home builders in business. the system is grossly exaggerated, acting as if banks don't manage the risks. the risk is grossly exaggerated. we had collateral limit so when our exposure went over x amount you had put up cash collateral and by the way there was a huge inflow of cash. we were buried with cash. what there was was a flight to quality which one could argue is what should have happened to peter's point, if we let this correction happen people like

citigroup would have been out of business and that would have been good, not bad. it is good the washington is out of business. these are rational allocators of capital and should have failed and the people -- my career at citigroup failed three times. in 15 years they will fail again because of temptation when you have an implicit government guarantee to take too much risk in the good times is enormous. i agree with peter. it wouldn't have been much fun. with content been much fun the we would be a lot better off today. >> give us half a minute on your view of the volcker rule. >> it is a waste of time. i don't think it had anything to do with financial crisis and it is -- i don't think it is a big huge negative but it is a waste of time. >> other questions? to the back, we will get you in the front. the gentleman -- there we go.

>> competitive enterprise institute. this is for peter wallison. i want to get your take on the narrative behind international finance regulation, basel iii in particular. define the implementation of that was similar to that of dodd-frank and how is different? >> is somewhat similar. it applies only to banks which is somewhat different from dodd-frank which is intended to apply to the entire financial system and in the case of what are called systemically important institutions, that could be any kind of financial institution. there are similarities and differences. the thing about basel is in applying it to banks they try to micromanage the kinds of assets that banks hold and we should have learned the lesson from what happened in the financial crisis that seems to have been

completely ignored, that is that banks were herded into owning not only mortgages for which there was a much lower capital charge for owning a mortgage also into mortgage-backed securities. all of them were doing the same thing at the same time because of the basel regulations. that is a huge mistake and we paid for that mistake because when that particular aspect mortgages the client in value mortgage-backed securities also declined in value. all the banks looked weak at the same time. especially when mark to market accounting was applied. so it was a big mistake to regulate them through basel i and ii and they're doing this same thing now with basel iii. the right answer is to have a leverage ratio of some kind between assets and equity and

real equity and banks are free to make any kind of investment in any kind of assets they want to carry and that will mean they will look different. if one gets into trouble the doesn't mean all the others are also in trouble at the same time. >> two quick footnotes to that and even more egregious example of risk-based capital encouraging banks to buy something they shouldn't have was the treatment of preferred stock in fannie mae and freddie mac which as a matter of government housing policy encouraged banks to buy those securities became and are worthless. a second point is a governments are always interested in having banks lend money to the government. one of the rules of basel is give preferential treatment to you're willing to lend money to

your own or a friendly government. one more question up here. then we are going to wrap up. >> is it on? i am amanda house and my question is if things such as g r a r to blame why was the mortgage bust a global phenomenon especially in spain and ireland? >> interestingly, banks in europe got into trouble because they bought u.s. mortgage-backed or mortgage-backed securities based on sub prime mortgages. for the longest time buying a u.s. mortgage was considered one of the best investment you could possibly make because delinquency in the failure rate was very small. in ireland, in spain, in a number of european countries,

they had very large bubbles which is really interesting phenomenon and many people said they had bubble's without fannie mae and freddie mac. the difference was their bubbles did not contain some prime mortgages because by and large their government policies didn't permit some prime mortgages and as a result of that their losses were tiny. there was a good study done of that by a professor at berkeley in california and he went to europe and studied the mortgage systems in europe and the losses that resulted from the deflationary of their bubbles and found the losses were very small. the main problem they suffered came from the fact that they all don't very substantial amounts of u.s. mortgages and mortgage-backed securities. >> we have come almost to the end of our time. i want to give each of members

of the panel reverse order for a parting shot if you have one so wayne, you can start. >> thank you very much. the book that peter has written demonstrate a need to bring in as many different points of view as we can and never read any point to say the debate is done, let's vote. too much of that in recent years. the debate is never done. because the dodd-frank act was created as a partisan law we will be forever reforming it because no consensus was established. people ask when will dodd-frank be done? never because it was never consensus. will continue to work on it which means our laws and regulatory program will forever be in flux. >> thank you. hester pierce? >> i would like to close with a warning the we shall be paying attention to peter's arguments as we watch