bear stearns deal that bear stearns had gotten in march. hank paulson didn't communicate that government always bailed out, they let lehman brothers go bankrupt on september 15th, 2008, and of course the rest is history. that is too big to fail. before it was an implicit assumption. now is the sort of regulatory policy. we have under dodd-frank systemically important financial institutions and that is your credit card--jargon for too big to be allowed to fail. certain institutions depending on size and assets are dumped important financial institutions. all the provisions aren't bad but simply doing that reinforces the idea of too big to fail. the other thing dodd-frank does is what i'm most concerned with, the consumer financial protection bureau, it sounds very nice. look at the logo, , what is not

to like? it is about protecting consumers. just up here across the street from the old executive office building and i predict it will outgrow its space in a few years. consumer protection bureau is a sovereign entity unlike any bureaucracy that existed before. not under the control of congress but the fed chairman and board don't have a lot of control over it. the president appoints a single director to overlap the presidential term and they have wide discretion interpreting and enforcing various financial regulations and basically have jurisdiction over everything in the financial sector from investment banking and mortgage banking all the way to daddy's money pawnshop in alabama. i have gone killing reports from c e os to have been investigated

by the cfpb and it is truly chilling. however well-meaning this might have been this is a dangerous organization and structure is dangerous. that is why the story is worth telling. this is when chapter in a very long saga of what i will call creeping soft tyranny. i don't think the thing which those who believe in the free economy have to deal in the twenty-first century is stalinist russia. nobody seems to want the government to own private property. that just doesn't happen. if you own private property as u.u do in poland everybody hates anything bad that happens you have the unions against you and private citizens against you but private entities still retain ownership but are completely controlled by the government you get the best of both worlds, total control and you get to blame the private sector.

that is a dangerous form of creep things off tyranny, predicted was coming on what he called the country's of christendom. at tyranny that does not destroyed and kill but prevents existence. it is not coercive we violent but shapes and governs us. frederick hayek once said he thought we do not value freedom until it has been lost. i certainly hope he was wrong. thank you very much. [applause] >> thank you. we have responses from two experts so we start with wayne abernathy of the american bankers association. >> of pleasure to be on this panel and to read the book and to read it ahead of time before it got out of print. i need to say my comments are my

own, these don't represent particularly those views of the american bankers association. i am on my own ticket in what i presented a. i hold in my hand a copy of monetary history of the united states, 1867-1960 by milton friedman and jacobson schwartz. in several important ways this is a landmark book especially because of chapters 7 through 9. those chapters begin what has become the reputation of what until then was the nearly undisputed narrative of what had caused the great depression. since then, because of their careful detail, their historical accuracy and i think they're very sound reasoning, friedman and schwartz demonstrated federal reserve monetary policy dramatically constricting of the

money supply is what started the great depression and kept it going for years after that. generally speaking everybody recognized that including the current head of the federal reserve. friedman and schwartz opened the door to serious rethinking and correcting of the record the depression caused. they started a new narrative. it took almost 30 years from the depths of the depression for their book to come out. it came out in 1963. fortunately that challenge to the official narrative of the recent recession and the financial panic is not taking that long. in 2010 bill isaac published his book senseless and neck. in that book isaac explained panicky policies by panicked policymakers turned what would have been a fairly ordinary economic downturn into a

financial run for the excellence and we saw that play out in 2008. john allison's book the financial crisis and the free-market cure was published early this year and in that book allison emphasizes how interfering, market distorting government policies laid the groundwork for the crisis and have been making things worse since then. peter wallace and published his book on the recession and the crisis but the title bad history, worse policy, this is a collection of essays, many essays that peter wrote the demonstrates peter before, during as well as after the recession has been riding and fighting the official narrative. wouldn't that have been great if there was someone in 1930 writing about and taking the official narrative being spun at that time and peter is working on his second book on the subject and the year to see that

when it comes out and there are others and there will be others if we believe as i do that eventually the truth comes out. demonstrating the true story will come out in the effort is growing in strength and is ever more appealing. one thing i like about the book is is readable, a book you can take to the beach and enjoy rather than supposed to read this but tough to read. this is a very enjoyable, interesting book to read as well as very well researched. the story in "infiltrated: how to stop the insiders and activists who are exploiting the financial crisis to control our lives and our fortunes" is a story that began long before the recession and continues after word and it is a bigger story that is bigger than his book. the core message is illuminated by the recent events and their aftermath. through his book richards

demonstrate something that transcends but is well displayed by a recent and continuing national economic trauma and is continuing. of you don't believe the economy is traumatized you must live in the d.c. area. if you get out of d.c. you will discover people are still traumatized and that is continuing. they think things are getting better? may be little bit but they are still going through the effects and the enduring lesson we should take away today is brought out very well in this book and i referred to the human wreckage caused when some people are able to harness the coercive force of government to impose their personal notions of benevolence on the rest of us. roger kimball writing in 2011 in the new criterion warned that such efforts at government and forced benevolence are, quote,

intoxicating, addictive, expensive, and ultimately ruinous. richards offers several well described examples illustrating the truth of kimball's observations. my own experience as i am drawn to the case of the community reinvestment act, working on the staff of the senate banking committee in the 1980s and 1990s 9 noticed how c r a provided no added value to get banks to lend to their own communities, the purpose of the act because bankers were doing that in 1977 and have been doing it ever since. where else is a bang going to lend other than its own community where it has a special knowledge and competitive advantage? what alarmed me was how it was put to other uses. for example, see are a --cra became a leverage for some banks for competitive bid vantage that they had not earned in the

marketplace. one bank in particular rhyme it need not mention the mission was buying the other banks and using c r a to keep competing bidders for those particular banks at bay and out of competition. cra based protests by community activists and organizers can slow a bank's acquisition efforts by raising the surgeons the banks involved were ignoring their own markets, assertions that are almost never proved but always carefully investigated by the regulators slow everything down. the bank to which i referred discover the strategy of entering into billions of dollars of financial arrangements for community groups before announcing an acquisition plan. and to no surprise those grooves later wrote letters and sometimes testified in support of that bank's merger efforts. the cra supporters got the joke.

in 1999, i came across a lot wonderful colloquy in the national record, i found it again to dig it out. i know it was there and tried to find it. when senator phil gramm and others were pursuing legislation to stop the expansion of cra, john edwards and barbara boxer held a colloquy on the senate floor, two senators engage in a conversation for the official record. they were talking and phrasing about this particular bank and its cra record and senator edwards was proud to quote the head of the bank, quote, my company supports the community reinvestment act both in spirit and in fact. we have gone way beyond its requirements. we have had fun doing it. and we have made a business out of it. indeed they did. a news article in a of 2008

explain how. the reporter amanda perry noted in a series quoting from an article she noted in a quote, series of new englanders called wicked smart moves, well-publicized deeds helped pave the way to this growth by an protested acquisition. terry wrote in the article the bank's use of the cra, quote, help avoid delays that gum that deals between banks accused of noncompliance. some people today complain about some banks being too big. cra helped this bank grow. a valuable lesson for policymakers and the people they would govern. the more discretion you give to government the more you create the opportunity for abuse of that discretion for private gain. the more discretion you give to government the more you create

the opportunity for abuse of that discretion for private gain. europe in the 18th-century was lousy with the practice. our forebears' sought to escape it and fought a revolution to get out of its grip. the tee thrown into the harbor in boston was in protest of the partnership between the british crown and a privately owned british east india company. b where a private public partnerships. j. richards -- jay richards explains some mortgage partnerships went very bad. for the partners and for all of us caught in the dust and debris of their collapse. reminded me of dick armey's morning when you enter into a partnership with the devil you are always the junior partner. to conclude with the words of law at new york city democrats, delivered 110 years ago almost to the day on the fifteenth of

july, 1 10 years ago and one week, quote, that government only is good, that government only is great, but that government only is just which has neither favorites nor victims. that should be our government. thank you. [applause] >> mark calabria from cato institute. >> thank you for the invitation and a jay richards for a great book and also not sure whether i should saying wayne abernathy but i will thank him for hiring the to the banking second 2001. i don't know if he bears responsibility for having me spend the last two years fighting these efforts but back to the point i do want to emphasize this is an enjoyable book. i have to read lots of things on a regular basis that i would rather not read and this was not one of them. this is something enjoyed reading and i want to emphasize

very accessible and straight forward, you don't need a ph.d. in economics to follow the narrative. jay richards does a tremendous job breaking things down into very straightforward, and discussion and undergraduate course discussing consumer finance so this leads me to where i think this book succeeds where so many others fail. like jay richards i had read tremendous amount of books on the financial crisis, probably more than jay richards, just more than i wanted to and they followed two types, best-seller account written by journalists, fast-paced story of bad people doing bad things and they tend to be the scholarly account that sometimes offer at a theoretical framework for understanding the forces behind the crisis. bose these files have strengths and weaknesses. one thing i think jay richards has done that is not out there is he found a balance between

these two. in that sense it portrays two books. one of these books is he brought economic philosophical discussion of consumer lending that talks about the crisis but goes beyond the crisis. discussion about consumer choice, regulation, these discussions to me were always maybe unfortunately always relevant but go beyond the crisis and presented in a manner that is very accessible. so again, that is one thing to follow on. the other part of the book is a long lines of bad people doing bad things all the while will emphasize as jay richards does the often these bad things are really done and motivated by sometimes very good intentions and i think that is something that is important to keep in mind. one interesting aspect of the book is jay richards does not focus on the usual suspects. if you read something like too big to fail you won't get repetition here.

there are no pages and pages about jimmy came's bridge game or john paulson taking big bets against the housing market. there is very little discussion about wall street would some may see that as a criticism. i see it as a strength. important to keep in mind by september of 2008 we had been in a recession for a year already. the temporal lebanon seems to suggest the reaction of wall street was a reflection of the crisis more than a cause of the crisis. i go as far to say that the usual obsession with wall street has reduced the public's understanding of the crisis rather than improve it. jay richards right refocuses crisis blame where it belongs, in washington. jay richards also reminds us that washington is a reflection of the goals and agendas that originate outside the beltway. for instance the agendas of sandler, the founders of gold and west and their identities charitable giving to harass

competitors in the mortgage industry. jay richards touches upon this, let me emphasize my experience in financial regulation, its often far more about competitors trying to stifle competition than it is about protecting consumers. i emphasize in seven years on banking committee staff real battles were rarely about the taxpayer or the economy, they really were about big banks trying to stick it to the banks, wall street trying to stick it to commercial banks, insurers -- that is 85, 90% of what goes on, not how do we protect the taxpayer. very little about unfortunately, one of the results of the crisis and in my opinion one of the results of dodd-frank will be increased concentration in the financial-services industry. wayne abernathy mentioned how cra facilitated that. i hear that described as an indebted consequence of

dodd-frank. i think it is an intended consequence of dodd-frank. when i see dodd-frank trying to achieve what i call the fannie mae style model of financial markets essentials what the model is is we are going to be so marked power, bestowed too big 2 sales status to certain entities and once we have essentially giving you those monopoly profits government will come back and demanded kickbacks the profits to favored constituencies. let's keep in mind a perfectly or near perfect competitive market does not offer rent, which government to redistribute. i should say as an aside, formalized this in the 70s and one of the better descriptions of how government works in practice. note is mentioned, jay richards talks about the center for responsible lending, a lot of detail, a lot of discussion of their activities. during my time on the banking committee and was lobbied regularly by cra, a my bill as

far as to say i got along with them, disagree with them on a number of things but i do want to emphasize, jay richards makes this point, it is a symbol of a lot of other groups, certainly not the whole league, probably the best organized, the most articulate but far from being alone. i will also emphasize and this is the real credit to a lot of the research that went into the boat, despite the having spent ten years dealing with many of these groups jay richards digs up a number of stories i hadn't heard. is good to learn a few things and not repeat them back to me. i want to emphasize jay richards's story is 100% consistent with my experience on the banking committee being lobbied by these groups. to add some flesh to the story we often get presented the recent crisis was big sub prime crisis first time ever but perfect is we had a boom and bust in the private market in

the 1990s and most of these were state-chartered finance companies that were not depositories. when the asia crisis hit, many of these institutions went out of business. what we immediately saw on the banking committee and in congress was the number of groups decide in the aftermath of this bust fannie and freddie should get a sub prime. i want to be incredibly clear i was lobbied on numerous occasions in the early 2,000s to push fannie and freddie into sub prime. i was there and i certainly was not alone. i give credit to many of these organizations that were very upfront, the letter that was read was very common. these were not things being hidden at the time. again, i see many of these efforts behind cfpb, behind dodd-frank to recreate this model. there's a fair amount of important philosophical discussion in jay richards's

book. at the heart of much of this is a rejection of competition as an avenue for protecting and benefiting consumers. as i mentioned the model tried to recreate a monopoly style government monopoly style finance. i will give you one example in some of this as well, section 1205 creates a government subsidized version of these loans and also showing congress has a good sense of humor on many occasions they titled this low-cost alternative to pay their loans. i am fairly certain these will not be low cost for the taxpayer or the borrower is involved. pay day and sub prime are only part of the war on risk-based pricing which is that notion that higher risk borrowers pay higher interest rates and lower risk borrowers though the core agenda of the consumer financial protection bureau will be to reduce the use of risk-based pricing, to take us back to a

world of average cost pricing where the prudent subsidize the improvement and that is an explicit agenda of this agency. jay richards does a good discussion, very accessible. he also discusses a lot of the academic research and let me emphasize there is a tremendous number of studies that would get paid a lending and installment lending and consumer lending and show a tremendous amount of benefit and these are objectives dollars, well-known scholars in academia, solid evidence, sadly despite the repeated claims we year of the cfpb be evidence based they ignore the academic evidence contrary to their opinions they pretty much reached and again cfpb plays a starring role in jay richards's book and does emphasize why we should be concerned about this and he talks about as well back story and let me really emphasize many of the organizations discussed in the

book really did take advantage of the crisis and were very much behind-the-scenes creating cfpb. this is not something -- i want to emphasize i work in the think tank and i'm usually fairly button to question anybody's motives or funding sources. i take the perspective that you should judge policies on their merits and i believe dodd-frank fails on its merits despite whoever funded the efforts to get it in place but even that set i think the story given in this book does illuminate the campaign we have seen to create the cfpb and a campaign to limit lending alternatives for borrowers. i find that back story to be of interest even if again i think our first approach should always be what is the argument, how do we address the argument on its merits? in the spirit of balance let me wrap up with a few minor criticisms of the book. i noted earlier at the beginning

with dual scholarly journalistic nature of the book which i see as a plus the downside is the organization of it can be disruptive, flipping pages as if reading a book on the beach and all of a sudden a digression into the philosophy of consumer finance. is actually quite interesting and well done but i want to get back and find out what this person is going to do next. the flow of it trying to achieve both of those things at the same time i think could have been done differently but i will commend jay richards for being the only book i have read the tried to achieve both of those things in one book. there's also a recognize and like to think everybody in the world is written for me but in some ways it is not, so if you are familiar with consumer finance. this will be a third of the boat in which you can very quickly flip through and get more of the stories. i want to emphasize this is less a story about the financial

crisis than certain elements of it, certain responses to it, my opinion is the financial crisis was the result of a dozen different policies that interacted. some of these are mentioned, this is where i disagree with some of my friends. i think monetary policy was a very big player and there's a little mention of that. we got a page that mentions that and that is appropriate but a number of other things are not discussed so i would emphasize if your primary interest is consumer finance this book should be at the top of your reading list. if you are trying to get around the financial crisis i would say jay richards's book is a useful addition to four five other books you should add as well and again it is also a good discussion of the consumer finance provisions of dodd-frank but i also emphasize in my opinion there are harmful provisions of dodd-frank is a massive bill with 16 titles and 800 some pages so if you are looking for an overview of

dodd-frank this is a good place to start but you also have to look and a lot of other places as well so let me emphasize by saying really well researched, accessible book, consumer finance, really gives the economics and politics, just as importantly this is not a mirror approach, this is how we got here. there really is a road map to go forward and the issues of concern that are pointed out, organizations like a corn have disappeared the replace reform through staff that has not gone away. they have reorganized so there is a continuing effort to politicize consumer finance which to me was a big contributor to the financial crisis. i will end saying my real worry about the consumer finance agency is we will manage to do for all other forms of consumer finance what the government has done to the mortgage market which is screw it up. >> thank you.

[applause] >> i want everyone to take a minute, think of what your question might be. first we do two quick things and respond to this as quick as we can and i will have a question for everybody and we will move to the audience. >> thanks so much. i wish i had known you guys earlier because i didn't have a lot of access to folks on senate banking committees that the relevant times so that was just terrific. a couple random thoughts. wayne abernathy mentioned market panic and the conventional wisdom is market panic because the government allowed lehman brothers to go bankrupt. i don't think that is right. you are talking counterfactual but think what was actually happening at the time. the ceo of lehman brothers spent a year not preparing for bankruptcy. the reason is because the government had negotiated a deal, not a direct bailout, kind of a soft landing for bear stearns. bear stearns is the tenth the

size of lehman brothers so it stood to reason the government is going to step in, won't let lehman brothers collapse but hank paulson said i don't want to communicate that everyone will get bailed out, but if you are a market player looking at this you realize there is absolutely no principle involved in determining which companies are bailed out and which aren't. is somebody flipping coins? what is happening? that level of uncertainty was bound to lead to panic and if these things had been handled according to bankruptcy laws already on the books we might not have had a panic. that would require legislators and politicians to restrain themselves and there's a good book on this by a professor at penn state called the new financial deal and that is the kind of scholarly book you want. university of pennsylvania law. it is i think a couple more books out like this but a very

good scholarly treatment of dodd-frank was published a year afterwards. mark calabria is exactly right. the book is at least an attempt to combine both argument and analysis and philosophical reflection. i of the philosophers of hard to resist doing a little of that. with the realization, a lot of books written on these subjects and on the financial crisis and i wanted one that was readable. there is narrative nonfiction like a big short by michael lewis but it focuses on five guys you never heard of and doesn't give a lot of argument. then you have a lot of analysis including by many good ones here in washington so what i decided to do to split the difference is try to combine these things and put a section on additional resources at the end of the books of if you are just starting on this and wants to dig deeper, go to peter walston's book for the truly,

those who are not faint of heart is about 550 pages long but you will get the story in detail. another thing mark said that is right, i do primarily emphasize affordable housing policy as the causal link in the crisis but i don't think it is the only thing. i also think policy and too big to fail mentality had something to do with it. what i was interested in was i don't know the fed policy too big to fail would have created all of these risky loans in the market but for this kind of missing link with affordable housing goals and there are a bunch of them. you hear about cra but there are a lot of policies in place. it was mark that said we are really seeing the new pscs, government sponsored enterprises, fannie mae and freddie mac, for smaller

siblings. the government sponsored enterprises are government-owned enterprises, posting a profit at the moment and there is the reason for that. new government sponsored enterprises sites suspect will be something like systemically important financial institutions. and systemically important non-financial institutions which cover everything else. it ends up being things like large insurance companies so what we are seeing is the kind of ratification of things that were implicit policies before putting to place by law. there's a lot still ahead of us. >> thank you. question. if the financial crisis and housing collapse had to do with fannie mae buying up all these bad loans and collapsing and taxpayers bailing out and that was the boundaries of it then we could chalk up to government intervention but banks failed, many of those banks still around

today and there were people who bought up market securities, not just the government. a lot of people bought a lot of investors, big companies and big banks thought these were good investments. i want to know what sort of, i am asking this of all three of view, what amount of blame and which way does it why? the private sector, especially banks and wall street and also separate from the private sector, market themselves? we will start this way. >> i usually approach this, i will let go the point earlier about greed. people respond to incentives. people will be aimed differently to the wrong incentives so we set up a system where banks made bad decisions based on the incentives they face, fannie and freddie made bad decisions based on incentives they faced. one of the usual talking points

to excuse fannie and freddie is the decline in market share 2005-2006. that is completely wrong because fannie and freddie bought 40% of the private-label mortgage backed securities. when they doubled their purchase of private-label mortgage backed securities the sub prime market doubled so again, we don't have a free market. there's often this sort of comparison between fannie and freddie and the banks. competition between the banks and fannie and freddie is less accurate than collaboration between fannie and freddie and the banks. fannie and freddie were vehicles for the banks to dump their losses on to the taxpayer. countrywide at one point was the third of any's business and the largest banks are not subject to the degree of market discipline, we do not have free-market banking in america. we need to deal with too big to fail across the board. you also have to keep in mind

this is the fourth time or so we bailed out city. it is important you have got to have a way for weeding out bad business practices, corruption, incompetence, at any of these will be weeded out of the system and these continued bailout scheme bed business cultures around so incredibly important that we have these institutions go away and so i think it is counterproductive to separate the banks from fannie and freddie as something different. the difference of degree, not differences of kind. >> speaking for wayne abernathy, not the american bankers association, what does this take? >> i think the reason this crisis focus at this time in the housing area, not other areas and things we talked about, the

risk in the mortgage market system had been incredibly camouflaged and disguised by a whole host of different types of government policies and programs that yet remember these are large investments. we are not talking about even on those loans that average mortgage loan is $100,000 so it involved a large part of the economy and most people investing in the mortgage area thought they were going into low-risk investment. they were chasing low or non reinvestments but in fact they had gone to high risk areas because of the government camouflage and what was going on and when the reality of the risk started to assert themselves, chaos ensued and that was added by the government. when the government panicked, by the fall of 2008, early fall or late summer the banking industry had pretty much written down their losses. they were still in

making loans and then the treasury department called the nine largest financial institutions seven of which were banks and two were not in to the treasury and said you will all take -- i got $700 billion i got to find out what to do with, just gotten t.a.r.p. money and i will not use it to buy a bad loan, i can't do that so instead i will invest in banks and of those nine that were there, i caught this month ago, chris dodd and barney frank wrote an op-ed piece in the politico, first-time i ever seen policy makers admit frankly as we all knew, most of the banks that were pulled into the meeting were there to camouflage a few that absolutely needed the money. but from that point they took that t.a.r.p. money nobody in the investing world knew what the rules were any more so all the investors went to the sidelines until they could figure out what the investment rules were going to be.

>> i do think the ratings agencies played a role in this. this is where i agree with the majority report of the financial crisis inquiry commission, called the miss central cog in the wheel of financial destruction. a lot of people think that is because standard and poor's and moody's are corrupt or something like that, it is possible. i don't see evidence of that. in general you want to assume ignorance before malice and accused of malice if you can prove it. what is funny is this underlying the assumption that was held by mortgage brokers and mortgage bankers and home buyers and builders and ratings agencies that the housing market at least nationwide would keep going up. you get a drop in one or two isolated places but it won't suddenly collapse and go in the opposite direction. as a result of that there were

these collateralized debt obligations. it gets a little details but the basic idea is you divide the assets according to risk so the high risk things have higher rates of return but the more likely to cause you trouble, the low rate returns for the low risk of, what happened was these are already geographically diversified so you gotta thousand loans from around the country in these but what if we take a bunch of the middle trenches, the triple b trenches and take those from 1,000 different collateralized debt obligations. now you have radical geographical diversity and by doing that, able to get many of these bonds made up of triple b rated stuff rated as aaa so you have a complete scrambling of information's signals with respect to risk in the market

but it is amazing how much you can explain the ratings agencies by that false assumption about national continued uptick and also by the bad incentives because of the way ratings agencies are paid. there paid by people creating bonds rather than the ones buying the bonds. that is more than a little screwy. doesn't make sense. you want to do that the other way and that is how it was. if you wonder how the arrangement can about it was a result of government regulation because pensions and retirement funds, unions didn't like paying these fees to get this research done and so it got moved to the people rating bonds. you get bad incentives, scramble information, no surprise we had disasters as a result. >> we are ready to take questions, we have a microphone going around, please raise your hand, we only have time for a few questions and let's make some quick. mike will come to you, identify

yourself, ask a brief question. >> obviously your book suggests, touch upon the issue of who do we blame for this? what i liked about your book was it was different in a different way. you brought colonialism into a dimension of bootleggers, often denied, there is been so much time on the bootleggers we forget there are baptists and your book also very correctly identified baptists as more dominant at least as a rumor cause than the bootleggers and that is something we forget. rhetoric is more important than economic power. we believe that as idea people but when we get into the political world it is of economics, all negative economic colonialism and that suggests a question we should all ask, to

what extent our tendency as a movement to be critical, overly critical of crony capitalism, cronyism, libertarian populism or what have we. the risk of throwing the baby out with the bathwater collecting the ideological causes of the problems we are in and focusing only on economic players in that game. >> let me translate this. fred is not talking about theology. it is a story about to make it very brief who benefits from making a county, the bootlegger obviously but who is making the public argument? might be the baptist minister. >> that is right. thank you for that. i refer to baptists and bootleggers in an earlier edition. might have gotten edited out before it came to publication. my view is this. most people, people outside the

beltway, 99% of those people are interested in economic questions for moral reasons. they are interested in inequality, poverty, and just the government takes so much money, they end up being more concerns and they are rooted in moral intuitions and moral intuitional from statistical arguments, or arcane economic arguments every time. i think it is very important for lovers of freedom that we get a hold of this valid and intuitively compelling moral argument for these things and to do that we got to take on the moral challenges to these things. the thing we have to give people who are deeply oriented by their moral concerns is a bit of prudence. prudence is the intellectual virtue of seeing the world as is and acting accordingly as opposed to seeing the world as you would like to be and acting accordingly. it is our job to connect

people's legitimate moral intuitions with that bit of the art of economics, consistent looking at not the immediate but the longer the effects of policy. that is economic reasoning. you don't have to have a course in macro to do that but you got to connect your moral intuition to that economic reasoning if you don't want your actions to lead to destructive consequences. >> another question. since we got the mic in the back, you, ma'am. >> i work in the stock market. really enjoyed your presentation. over the years i heard dozens of presentations about the financial crisis. i never tire of it. it is fascinating. as we go back to around 2008 when this was hot, one thing i remember is guys like barney frank and even people from

brookings and middle-of-the-road people, if you mentioned community reinvestment act, would immediately say this had nothing to do with cra, wrong, wrong. was that a lie or some sort of they were speaking technically? could you explain that to me? >> let me start with that explanation. it is a long and complicated explanation. short hand, if you milk at the numbers, the amount of cra loans on the books was not very great and they tended to perform pretty well because banks got rid of the bad stuff and sell it off and wouldn't hold it on their books but even at that the biggest part of what cra did was changing of the mentality with which a banker approaches a loan. it changed the risk evaluation on the part of banking and

basically said to bankers don't worry about the ability to repay. don't worry about past credit history. those are all kinds of things that make it difficult for some people to get loans. you need to give loans to those people anyway. when you broke that relationship and not just for the bank but the regulators regulators would come and might look at some loans and say we are reaching out to be underserved part of the population and regulators would go easy on that and you were encouraged to make loans that wouldn't meet your underwriting standards. so it is what cra did to the regulatory approach to sound underwriting and particularly manifested itself in mortgages because those are the biggest consumer loans banks make. >> a couple comments. i would say i really wouldn't put it in my top five but my top 20. there were lots of things behind

the crisis. one point you always here is cra was passed in 1997, white and things go bad right way? that ignores cra for a long time was largely irrelevant until you get to the 90s and those regulations, cra from 77 to 95 was a process driven, it was not an outcome driven regulation. starting in 95 you really moved to more of the quota system. important to keep in mind you had a boston fed study done in '92-'93 that really provided the intellectual argument that it is all race. it is not that it is a risk. the point jay richards makes about good intentions and i emphasize this from my own experience working on these issues in the banking committee. the number of people very

earnestly and sincerely believed despite a number of academic articles that would tell you if you accounted for family structure, cost of living, cost of housing all the differences, 95% of the differences in homeownership rates, cost rates disappear, it was very earnest and sincere belief that you would not be lowering credit but eliminating racism. people ultimately i fn these conversations with my friend on the left and they sincerely believe that is all they were doing and you have the boston fed and many other banks and regulators to publish papers saying if you look at things like utility payments for rent payments you really did see an erosion of underwriting, people sincerely believe they not taking the additional risk that that is what they were doing. >> let's get a question over here. please introduce yourself and make a quick question. >> chris russell with the house financial services committee. one of the things we haven't discussed today with some of our friends on the left and the crisis and get you to comment on

is this idea of a notion that predatory lending was one of the main causes of the crisis, these products set aside for a small set of people that became more mainstream, led people down into bad loans and that was the trigger that caused default and economic problems which lead to more default but started with predatory lending. comment on that. >> i talk a good bit about that. i can't quite figure out what predatory lending is and how is distinguished from other types of lending. we understand bank fraud where some broker misrepresented the terms of a loan but that is illegal. the word ends up being a stake to beat the banking sector with. the center for responsible lending, they use this word

continually, it was simply the result of predatory lending. i will give you an example why not only those who use it not know how the word is defined. one of the key funders of self-help and crl are urban mary and sandler. what would you call a loan that allows people, people without giving evidence of their actual employment, a loan in which they could get deeper and deeper into debt for ten years before the loan reset at a higher interest rate and if they paid it off early they would pay a prepayment penalty. that is the standard special. crl never accused sandlers of predatory lending. martinique is a man of principle who opposes prepayment penalties but it is very interesting that if you call something a predatory home loan that would seem to be it.

what you want in a home loan is lit for it to be a win/win. the bank makes a good loan and they earn a profit and the homeowner buildup equity and eventually owns a home and able to get in before they have all the money to pay for it. these option loan's i would not say should be illegal but generally a bad idea and if i were going to call a mortgage loan predatory that is where i would point it but i don't think the word has any specific meaning other than rhetorical and emotional so it is not very useful if you want to explain stuff. >> if i could put that up a little bit and refer to jay richards's book in the late 90s chairman phil gramm sent a letter to the banking regulators because the banking regulators were starting to enforce on predatory lending what is your

definition of predatory lending? we went to the fdic and the fed and they said we have no definition. how can you enforce something when you don't know what the definition is? they haven't come of with a definition yet. >> i will mention we have seen the exact same thing with the word abusive by the cfpb. the boston fed, i will say something nice, one of the economists at boston fed, his work is online, tremendous number of really good academic work rebutting a lot of bad loans caused the crisis and saying this is what convinces me that the bad loans through the crisis narrative is wrong that the inflexion point and house prices preceded the inflexion point in default unless there was some star trek style backward rift in time price declines caused defaults rather than default caused prices declined. >> i want to ask a follow-up. you can say predatory loans

don't have the word exploiting in your title so sometimes putting someone in a situation where you know better than they do this might not be good for them and that is what i would call immoral. student loans for 18-year-olds borrowing this money with a payoff might count as predatory loans. can't we say do we think there are not predatory or banks or some lenders aren't exploiting, making loans they think will hurt many customers but because of the ability to secure ties or some other reason will be profitable? >> if we define predatory that way, almost certainly agree there are some loans that do that and i agree that if let's say i am a mortgage broker and i am dealing with somebody and i have a pretty good idea of their ability to pay and fairly high degree of certainty what their job is and really shouldn't get into this loan and it won't be good for them but it will be

good for me and my commission and i do it anyway, that is immoral. the question is we have laws, laws can't appear in and say did you intend to do this and when you do predatory loans what is being referred to is you always get a sad story of someone who took out a home loan or pay a loan and got into trouble with that but just because a person got into loans doesn't mean the lender meant that to happen or knew it was going to happen so that is where the law has to take place in terms of explicit documented disclosure and things like that. >> let me emphasize the morality argument is important and one of the things john allison likes to talk about is when he ran b b and d, this is not good for our clients and we won't do them. the economist in me, the ultimate source of discipline has to be on the investor.

this argument i never understood on the predatory side is how is this profitable over a long period of time? people figure out who you are, reputation matters, brokers were mentioned, there was a time in the 90s when brokered loans and wholesale retail ones did not priced differently. that changed. investors figured it out and the problem with the marketplace was you had a number of large investors like fannie and freddie who simply did not care about economic returns and i will end with a nice cat across the table of the staff room on the senate banking committee from the ceo of freddie mac who said give me cover to stop making these loans. >> don't want to defend that banking practices but even bad banking, banks, separate from other types of financial firms, banks are long term businesses. you can't get a charter quickly and banks are gone tomorrow generally speaking. banks that succeed succeed because they develop long-term

customers. they want you as a customer for life starting in your teenage years and going on to being a businessman and all, giving your customers' bad products isn't the way to get there. the banks that tried to get into the business quickly and get a lot of business by doing bad underwriting and the banks could fail in the last several years, once that were cutting corners on underwriting and those types of banks should get out of the business and you want a market system that fails those kinds of institutions that don't get into a good consumer practices but banking as an industry benefits from good consumer practices. >> right here. >> the department of justice. jay richards, if the baptists were out of touch with reality and created this huge government

centralized mess, what should have been our free-market argument at the time to allow percentage of marginal buyers to become part of acquiring capital and going from lower working class for renters into the ownership of capital? >> my view is if i am a banker and looking across the landscape, a got a lot of competition and i know there is a subset of the population, say their credit records got a couple of bumps but nevertheless if you assess them they will be good borrowers. as a banker i would go after those people because no one else is giving them loans. there is a natural incentive and some of these loans retaking place already. the thing that i think we should have said and should have been said at the time is congress in

particular confused correlation with causation. we know from social science studies that homeownership correlates pretty much with any good metric, you are more likely to take care of your house, more likely to vote, less likely to commit crime if you are in a home and people say let's increase that for people including low-income people and all those positive virtues will accrue. there is confusion of correlation and causation because in the normal market value would acquire a home or home loan you would have to do certain things, have to exercise certain commercial virtues, work hard, have a job, save money, delay gratification, save up 20% of your loan and go through a difficult process to get a loan a you have skin in the game that costs you a lot so you value that loan that you are less likely to default and maintain those virtues so you get a virtuous circle. change that so the risk

assessment changes completely at the point of buying and lending and the basic market incentives of the bank, it is easier to acquire a home without skin in the game so you get a good financial history or the down payment, then you get a home and that doesn't encourage those commercial virtues because if you have zero down payment it might mess up your credit history if you default on it but you didn't have great credit history anyway so you what -- when you get is a vicious circle, so he's really important kind of moral points having to do with commercial virtues and incentives that needed to be distinguished from this bad sense of correlation between bad behavior and homeownership. >> have to call it a day. let me say there's a dessert reception afterwards out there and let me thank all of you for

coming, let me thank mark and wayne for their comments and jay richards. thank you all. [applause] .. >> a generation of future voters and also, you know, this is a time when you're in your teens and late teens and early