the idea that the spirit only sends grace through this one conduit, popes, bishops, priests. if that were true, then all of the protestants would just be without god. they don't have the right channel. >> thank you so much. [applause] [inaudible conversations] [inaudible conversations]

>> every weekend, booktv offers programming focused on nonfiction authors and books. keep watching for more here on c-span2. and watch any of our past programs online at booktv.org. >> book of continues with "after words." this week peter wallisson discusses his book "hidden in plain sight." he argues that government housing policies caused the 2008 financial crisis. he is in conversation with the deputy global economics editor at the "wall street journal." >> host: peter, you new book is called "hidden in plane sight: what really caused the world financial crisis and why it could happen again." you were a member on the inquiry commission which was investigating the cause of the '07-'08 crisis you. dissented not only from the democrats on the committee but

also from the republican appointees. what did you see they didn't? >> guest: i had been looking at the housing system in the united states, and dodd-frank and -- well, i'm sorry -- fannie mae and freddie mac for quite a while before i got on the commission. so i had quite a lot of background about what has actually been happening in the housing sector. so, i was looking for the commission to look into what happened with fannie mae and freddie mac what role they might have played in the housing crisis and ultimately the -- the financial congratulations, and i found the commission wasn't interested in that and wouldn't look at it to the degree i tried to interest them. i was just told i was -- i was given signals that was not something they were going to do. so i decided i would dissent. now, my different with the other republicans, i think came from the fact that my view was that our responsibility on the

commission was to make sure that the american people understood what happened in the crisis. that i was outside, i thought the partisan differences between the republicans and the democrats. i'm afraid the republicans felt that they just would not agree with anything the democrats said, and they didn't want to indict the bush administration some of them actually had been in the bush administration. so i felt that i had to speak with an independent voice and that's why i dissented. >> host: you wrote a lengthy dissent for the commission and for the late stages of that inquiry, that of course grew into your book and you have a lot of up conventional views which'll get into. for people who don't understand, this focuses on he housing and mortgage markets in the ute and the government's role in it. when and why did the u.s. government get so heavily involved in the housing market? >> guest: actually it began in

the new deal back in the '30s when the government attempted to assist banks in making loans by guaranteeing those loans insuring those loans, and then fannie mae was established in late 1938, also part of the new deal to provide liquidity to banks. when they made a mortgage, they could sell the mortgage to fannie mae, get liquidity for that mortgage and make more mortgages. so it was all helpful in inducing more home sales in the united states. that was the beginning. the government really got much more involved in the '50s when they actually started adjusting the fha, the federal housing administration standards in order to improve housing in the united states, or increase the amount of housing sold in the united states, in a desire to help the economy. that is when we sort of got off the rails because once the

government started using housing as a way to improve the economy understood to improve the american people's view of their government and how successful it is then it became a political issue instead of what it had been before which was simply a question of making sure that the market functioned well. >> host: this stretches across democratic and republican administrations. the interest in housing and encouraging housing activity. where do you see the more recent turning points in this development? >> guest: well i think the key turning point here, at least from my perspective, was 1992 when congress adopted something called the affordable housing goals. they were under a great dole of pressure at the time to make sure that the borrowers who were below median income or low income borrowers had credit for mortgages, and many activists in

support of those borrowers in these communities pressured congress to do something that would provide much more credit to those groups. congress then adopted the affordable housing goals, which required fanny may and freddie mac -- these goals were on applicable to fannie and freddie, and required them, when they bought mortgages from banks and other originators to make sure that of the mortgages they bought, 30% had been made to people at or below the median income. that the authority to require a certain quota was given to the department of housing and urban development at that point, and over time between 1992 and 2008 they gradually ratcheted up these requirements and added new ones, so that, for example, by the year 2000, 50% of all mortgages that fannie and freddie naught any year had to be made to people who were at or

below the median income, and by 2008 it was 56% that would have been in the bush administration. so it wasn't -- this is not a partisan thing. it's done under clinton first, but then under bush it -- the whole idea was carried through by hud. >> host: their theory it was designed to encourage americans to save money to develop, to build equity in their homes. part of this is to ensure that lower income and middle income people can have a home and have an asset of this kind. there is something wrong with this idea in general, about people should be able to buy a home and find a home in america? >> guest: absolutely nothing wrong with that. there are lots of good reasons why home ownership should be encouraged. the problem with this system is it forced fannie mae and freddie mac over time to reduce their underwriting standard, and that way they lured a number of people into buying homes who could not actually sustain the

mortgages over time. in fact, by the year 2008 -- this is really an important date in the book -- by the year 2008 more than half of all mortgages in the united states were what you would call subprime mortgages. about 31 million subprime or other weak mortgages by 2008, and of those, 76% were on the books of government agencies, which to me shows clear live it was the government that created the demand for these mortgages. now, what happens when underwriting standards decline, it's not simply that the people who have bought homes are unable to carry those homes. what also happens is when those homes fail, when the mortgages fail, they affect all of the people around them too, all of the neighborhoods. the values of homes in all those neighborhoods go down. so what the american people should understand, after the financial crisis, and which i don't think they really understand today -- is that they

are all hurt. when underwriting standards are reduced so that other people who can't necessarily sustain these standards, don't have the proper credit relationships don't have the down payments unable to keep their mortgages. >> host: we have a couple of separate issues that intersected in this period. one was just the existence of fannie and freddie and what they did and had done for a while. the other was the congressional and political push to encourage more home ownership. >> guest: that's right. >> host: when these two combined, fannie and freddie was there as the vehicle to do all of this. what happened then in fannie and freddie and its existence and relationship with lawmakers that led to where we got in the crisis. >> guest: it's really quite interesting. the person who ultimately became the president of fannie mae kim johnson was his name

realized -- he was a political operative before that but he realized that fannie mae was under stress because it had very strong government franchise that it would have to sustain over time and i think he recognized that if fannie mae and freddie mac, of course -- but if fannie mae and freddie make actually became kind of supporters of low-income housing, that would give them a strong backing in congress. that would keep them in their superior franchise position where they were getting all kinds of support for the government and making quite a lot of money, both of those institutions. >> host: fannie and freddie, even though they were essentially started by the government, they became like private entities. >> guest: well, they were privatized in 1968 and in 1970 they were given authority to go from where they originally were which was only buying

government-backed mortgages into the conventional market where they could begin to buy regular mortgages. that made them very important profitmaking institution. >> host: they became publicly trade companies. >> guest: that's right. both on the new york stock exchange and some of the largest financial institutionness the united states at that time. all the way up until the time they became insolvent in 2008. but the political relationships became extremely important for them because as they grew and got bigger and bigger, the dangers were always that somehow he government would move against them, would regulate them more strictly, and there was a great deal of push in the bush administration for much more regulation of fannie mae and freddie mac and from their point of view especially fannie, which is much more political -- from their point of view to avoid more regulation they had to rely on the democrats in congress. the democrats in congress were

focused on making sure that fannie and freddie supported low-income housing and so even though they were beginning in the 2000s to find that they were big mortgages that would ultimately cause them to suffer tremendous losses they couldn't go to congress or go to hud and say, we won't comply with these quotas anymore because it's driving us out of business. we're going to fail -- they couldn't do that because if they did that the democrats in congress would no longer support them and the effort of the bush administration to place them under much greater regulation -- this was in 2003 2004 2005 -- would have become successful and then they wouldn't have been so profitable. so they were caught in this vice between on the one hand having to keep the democrats on their side and on the other hand having to comply with the affordable housing requirements

that were gradually going to drive them to insolvency. >> host: i don't know of many areas in the the financial crisis and the lead you the financial crisis that are more hotly debated and generated more political sparring than the role of fannie and freddie. a lot of different views on exactly happened the relationships and if you look at the clinton administration, anymore the administration who say we also tried to deal with fannie and freddie. they saw it getting a little bit out of control and wanted to do something about it but couldn't get support from congress. the bush administration, even though there were people who wanted to push fannie and freddie in a certain direction, was also pushing the home ownership goals at the same time, which conflicted with other pieces of the administration that was moving in this direction and there's culpability throughout congress at different stages democrats who were at times pushing for it when they weren't in the majority when they were pushing for it. the republicans have another

view of putting the blame on democrats. is there any particular moment in the fannie/freddie relationship with either the white house or with congress where it truly got out of hand or was this a slow development over 15 or 20 years? sunny see it as slow development. i don't think -- at least from fannie and freddie's point of view it got out of hand pretty quickly. if they recognize what they were doing -- i think many of them within those organizations must have realized it, because up until 1992 they would only make prime loans. they were famous for only making prime loans, and after the affordable housing requirements were put in place and they had to buy loans from people who were below the median income 50% or 56% of those loans had to be to people whose credit relationships were not particularly good. they began to reduce their

underwriting standards and realized they were taking huge risks in doing so. by 1995, for example, they were accepting mortgages with 3% down payments and by 2000, they were accepting mortgages with no down payment at all. so they knew what was happening. but they were caught i think, in a serious political difficulty. i actually do not blame fannie and freddie so much in the book as i blame hud, because fannie and freddie were implements. they were tools in the hands of congress and the administration. both the clinton and the bush administration. and it was hud that was carrying -- >> host: the department of housing and urban development, cabinet agency. >> guest: exactly. the department of housing and urban development was carrying through the mandate's the affordable housing requirements and they were being very tough about them because there was a lot of very good political juice

in the for the administration to say which they were serving and in the case of the bush administration, yes, he wanted -- burn was very favor able to the idea of home ownership, and indeed in his memoirs, bush said i was delighted with the way that low income people were able to buy homes and the home ownership rate in the united states was rising, but what i didn't realize was the risks that we were undertaking at the same time. so he kind of apologized in that way for what his administration did, and i think that was the right way to do it. they did not realize the risks they were introducing into the housing system and ultimately into the entire financial system by forcing fannie and freddie to buy mortgages that were not well-grounded. >> host: there are couple of core areas of dispute about the housing crisis. one is really about regulation

and should there have been more regulation or less regulation? you're obviously arguing it was at the regulation itself and the way it was promulgated that led to thus. the thought experiment. what if there were a different kind of regulation. there weren't -- there were some kind of push on home ownership but not with as weak underwriting standards as we saw -- clearly stories in the housing bomb about ninja loans no income no job no asset what do you think might have haven't if there were standards? that's part of what came into the financial crisissier commission, if the government had actually set proper standards for people to get these loans and maybe we wouldn't have got ton that point. do you think that would have made some difference? >> guest: well, yes, actually. if the government were to set underriding smarts that would be very helpful because in fact at

the base of all of these problems was the fact that the government had allowed underwrite standards to decline so stoopsly because 0 other political interests they had. so the government could have done this a number of different ways. assuring that underwriting standards were maintained but perhaps helping low income people to get down payments would be one way to help them to become home owners. but we have to stop for a moment and think about whether home ownership is in fact the best thing that it has been cracked up to be. that is something that americans mostly believe is true, and i think there are a lot of benefits of home ownership. people cut the grass and keep the place in good shape and nobody ever washes a rented car. there are very good reasons to

maintain our housing stock through ownership. on the other hand home ownership is not and has not been over time as good an investment as stock market. i think the numbers are about one or two percent growth in home ownership, whereas the stock market over the period of time is seven percent. so we shouldn't force people to be in the home -- to own homes. we should make it possible for them to own homes that will sustain their value, but the government sometimes goes overboard in the hope of supporting particular constituencies rather than home ownership in general. >> host: another big area of dispute is whether this -- whether the crisis was driven by public sector actions like what we saw in the gses with government housing policy, or private sector activities. and there arlet of forces coming into shape in the private sector in the housing market, and

creating mortgage securities. tell us about what was happening in the private market first and then let's connect that to what happened in the pack market. >> guest: as i mentioned before, by 2008, 76% of all these very weak mortgages were on the books of government agencies and that means 24% were on someone else's books and that was the private sector. the trouble with what the narrative has been about the financial crisis since 2008 is that it has focused entirely on the private sector, and on wall street and so forth, and i of course have been accused of backing wall street or favoring wall street. not at all. what i'm trying to do is point out where the real liability for -- or responsibility for what happened in the financial crisis occurred and that was with the government's policies but wall street had a very important -- or private sector in general had a 24% and very

important role in this. the trouble with putting all the blame on wall street and the private sector is that in many ways they were lured into the position they were in by the fact that fannie and freddie were saying to them we need these mortgages. we're not going to be too concerned about who the borrowers were and what kind of credit score they had and whether they had a down payment. those things are not going to worry us. we have to meet a quota. and so over a period of time wall street and other originators, countrywide, for example -- wouldn't say that with wall street. it was a california company, but countrywide became very powerful because they were able to assemble all of these low are-quality mortgages, subprime mortgages put them into pools and sell them to fannie and freddie, and fannie and freddie got credit on the affordable housing goals for buying

securities backed by these eligible mortgages. so, a lot of what the private sector did was to feed mortgages through mortgage-backed securities to fannie and freddie, and during the mid-2000's about 2003, 2004, 2005 freddie and fannie were one of the biggest buyers from the private sector up. but then housing prices began to rise and people looked at housing as a really good investment. maybe wound of the best investments. and so the wall street banks and others kept many of the mortgage-backed securities that they created. many were sold to fannie and freddie but they kept the rest. that it why they got into trouble because they actually believed, it seems that these mortgages were -- of mortgage-back securities were really good investments. so, i think we have to look at

both sides of this equation. the private sector, responding to the incentives that were created by the government, send us more of these mortgages because we need them to meet the hud quotas -- and then the government's role in especially hud in forcing fannie and freddie to continue on this course even though, by the late 2000s they were beginning to see that fannie and freddie were on their way to insolvency if they continued to followed this course. >> host: there's an earlier issue in the private sector that generated a lot of private sector interest in creating these mortgages. interest rates were near -- were at the time at record lows coming out of the 2001 recession, the fed lowered interest rates. investors weren't able to get the same returns they had long expected on bonds. they were looking for a way to draw higher interest rates and that is one of the causes of

this security generation -- these mortgage securities being general rated by private firms. what happened there? take us through that end of the private sector? there was fair amount of demand not just in the u.s. but globally the global savings glut theory. one thing federal officials point to, there was so much money sloshing around the world looking for a place to invest that actually generated a rome return, that it created the demand for these private securities. >> guest: maybe so. i take that issue on in the book, along with a whole lot of other issues, eight or nine major issues that have been cited, glass seeingle and credit default swaps. but the question of why we had this bubble in housing prices is one i looked at. congress was very fifthable to the idea it was the fed's mop tear policy, and then other people, including the fcic took

the position it was all this money sloshing around in the markets, looking for a place continue vest. i'm skeptical about those. you can't prove they weren't important. but the bubble that we were having in housing began in 1997. you see it very clearly in the data. and by 2003 which is the time when the feds monetary policy was such that interest rates were actually negative on a real basis. by that time we already had a bubble that was three times the size of any bubble we had post war. in addition the idea that money was sloshing around, you really were not able to see that in longer term rates. in ten year -- in the ten-year note or the 30-year bond. you didn't see huge declines in that -- in the interest rates on those instruments which you would see if there was lot of demand for them. so i am skeptical about that

idea too. i continue to believe that the housing bubble was caused by all kinds of new buying coming into the market with government credit through fannie mae and freddie mac and i -- at least i look at it, not being an economist, i look at it as a minsky moment. there was a famous economist, minsky can talked about the fact they the bubble owed cure when there's strange event the economy that hadn't happened before. major changes in the reelingships in the economy and i think that is wind this case where where all of a sudden 0 whole lot hoff people who had not been able to boy homes before, were able to come in and begin to buy homes and that started the bubble growing and in 1997 and it continued to grow for ten years, until it topped out in about 2007.

so that was a very important thing, and i think it came from u.s. government housing policy and not from anything else. >> host: as you know quite a few views about what created the housing crisis. a couple more i just want to run through. you do address these in the book. one is the global issue. why did so many other countries also have housing bubbles? it wasn't just -- they obviously weren't following u.s. housing policy. we had housing bubbles in ireland and spain and u.k. and australia and canada. many of them had banking crises in recent years in dealing with that. they didn't have fannie mae and freddie mac. what happened in those countries versus what happened in the united states and why do you see the -- >> guest: that's been one of the major criticisms, and i've always found it relatively easy to address because it's been looked at by a number of people. one is a professor at berkeley

named dwight offany, who has done a study of what happened in other countries, particular he the spain, ireland and the u.k. his conclusion was, yes they had bubbles there. i can't say why they had bubbles. they had bubbles there. but when their bubbles collapsed, the most -- the country with the greatest losses at that point were in the u.k. and they had losses of about three percent in the united states fannie and freddie which had of all the players had the fewest bad mortgages they had many, many enough to drive. the insolvent but didn't have the worst of the worst. their losses were between 13% and 17% and firms, banks and mortgage -- their losses went up to 35% and 40%. the fact is in the united states the bubble was filled

with or suffused with subprime and other weak mortgages, whereas in other countries, where there were bubbles the losses were at most three percent, which meant their financial crises were not the result of losses in their housing system. the reason why the united states was worse than others was because the u.s. government was promoting the acquisition of subprime and other weak loans and other countries didn't do that. they continued to insist all along, even while the bubbles were growing, they continued to insist on prime mortgages, and so when their bubbles collapsed there weren't so many losses in the housing system. >> host: most people have heard the term subprime a subprime loan weaker loan. what you did in the book was to actually try to develop a broader measure. you referred to knopp traditional mortgages in here. table upon table of trying to tally the broader measures here,

which is certainly different from what other people have done. walk us through why you decided to do those calculations, where those figures came from and when you came upon them and what their concludes were. >> guest: well, i used the term nontraditional mortgages because it was so much easier to refer in the back to ntms rather than each time talking bat subprime mortgage and a an alt-a mortgage. there are distinctions. a subprime mortgage is simple because it was defined by the bank regulators in 2001, and what they said is that any mortgage made to a person who has a credit score of less than 660 -- called a fico score. if your fico score is 660 or less, that is a subprime mortgage, no matter what else you might say about the mortgage. what kind of house it is how big the down payment was and so forth.

it's a subprime mortgage if it's below 650, and the reason is the data shows again and again mortgages below 660 have a much higher rate of default than any other kind of mortgage. and so that is a defining element of the subprime mortgage. then there was something called an alt-a mortgage and that phrase came from the fact that the agencies which were fannie mae and freddie make, called in the market agencies -- would not accept mortgages that had low down payments, below 10%, for example, had -- were not mortgages that paid -- that only required interest payments. they didn't decline in -- they didn't make any principle payments as part of these mortgages. those kinds of mortgages they would not accept before 1992. it was only after 1992 that they

began to accept those mortgages. so, i lumped them both together and actually the fcii did the same and called them nontraditional mortgages because of the traditional mortgage in the united states was a prime mortgage which in normal times in the traditional mortgage had a default rate of legs than one percent -- less than one percent. when we gave up on prime mortgages and began to accept mortgages that were alt-a or subprime, in other words nontraditional mortgages that's where we went wrong, and why we really put our financial system in a serious position where, as soon as we started having a lot of default, we began to weaken our entire financial system and had a financial crisis.

>> host: you say in the book you were essentially trying to go and provide a broader view than what members of the commission were able to see than some of the informing that was out at the time. what do you know now that either wasn't known there or wasn't public then? >> guest: it's really interesting. one over the reasons i wrote the book is that i found in going through a lot of the data that the commission had accumulated, a lot of the material that supported the position that i took when i dissented originally and i was quite upset that this information was never made available to the commissioners. i being one issue should have seen this and would have said, doesn't this support my position? i won't say it's suppressed, but they collected a tremendous amount of information which they didn't use and a lot of that information was data that supported my position. there is, for example in the book, a table that had been

disclosed by fannie mae and freddie make -- well by fannie. freddie had the same general tables but fannie's table was particularly good because it showed how subprime mortgages met their affordable housing requirements over time. starting in 1996 until 2004, 2005. showed the increase in the purchase of subprime mortgages and then it showed that they met the requirements under the affordable housing goals for loans to people who were below the median income in each case. as those goals went up, so did their purchase of subprime mortgages, and that one piece of data that one table that was supplied by fannie, would have made my case to the entire fcic but it was never disclosed to me and never disclosed as far is a could tell to the other commissioners. >> host: now let's go into the crisis. you have made the case on

housing leading up to the final cries. when we think of the final crisis we think of bear stearns lehman brians aig, a big insurance company and its collapse weapon don't necessarily think about countrywide as much, even though there was quite a bit of attention on countrywide in the lead up to the financial crisis. tell us how the housing piece of this collided with everything else so we get to a point where the government is actually bailing out a big insurance company that obviously was not directly involved in the housing market. >> guest: this is a story of increasingly significant government blunders, i'm afraid and i have to blame the people who are in office at the time, and then to some extent even into the obama administration, but there was the thought apparently in looking at the

memoir of the secretary of the treasury at the time, hank paulson there was the thought if a large financial institution failed it would drag down a lot of others, and what was happening, beginning in 2008, -- 2007 and then 2008 -- as these mortgages began to fail financial institutions that were holding mortgages or mortgage-backed securities had to write down their assets very substantially. when you've write down your assets your capital declines and then there was uncertainty whether in fact they had done enough writing down, and whether they were not in fact insolvent. they certainly looked weak but investors were worried about this and as we approached the first few months of 2008, one institution in particular that had done a lot of investing in

the housing business bear stearns, which was an investment bank -- still is -- looked like it was going to fail and the government stepped in and rescued it by providing about $29 billion in risk-sharing funds provided by the fed to jp morgan chase, very large bank that bought bear stearns and shaved it. the shareholders got $10 a share. this was unusual because the government had never before actually stepped in with cash and rescued an institution that was not an insured bank. so, right then the market thought, well we now have a policy by the government. they're not going to let any of these financial institutions fail. and then we come to lehman

brothers. everyone thought the government would save them. it didn't. they allowed lehman brothers to fail. it was huge mistake. i was a mistake to rescue bear stearns but a that create ate a lot of moral hard, in other words people assume they know what the government is going to do and the government is going to protect them so they make different decisions as result of that. but having created all this moral hazard, they then allowed lehman brothers to fail, shocking everyone in the market. people did not know who was going to fail, who was not going to fail, people began to withdraw their funds from banks and other financial institutions. the credit markets dried up. and banks refused to lend to one another. these were insured banks. the large nest the country. refused to lend to one another, even overnight, and almost no one would follow financial markets for years ever saw

anything like that. so i think this was the result of some serious mistakes by government officials. first in rescuing bear stearns then in not rescuing lehman brothers, and then in the same week aig became -- was unable to meet its financial obligations and then after letting lehman brothers fail, they went and rescued aig. they tried to make a distinction. the secretary of the treasury and ben bernanke tried to make a distinction between aig and lehman brothers. no a very effective distinction but they rescued aig, and so many people in the market said these guys have no idea what they're doing. they are playing with our money. they're making decisions and we're out here at sea not

knowing at all what the government is going to do the day after tomorrow. that created -- that made the financial crisis much worse, i believe. >> host: when you recall these events in real-time, covering it -- we all remember in the summer of 2007, there was some credit tensions and credit markets globally and we saw that develop into bear stearns in march of 2008, and the rescue of fannie and freddie in the summer of 2008, and lehman brothers in -- the bankruptcy of lehman brothers in mid-2008 and a few days later the rescue of aig. one of the themes that was occurring throughout this period and following in real time, i remember even the officials who were involved, they couldn't get their head around what was actually happening in these financial institutions. they looked like these were out of control banks, they were out of control finance geeks who had gone and -- i think president

bush used the word, the phrase in 2008, wall street got drunk on fancy financial instruments. and that's what he said behind closed doors. this was a wall street problem. they went and they built up their balance sheets with all this stuff some of it trash, and clearly extreme flench some bank -- stream leverage in banks. you weren't sure how much they could absorb-much capital they should have had. the competing view is that these wall street banks were just entirely out of control. they weren't actually being monitored properly. the regulators who were responsible for tracking them weren't even sure what was on the books. what was happening there on the wall street end of this for a situation to get out of control that much without government regulators, who should have been watching to even no. what was happening. >> guest: the first thing you have to recognize about what was

happening at this point was that fannie and freddie were not revealing the quality of the were taking on. as i said, at the beginning of ouriscussion fannie and freddie always bought only prime loans. no one knew they were reducing their underwriting standards substantially and buying subprime loans. so that as far as the market knew they had about 6.8, 6.7 million subprime loans whereas in fact they probably regulators and investors and risk managers and other banks had no idea how risky the market was that they were playing in. that was one of the major problems. i want to mention also the rating agencies. i don't know how their models work but if you was fed into their model there were 18 million subprime loans

instead of six million, the mod wool have spit out a much different set of risks. so people really didn't understand at the time how risky the market was. and that's really important thing for everyone to understand about the market. now, wall street regulated insured banks are regulated. havery regulated by the government. in fact in the larger banks there are examiners in the bank 24 hours a day, seven days a week, all the time and they didn't recognize the risks that these institutions were taking on because the institutions themselves tide not. one of the reasons is that as a it gross these mortgages before more and more valuable. there are very few defaults when a bubble is growing, people can refinance if they can't meet their obligations. so defaults go down. people looked that isn't this amazing. we always thought that all these subprime mortgages were risky

but we're not seeing a lot of defaults. so, we can really go into this business and invest in subprime mortgages, which is what i think people in wall street did. they were also helped by the accounting rules at the time, because if your portfolio was growing, it went to your bottom line. what happened, of course, is when everything reversed, and mortgages started to fall in value, it apples went to the bottom line and they began to lose money. they began to look risky. their capitals declined. and so all of these things that happened at the time were the result, i think, of insufficient information about what was really going on in the market and one of the reasons for that is that people assumed a lot about fannie and freddie. they assumed a lot about government policy. they didn't realize what fannie and freddie were actually doing or what hud was forcing fannie and freddie to do, and so people

were surprised. that's why people in the government could not understand why things were so bad in the market. the federal reserve has probably more information and better information than any other financial institution or regulator or government agency in the world. they have a huge staff of economists that follow the markets very carefully. when ben bernanke was testifying in congress he would say issue think we're having a little trouble in the subprime market but it doesn't look to me as though subprime market is really so large that we can't overcome that even if we had a large number of failure toes in that market. it was amazing he was saying these things to congress in 2007 when in fact fannie and freddie were on their way to insolvency, and the market was

foul these very weak mortgages. he did not know that. so, if he didn't know that certainly the banks that split up into -- they're don't share information among themselves. they didn't know it either. and so i have a little bit of trouble with people who turn on the banks immediately and blame them for what happened in the financial crisis when it was so much the responsibility of the government. >> host: there's a widespread assumption from ben bernanke on down that house prices weren't going to decline. we'd never seen a generalized non flop home prices. turned out to be a great understatement. we saw declines of 30% to 40% in many areas of the country. but there were also a view within these banks -- they have enormous risk management teams. they have very highly paid executives who are responsible for trying to understand the

risks they have on their balance sheets and how the risks from counter-parties, from other banks and other firms could affect them and how, whatever they have on their only balance sheet could affect them. was there not a failure to from the banks to understand what was going on in their own firms? >> guest: your risk management is only as good as the data you have and if you don't understand the quality of the mortgages that are actually in the market, if you don't understand how many subprime mortgages and alt-a mortgages, nontraditional mortgages, were actually out there, you can't actually give a analysis to the management of the bank saying we're in trouble here there's going to be a crash because of the way the market has developed over the years. the information was not available. it's now available in this book. but it wasn't available at the time. and so i -- again, i think we have to understand the position that people were in at the time.

there were, for example -- i enjoyed this quite a lot, reading the book by michael lewis, about the big short, which talked about the fact that these people had thought well there's going to be a collapse in this market, and if you bought the right credit default swaps, you could make a fortune on that. for 20 cents you could make a thousand dollars the way the thing was set up. and he went around -- these guys went around on wall street and couldn't find baez. people said i don't see it happening. where are all these defaults? we have had years and years now of growth in this market. the housing market in the united states as you suggested, never declines by more than three percent or four percent, so why worse now? there's always uncertainty here. a lot of people who are saying everything is going to continue

to grow and then some people say they're going to collapse. things are going to collapse. we have to stop what we're doing, change do something else. but it's very hard to persuade people to do that including people in congress if they're not seeing any evidence that problems were occurring until 2007. so we were led down a path into believing that things were going to be fine. but in the end of course, we had a collapse that no one could foresee because of the absence of sufficient amount of data. >> host: one of the outcomes of the crisis was the dodd frank act, which built up new regulation on big financial firms, attempting to teal with the problem of too big to fail banks, created a whole lot of other either entities or ruled that are still being developed. what do you think would be

different about dodd-frank if people had followed your view on the housing crisis? >> guest: there wouldn't have been the dodd-frank. when you blame the private sector for what happened and when you say, well just insufficient regulation we could have stopped this all from happening, but the regulators didn't have enough power things like that then you get dodd-frank and from my perspective, dodd frank is the reason why we have had such a slow recovery from financial crisis and the recession that followed. this has been the slowest recovery since the mid-1960s by a wide margin. why is that? what happened that made such a sniffs normally you have a big drop, you then have a fast recovery v-shaped kind of recovery. didn't happen this time and the reason i think is dodd frank. we have spent a lot of time trying to blame the private sector for what happened here trying to impose new regular layings on them creating a lot

of uncertainty for them forcing them to reduce their risk-taking, all of those things have caused our economy to grow much more slowly than it normal lay would after a recession. and the problem is that if we had actually understood what happened in the financial crisis we would have said now, wait a minute. we really ought to reform what the government was doing. if we understood that the government had cautioned underwriting standards to decline as the book points out, then let's change the government's policies. but they ignore the government completely focused entirely on regulating more stringently the private sector and that, i think, is the reason why we have the dodd-frank act. so one of my purposes really with the book is to show that the dodd-frank act is actually illegitimate. it was based on the wrong target. it was ideologically pointed

toward the private sector because many people support whatever it is the government does, and in this case they wanted to -- they did not want to admit that the government had been responsible for this crisis. >> host: there are a number of other views on what -- why we have had a slow row. one view is that there's been government austerity while we could have had more government spending. that certainly a common view. another view is that we had overleveraged consumers. consumers had taken on too much debt partly because of housing and in deleveraging and reducing the debt they have been slow to spend. dodd-frank is another view about regulation, too much regulation. restraining businesses. that's a common view from people on the right. one piece of dodd-frank is about providing information whether it's about what is happening on the consumer front what is happening within banks actually

providing a clearer picture through regulators, through people watching what is happening, providing that information. do you think they're value in that of the government actually knowing what is happening the this complicated financial institutions? >> guest: i think the government all always knew that there's nothing in dodd frank i see that is completely new in terms of regulating financial institutions. the two areas that are new, the ability of this financial stability oversight council to designate certain financial institutions as systematically important and have them regulateled by the fed no matter who their regulator was were they're now to be regulate bid the fed. that's one. and then the regulation of the futures business especially so-called credit default swaps is another. that's new. but other than that the regulators always had tremendous power over and knowledge about what was happening in the

banking or financial system. >> host: yet they missed details in the housing sector right? that's another point you make there wasn't information about what was going on. do you think there are to all tools to get that information now if people are looking? >> guest: well, if you look, you'll find. but if we have a situation as we had before where there was a government agency that was in charge of the housing business and people looked to that agency as the one that was responsible, and that would have been the department of housing and urban development, and then fannie mae and freddie make operating under them, people said, this is another form of moral hazard in the way people said we don't really have to know any more information because the government is protecting us. the government is behind us. nothing is going to be allowed to occur that the government is not charge of in some way. so we don't have to worry about

this. and that is a real danger. that's one of the reasons why i think that we ought to turn our -- my view is we ought to turn our housing business over to the private sector again. the let the private sector written, because under those circumstances the mortgages that are made would be prime mortgages. people do not want to make -- as a business matter it's not a good idea to make a subprime loan unless you're a specialist in that area and know how to price them and how to deal with the people who are only capable of borrowing at subprime -- on a subprime basis. ...