the u.k. space agency works together to promote the sustainable use of the spectrum. when authorizing space activity we carry out technical analysis to make sure space objects do not pose any long-term interference in orbital regions. we ensure the orbital lifetimes are compliant with the 25-year recommendations in the guidelines. we require space operators to boost their spacecraft at end of life into an orbit of the go region so they don't interfere or return and become part of the graveyard orbits. we regularly check with u.k. operators to ensure the

reliability. the u.k. is engaged in a number of national and international activities on orbit objects and debris. we have conducted research and experiments to ensure the accuracy of orbital space data with australia and we're home to the space data organization, which supports the controlled reliable efficient sharing of data. we're members of the interagency debris coordination committee. we hosted the last meeting in april of this year, and we share data and methodologies in support of efforts to better understand how orbital debris is populated. as the rate at which orbits are placed in orbit is exceeding the rate at which they are removed, the active removal of debris

will become a necessity in the future. we should also aim to reduce the amount of debris which is created during launch and we're supporting development of novel technologies such as an air breathing rocket engine, which has the power to deliver low-cost impact to space. guidelines 16 and 17. we have identified space weather as a potential risk to the long-term sustainable activities in outer space. we therefore published our space weather strategy in 2015 to guide our action to improve the u.k. resilience on the ground and in space to space weather events. we're working internationally with our partners to improve the forecasting of and response to space weather events. for example, the u.k. office is involved in the interprogram coordination team on space

weather. and t the british geographical survey hosts the world data center for geomagnetism, which is forms part of a worldwide exchange. and the u.k. space agency funded a study on the eco cost of space at a global and national level. moving to the last area of capacity building and information sharing or guidelines 25 and 26. a good example of some of our recent capacity building is u.k.'s participation in space disasters. another example is providing

access to international experts on space governance through courses held by the london space institute of law. thank you. [ applause ] >> i really want to thank the panel for everyone keeping to their time. that was amazing. it's really hard to do, i know, to stay within ten minutes. the organizers has let me know we have ten minutes maybe to eat a little bit into the lunch break so that people can ask questions. i do encourage the audience to do so. this is a great opportunity for you all with such a great panel. please wait for the microphone and identify yourself.

thank you. >> i'm marsha smith. my question, i think, is on 12 guidelines in which there is agreement. there's another set in which agreement is close and another set where agreement is far apart. when you talk about the need for an integrated set of guidelines, is it russia's position all of have to have consensus reached or can you have a smaller set going forward? >> actually, we consider by 2018 it should be an integrated package of the guidelines to agree. yes, we do not consider the guidance of operationism additional. we think it will be a full package of the guidelines.

even more, i can offer you the expertise of our minister of foreign affairs. >> thank you. do i see anyone else? i'm blinded by the lights here. okay. well, then i'll take an opportunity of the chair to ask a question. i wanted to ask you about europe's effort to develop a space tracking space situational awareness network. this is under guideline 12, i think. this would come under guideline 12 about sharing orbital information. i want to know what progress you've made and i also wanted to know whether or not you're in conversations with other

countries such as the u.s. about how that eventual network will be able to share data with other entities in other countries because we've seen a lot of people working on these capabilities, but we don't have a system for sharing that kind of data. >> thank you for the question. indeed there's an initiative in europe today and we are building this cooperation for the moment with five other states. we do not talk deeply on this initiative. i think today there's a proposal on the table. it was a u.s. probably to create an expert group on information exchange on space objects and events, so we need to work on that issue. the objective would be to discuss the possibility to

exchange information so we are clea clear objective, but then how can we implement this proposal. there could be international cooperation. it could be regional cooperation as in europe today. there could be different proposals, different means to reach this objective of exchanging information on space objects and events, and i can't say today what would be the reason for such a work. we need to work on this. >> thank you. do i see any other questions? if not, i think everybody must be hungry. if not, we'll adjourn to lunch.

victoria said it is straight out the door. thank you all and let's give a big round of applause to this panel. [ applause ] tonight at 8:00 eastern on american history tv, the first of two days of programming on winston churchill's friends and contemporaries. segments about the world war ii prime minister's relationships with monarchs and other presidents. also a look at winston churchill's financial team. part one of churchill's friends and contemporaries begins tonight at 8:00 p.m. eastern on c-span 3. a debate now on the causes of the 2008 financial crisis and whether federal housing policy contributed to the problem and implications for potential future economic downturns. >> good afternoon. i'm neil ruiz.

the center is a think tank designed to be a focal point here in d.c. for the study and debate on major economic issues for the u.s. and the global community. we're excited about today's program. we have some of the best experts coming from different perspectives to discuss did u.s. housing cause the 2008 financial crisis, what is the right policy for the future. for all the audience members here, we're actually live right now on c-span 2. just so you know. if you ask questions, identify. it will be broadcast to the world. i would like to introduce to dean alan morrison. >> thank you. i bought his book. i read it. it's very interesting and very challenging.

i'm sure we'll have a wonderful day today. peter, thank you for coming. now the real moderator my colleague, professor arthur wilmarth. >> thank you, alan. welcome, everybody. we're delighted to have you here for a stimulating and interesting discussion on two issues. i guess we're looking backwards and forwards. first, we're looking backwards at the financial crisis and asking the question of whether u.s. housing policy before the crisis played an important role in essentially sowing the seeds for the crisis. then secondly, we're going to be asking the question of what should be the u.s. housing policy going forward. i'm not going to anticipate the commentators' remarks, but obviously all of you are aware

that fannie mae and freddie mack are in a quasilimbo state at the moment. they're essentially controlled by the federal government through conservatorships, and there is periodic continuing debate on what the future of those organizations should be or what any alternative organization might be in terms of federal participation in the mortgage market. i'd like to now introduce our three speakers. as dean morrison mentioned, we are indeed greatly privileged to have all three of these speakers here today. they are nationally recognized experts on the mortgage market and on financial regulation more generally. i'm also delighted to welcome all three of them back to g.w. law school. we are very grateful that they have come back once again. our first speaker will be peter wallison. peter is a co-director of the

american enterprise institute's program on financial policy studies, and he is a long time expert analyst and commentator on financial regulatory matters generally. he was general counsel of the u.s. treasury department under president reagan and then served as white house counsel under president reagan. earlier this year, he published his book, which dean morrison made reference to, "hidden in plain sight, what really caused the world's worst financial crisis and why it could happen again." he's also the author of five previous books. his current book arises out of work he did as one of the commissioners on the financial crisis inquiry commission, which was a commission established by congress to analyze and comment on the causes of the financial crisis. our second speaker is damon

silvers. damon is a director of policy and special counsel at the aflcio. he joined the aflcio as associate general counsel in 1997. he serves on a pro bono basis for the state of new york. he also served as deputy chair of the congressional oversight panel for the troubled asset -- is it -- >> relief. >> relief program. troubled asset relief program. it is t.a.r.p. originally it was going to be repurchased. >> important difference. >> from 2008 to 2011. so he also had an important role

in analyzing and commenting on the causes of the financial crisis. before joining the aflcio, he worked for two different unions and also clerked for two judges on the delaware court of chancery. our third speaker is professor kenneth snowden. he is a professor of economics at the university of north carolina greensboro and also a research associate at the national bureau of economic research. he's published extensively on the u.s. financial mortgage market. his two most recent books, he is a co-author of "well worth saving, how the new deal safeguarded home ownership" and contributor to "housing and mortgage markets, an historical perspective" both published by the university of chicago press. he received his ph.d. in economic history from the university of wisconsin at

madison. so again, the order of our speakers will be peter followed by damon and ken. then we'll have a brief period for colloquy among the three speakers. then we come to q&a, because the program is being broadcast, please allow our assistant with the microphone to reach you before you ask your question. without further ado, peter, please kick us off. >> thanks very much, art. i also want to thank alison morrismo -- alan morrison. in any event, i'm going to talk mostly about my book. if we talk about other things afterward, i would be happy to participate in that conversation

too. "hidden in plain sight," the name of the book, grew out of my dissent from the national crisis inquiry commission. i may surprise many of you to know much of the material that the commission had assembled was not actually made available to the commissioners, like me, and so i wrote my dissent without that. when i finally did see much of the material that the commission had assembled, i was able to write a book which fully supported what i had put in my dissent but with a lot more, i thought, useful material. so let's start on the whole point of this. why did we have a financial crisis? now, everybody can agree that the financial crisis was caused by the fact that we had in our financial system too many low quality -- we'll call them subprime or otherwise weak

loans, mortgage loans, residential mortgage loans. that is what we all agree on. the question is why did we have so many loans in our financial system like that. and i'm going to now, i hope, if this thing actually works, try to explain why this happened. what you see on your screen now, on the screens, is where things stood on june 30, 2008 just before the financial crisis, if we assume the crisis began with the bankruptcy of lehman brothers in september of 2008. on june 30, 2008, this is what the situation looked like for subprime and other high risk loans. on the left, the federal government had 76% of all of those loans.

and the blue is fannie mae and freddie mack. above that, the red is fha. above that, a number of other government agencies like the department of agriculture, veterans affairs, and so forth all of which participated to some degree in the mortgage market. on the right is the private sector. so what you see immediately when you look at this is that the government had a major role in buying these low quality and risky mortgages. in fact, you might say that the government created the market for those mortgages. after all, they were the principal buyer and the holder of it. now how serious were these mortgages in terms of their effect on the holders? this is an excerpt from a credit profile published by fannie mae

in june of 2009. just about a year later. and they've had a chance at this point to take a look at what their losses came from, and this will show you that they had about 837 -- almost 838 billion subprime dollars -- billion dollars in subprime or weak mortgages. in 2008, 81.3% of their losses came from these mortgages. so that shows two things. first, that the government was a major buyer, in fact i believe created the market for these mortgages. and secondly, that these mortgages when they were held by the government were the principal source of the losses that occurred in our financial system. now why is all of this

important? it's important because the response to the way the financial crisis has been perceived produced some very significant legislation, the dodd-frank act. the way the financial crisis inquiry commission described the financial crisis was that it was the fault of the private sector. banks and other financial institutions, according to them, had -- were insufficiently regulated and had insufficient risk management. and as a result, for reasons that were not actually in my mind fully explained, but for whatever reason they were the ones who caused the financial crisis. the government was really not involved at all. and if you look at the report of

the financial crisis inquiry commission, you'll see that they say, well, fannie mae and freddie mack, two major government mortgage companies, were side lights. they really weren't important. the real substance of the crisis came from the fact that these banks and other financial institutions essentially went crazy. they began to make mortgages that they had never made before and as a result, they failed and that was the substance of the financial crisis. the government agencies that held these mortgages and failed did not cause the financial crisis because after all the taxpayers took care of their losses, but that's a misunderstanding of how the mortgage system works. because to the extent that a mortgage fails in any community, it drives down the prices of

housing throughout the community. and as a result, even if the loss is ultimately suffered by the taxpayers because of fannie mae or freddie mack or some other agency that bought this mortgage and was holding it, the failure of the mortgage is the one that causes prices of homes all throughout the community to decline. so once you have these failures going through the financial system, we are going to have many more losses as a result of these very weak and high risk mortgages. so when you blame the financial crisis on the private sector because they have not been adequately regulated, which was the fcic's view and the view of congress, what you get is some significant regulation of the financial system, the so-called

dodd-frank act. what you're looking at now is a comparison of recoveries from recession in all years sense the mid 1960s as compared to the recovery from the recession we have had since the one that followed the financial crisis. and you can see that the red line, which is the current recovery, eight years old now, is much below, far below the average recovery, which is the black line, of all recessions. an incorrect diagnosis of the financial crisis. blaming it on the private sector rather than on what the government did caused -- produced legislation that has punched all of us, all of us,

through in the economy because of the very strict regulations that have been put in place as a result. now how did this happen? fannie mae and freddie mac were two very large government-backed mortgage companies. they were by the year 2000 and even before that the dominant players in the u.s. mortgage market. they were buying about 50% of all mortgages that were made in the united states. in 1992, congress adopted something called the affordable housing goals. the black line in what you're looking at here are the goals as they increased over time. initially, they required that when fannie and freddie bought mortgages 30% of all the mortgages they bought had to be made to people who were at or below the median income in the places where they lived.

however, the department of housing and urban development was given authority to increase those requirements, and what you see here in the black line are the increases over time. it went from 30% to 40%. by 2000, it was 50% and by 2008, 56%, which meant any time fannie and freddie bought mortgages, 56% of all the mortgages they bought in any year had to be made to people who were at or below the median income. now fannie and freddie were known for one thing before 1992, and that is they would only accept prime mortgages. what is a prime mortgage? that's a mortgage with a down payment of 10% to 20% made to a person who has a credit score of at least 660, which is not a great credit score, but it's a solid credit score. that person has been paying his

or her obligations over time. and the third element was what's called the debt to income ratio, and the debt to income ratio that is after the mortgage closed your debts were no more than 38% of your income. if you had no more than 38% of your income or all your debts including your mortgage, that was part of a prime mortgage. up until 1992, that's how fannie and freddie conducted their business. but in 1992, they were persuaded that this was keeping many people in the united states from buying homes, especially low-income people. and for that reason, the affordable housing goals were adopted requiring fannie and freddie to buy mortgages made to people who were at or below median income. and as they rose over time, fannie and freddie found tit wa

very difficult for them to continue to buy prime mortgages when they were required to buy increasing numbers of mortgages made to people who were below median income. it is very hard to find prime mortgages when more than 50% of all the loans you are buying have to be made to people below median income. so the obvious result here was that fannie and freddie started to reduce their underwriting standards. they started in the mid 1990s to reduce their down payment requirements, and as they proceeded through the years, they reduced their fico scores, their credit scores, the debt to income ratio because otherwise they couldn't meet these government requirements. so as we see by 2008, 56% of all

the mortgages in the top line here had to be made to people who were at or below the median income, and fannie and freddie has reduced their underwriting standards substantially. the two other categories below that have to deal with very low-income people and underserved areas which were largely minority areas, but we'll just focus on the top level and that shows a substantial increase over time in the mortgages that had to be purchased from originators and others but were made to people at or below median income where they lived. well, how will a reduction in underwriting standards have an effect on the economy? well, if you think about it in terms -- simply in terms of down payments, if the requirement to

buy a home is a 10% down payment and a person has $10,000, he or she can buy a $100,000 home. but if the underwriting requirement is reduced to 5%, then the same $10,000 can buy a $200,000 home. what does that do? it puts great upward pressure on home prices and that's what happened over time. in addition, a person who is going to buy a $100,000 home with a $10,000 down payment is now a much weaker credit because he or she has now bought a $200,000 with the same $10,000 down payment, which means that instead of borrowing $90,000, he or she has borrowed $190,000 and is a much weaker credit for all his or her other obligations, including the mortgage. but the most important thing is

to look at this chart and see what the effect of this upward pressure on housing prices was because this is prepared by professor sheila roberts at yale. and what it shows is that we had between about 1997 and about 2007 the biggest housing crisis bubble we've ever had in our history. and when in 2007 that bubble began to deflate, we had the financial crisis. there comes a point in any housing bubble where no matter how concessionary the loans get people can't afford to buy a new house. and so people stop buying houses and the bubble reaches the top, declines, and you have a serious

downturn in losses throughout the economy. and this particular chart shows the extent to which those losses occurred and how quickly they occurred. this happens to be only a chart that shows what was happening in the mortgage back securities market, but this is a pretty good representation of what was happening to mortgage prices throughout the country. and so what we see happening here is that the government had policies which required fannie and freddie to reduce their underwriting standards over time. as they reduced their underwriting standards, that created pressures, upward pressures, on home prices creating the bubble and eventually the bubble came to an end and we had a financial crisis. so it's on the strength of that that i believe the financial crisis that we suffered in 2008

was the result of government housing policies. not the result of the private sector going crazy. because if you think about it, fannie and freddie were the key buyers in this market. they were buying at least 50% of all the mortgages that were made in the united states. and when a principal buyer in any market reduces the quality of the product it is looking for, the market will supply that. now, you can say ethically the banks and others should not have responded to the requests of fannie and freddie for these low quality mortgages. they should have said, no, will i not make these mortgages. that's a little too much to expect. but in any market when the major buyer is looking for a lower

quality asset, that asset will be supplied by the people who create that asset and that is mortgage originators. so in 1992, there were very few high risk subprime low quality mortgages being made in the united states. the market was about a 10% market at the time simply because there were no buyers. fannie and freddie would not buy those mortgages, so people didn't make them. but as fannie and freddie became willing to buy those mortgages, people started to make them. and as their underwriting standards declined yet further, more and more of those mortgages were made over time, driving up housing prices and resulting in the crash in 2008. thanks very much. [ applause ]

>> so good afternoon. as you were told, i'm damon silvers. i'm the policy director of the aflcio. i was involved in the oversight of the trouble asset relief program. as the deputy chairman of the program that had the mighty power of the pen, meant we got to say things about the bailout, but we didn't get to actually do anything. peter and i have been engaged on and off in this argument since probably before even t.a.r.p. began, and peter has the edge on me in that he's written a book about it and i haven't. but the key thing -- let me begin by -- let me begin by saying the framing -- i deeply

disagree with the framing of the question. as you'll see, by the way, i want to frame the question. there's a different way of looking at this than the question of is the private sector at fault or is the public sector at fault. if you actually -- if you're engaged in public policy making in washington, you quickly learn there are no boundaries that are meaningful in many respects between the private and public sector, and this was particularly true in the area of financial markets and financial policy making in the area of financial deregulation. to say, well, this wasn't just the private sector's fault or just the public sector's fault is like saying which foot do you walk with, your left foot or your right foot. it's not a meaningful question. so my view is that in the era of

financial deregulation, the public sector, the regulators, fannie and freddie, acted in conjunction with the private sector to produce the financial crisis. they did so by executing a model of the financial markets and of the housing market that all the major actors here had in mind, that assumed the capital markets should make the major decisions and the public sector should support those decisions. and so the second thing i want to say about peter's framing here -- the first thing is the wrong question. the second thing is you've really got to pay attention to what happens over time. trying to answer this question by looking at a snapshot,

particularly the snapshot at the end, at the end of the bubble in 2008 or 2009, will give you a fundamentally misleading picture of what happened. you have to ask the question who moved first and why. i'm going to go through this very briefly and in a sketchy manner. but if you're interested, there is a chart. i don't have it on a slide, but this is the age of smart devices and all that. you can probably find it. there's a chart that shows fannie and freddie's buying of subprime credit during the financial crisis. it's in this book. peter can probably quote the page. i lost it because i didn't mark it. here it is. it is on page 124 of the financial crisis inquiry commission. it shows the purchases of gses by year. and the narrative that goes along with it is the key

narrative here to understand. so it is true that the gses, as peter said, had policies that were ancient. they went back to the new deal of buying only essential prime loans or what the gses call conforming loans and that these policies were in place substantially until the early 2000s. they were not removed at the time that the goals for purchasing low and moderate income loans were put in place in the early 90s. they were not removed when those goals were increased. they were removed in 2004 and 2005. the gses went on a buying spree in 2004 and 2005. and what did they buy? they did not buy whole loans. they bought securetized -- they

bought interest in securetized pools. it is very important when you look at peter's slide, if you look at that key slide that peter has based his argument on, which is the slide of the composition of who held the credit risk, understand it's who held the credit risk. it's not who held the loans. the loans were in previous securetized pools so that the subprime market exploded in the early 2000s. what drove the explosion of the subprime market? the key thing was that, a, credit was cheap. you can argue about whether that was a good thing or a bad thing, that we were in a recession. alan green span thought it would be cheaper than fiscal policy.

but the second thing is the people that were responsible for keeping on eye on the terms of loans being made to low-income folk and in making sure they weren't going to explode in the other sense, that they weren't essentially doomed to fail, stop watching, and the key people who were responsible for that decision were at the federal reserve. now, there are other places that other people should have said and done something, but the key actors here were the federal reserve. the key argument was between the fed governor and alan green span, the fed chair, and his staff. greenspan and his staff took the view that we should follow what the markets are doing. they're self-correcting. no, you have to do the job that you were statuetorially required to do.

the bush administration actively encouraged the use of private markets for the stimulus. then you saw not surprisingly wall street step into the breach. they started moving -- they started selling the 228 loans. they started selling loans that had small interest rates for a short period of time and then explode. they're called sucker loans. they started making a lot of money by doing that. selling them by using cutout like strip mall vendors, banks financed those people. the loans came back to the banks. the banks securetized them and

sold them to the capital markets. this was very profitable, and the banks been to take market share in a huge way by doing this. subprime lending began to dominate the mortgage markets in 2003 and 2004 before fannie and freddie are in the market. now you come to the other piece of the puzzle. back when fannie and freddie were responsible, as peter puts it, they had this characteristic that people don't talk about a lot which is that they were essentially quasi-governmental entitie entities. they were not owned by private stockholders. their management had the job of making sure that the bills got paid, not maximizing shareholder value, and they were not compensated using incentive structures tied to equity or leveraged equity. in the 1990s -- and this was a democratic policy initiative. this is not a partisan

conversation. in the 1990s they were privatized, meaning they were te turned from quasi-governmental agencies to private agencies with a public policy mandate. i'm sure they paid a great deal of money for consultants to tell them to do that. those executives in 2003 and 2004 were losing -- were running companies. at this point, they're companies. they're running companies that are losing market share and are not as profitable as, quote, their competitors in the large banks. not surprisingly, the executives of those firms became extremely eager to get into the subprime market. the way they did was they bought the securities that were already in the market. and by doing so -- here's where peter and i agree.

by doing so, they certainly contributed to the further growth of those markets in 2005, 6, and 7. fannie and freddie were accelerants at the end game of the crisis, and there was no question that they bear -- as institutions, they bear some responsibility for the ultimate scale of the crisis. they are not the prime movers. and the problem with them, the reason why they acted like accelerants, was they were given a government guarantee in a public commission and then they were structured to act like private entities and private parties benefitted from it. if you say to somebody, you've got an implicit government guarantee, now go out and make as much money as you can for yourself, that person with that set of incentives is likely to take some very large risks because there's effectively no downside. no meaningful downside.

so this is a story not of the private sector versus the public sector, but of what happens when you essentially take financial markets and financial market regulators and deregulate substanti substantively, but leaves things like implicit guarantees in place. now this has implications for -- this has implications, huge implications, for the future course of housing policy, properly understanding this. now before i get to those implications, i guess i'm supposed to say something about dodd-frank given my friend peter did. the reason why the 2008/9

financial crisis was so terrible was because the housing market was the biggest market in the world. so if you mess up that market, it is going to ripple through everything. as i said about the gses, all kinds of accelerants that existed that were the consequence of regulatory failure or the lack of regulatory jurisdiction or regulatory arbitrage in various ways. i mentioned the fed and the feds' lack of interest in consumer protection. this is the fundamental motivator behind the creation of the consumer financial protection bureau. you want the people doing consumer financial protection to actually believe it and to be focused on it. the fed has a few other jobs, and make a mistake as big as alan greenspan and his staff made, maybe you don't get another shot. so that's part of dodd-frank. but a lot of the rest of dodd-frank was about was trying to plug the regulatory holes

that led to the situation that we've been discussing, have greater leverage on the economy than it would have anyway. the problem of the lack of regulation of derivatives, the basic problem we've just been discussing was multiplied several fold by the existence of the cbo market and the cbo squares, which is now the subject of many movies peculiarly enough. the aig said it was technically a thrift to set up a giant mortgage insurance business in london without anyone asking is there any capital behind it. that led to the abolishment of the ots.

the trac in a funny kind of way what this is about -- no one should be under any illusion that people in financial markets try to act in wealth maximizing ways for themselves. it's kind of what we want them to do. if you understand that, then the question is what is government's role in ensuring that in a world of imperfect markets, imperfect information, imbalances of power that that impulse doesn't run amuck in our economy and our society. now finally, what the implications for the housing market going forward? we are currently in a debate which is largely incomprehensible about the future of the gses. there's this debate about what to do with them that has been

going on for a long time. children have been born and grown up while this debate has been going on, and nobody knows outside of a cognoscenti, nobod knows what this debate is about. it's conducted in a language that's completely incomprehensible. here's what it's about. it's very difficult without some kind of guarantee to maintain a large scale market for a 30-year fixed rate mortgage. who is willing to take the duration risk associated with that? there aren't enough people willing to do that on a naked basis to support the u.s. mortgage market as the american public has come to demand it. so then the question is, who gives the guarantee? who pays for it? who benefits from it? how is it managed? the gses in the 2000s were set

up with the government as the guarantor, the beneficiaries in the financial markets not paying anything, and in a sense, the general public not paying anything. and then governed as if they were a private company fully at risk in the marketplace. this is not -- nobody, nobody believes this is a good way of doing this. at least nobody is willing to say so publicly. so what are some of the choices? oh, and there's one other thing. you have to understand that since the gses are still with us in pretty much the same form in terms of governance and financial structure that they existed in after the treasury took them over in the fall of 2008, since they're still with us, this problem is not being -- this problem does not come up on a blank slate, all right? it comes up against the fact

that here they are, the gses, with a full government guarantee, and yet private stockholders, there are people who hold stock in fannie and freddie today, since that stock has sort of been worthless for ten years, who holds it? hedge funds. people willing to make a wild bet that somehow the same people willing to buy weimar bonds in the hope they might pay off sometime have bought this stuff. i make that remark -- >> argentine bonds. >> yes, argentine bonds. argentine bonds is actually a better example because of the use of political muscle to get them paid off. the w so you have the stub equity which only existed as an accounting device. it was necessary to keep the government from integrating its accounting with the gses. you have the stub equity.

those equity holders who have a certain amount of money in their pockets are busy trying to persuade everybody in washington that somehow they have got to be paid off here, that fannie and freddie are recapitalized in a way that they get to be money. that's absurd. and it is not just absurd in terms of the equities of the matter, so to speak. it's absurd because it's a door back to exactly the government problems that caused fannie and freddie to be an accelerant in the financial crisis. the other idea that's out there is the idea that fannie and freddie ought to be restructured to be the provider of a free guarantee to the large banks and their mortgage businesses, and that that guarantee ought to be -- that the banks ought to control fannie and freddie and that they ought to offer this guarantee kind of with government support. that's also a bad idea.

just think about it for a second, who is involved in that. the original -- there is a right way to do this. and a lot of hoops are being jumped through in order to avoid the right way. the right way to do this is to have an essentially heavily regulated utility that is run in the interest of its own creditworthiness that does not have equity holders, and that charges mortgage lenders a fee for bearing the risk. now, there's no question that ultimately the federal government is going to stand behind that guarantee. that's the point. and therefore it can't be a private company. it can't be run in the interest of equity holders. it has to be run as a more or less public intent whose purpose is to pay its debts and to ensure the mortgage market, and the hedge funds on the one hand

and the big banks on the on the other hand have to be escorted out the room. otherwise we are going to repeat this experience in some form or fashion. and i will just conclude by saying that the chart, the thing i love about peter's presentation is that each of the slides is a door into a timeline that's not initially there. it gives me a lot to talk about. if we go back to peter's slide, rovers from recoveries from recessions, the key thing about that slide is the rate of recovery from recessions has gotten worse over time. so the 1981 recession, which was the last of the classic post-war recessions, driven by rising interest rates, inventories and all that kind of stuff, had a "v" like this. the '88 recession was more like that, driven by s&ls and other

financial issues. the 2001 recession, dot-coms and things like that, had an even longer slope of recovery. this last one, the most financialized of the recessions, had the longest slope. it has nothing to do with dod dodd/frank. it has to do with the extent to which these recessions have been driven by the financial dynamics that drove what we used to call panics in the 19th century. if we repeat these mistakes, if we again go back to a deregulated economy in which people get to make private profits by taking public risks, the next one will almost certainly be far worse. and as we sit here today, a week from a national election, we should really ponder how serious the consequences of that might be. thank you. [ applause ]

>> ken? >> thank you. well, hello. thanks to art for inviting me. we've already heard from peter and damon, that was very interesting. for a little change of pace, i'm going to go back to ancient times that damon mentioned, 1930s. the intention of this talk is to kind of put this topic in a little bit more historical perspective than ordinarily it has. hopefully we'll learn something, that's always our hope as historians. i'll talk about three things, long term development of the mortgage market, how what we just experienced fits into that kind of chronology. second, i'll try and convince you it makes sense to look back on how we reformed our mortgage markets in the 1930s as an

example of kind of mistakes or maybe successes we can have in reorganization. and finally, looking at that 1930s reform, look at some of the legacies that contributed, fed into the events that peter and damon referred to. when i'm talking about long term development of the mortgage market, i really have three things in mind, could i have the drivers of development, the key features of development, and the dynamics of development. let me not waste a lot of time on that and just get to the point. drivers of development, i see these as coming from the demand side. this is what demanders of mortgage credit, and that could be for residential, it could also be for farmers and it could be for commercial reasons. these three themes keep showing up, at least i think they show up in what i've read in the last 150 years. first of all, they want a market that's integrated across national boundaries. they're not happy with big differences in mortgage lending

terms across regions or sectors of the economy. second, as we've heard today, the liberalization of loan contract terms. lower down payments, longer terms, longer maturities, lower rates, and more favorable repayment schedules. this is a constant theme that shows up in our development of the mortgage market. finally, there is an emphasis on improving and even equalizing access to the market, the mortgage market, even among people who are very different in their risk, in the costs and risks of providing mortgage credit to them. these are very familiar themes to us. now, the key features of development i want to emphasize to me are really kind of a function of how the supply side of the market responds and some of the characteristics with which it's responded over time. here there are two key features i want to emphasize. one is that we do go through periods of severe instability.

those are not lonely episodes, but they're infrequent, thank goodness. second, there's a lot of institutional disruption and change. let's go ahead and look at the videotape. and we see here in the top panel of this particular diagram, what i've shown here is kind of the growth rate of mortgage debt deflated by the cpi over ten-year periods. as you can see, this is just a measure of volume of activity in a way. and you can see three peaks, pretty clear peaks in the last 90 years. 1930 is a peak, 1955 is a peak, then of course 2007, which we just experienced, is a peak. although is kind of an indicator of the real impacts of the mortgage lending volume. we see single family housing starts. and as you can see, the 1930s was a bit of a disaster in terms of construction, and you can see that very clearly here. you can also see that 2007 had tremendous real impacts as peter has talked about during this

crisis. the 1950s is a little different. we don't see that kind of crisis. we'll come back to that later in the talk. we talk about institutional disruption. you've just gotten a flavor of it here listening to these folks. this goes over 90 years. we can talk about private versus public, publicly financed and sponsored mortgage lending channels. there's been tremendous change in the weight, the shares of those in total mortgage debt. but within each of those categories there are differences between portfolio lenders of buy and hold mortgages and securitization which occurred in the private mbs market up there. this is not a static sector of the economy. this is one that responds and institutionally responds in a way. now, this brings us into what i think of as the dynamics of development. this is why i'm talking about this, there's a little bit of a payoff here. i see it as a five-step process.

i think it very much will be reminiscent of the things peter has emphasized and peter talked about. first we have innovation, in my mind from public entities or private entities. it's just a new way of doing things, a new way of organizing things. leading to an expansion of mortgage debt. and then pressures on underwriting which frequently occur during these kind of episod episodes, followed by crises, resolutions, which are generally very distasteful, lengthy, and debilitating. finally we get to the reform stage. the way i like to think about history for today anyway is to think about, i'm not going to worry too much about the first three bullet points. that's -- damon has given you a view of recent ones. here, during crisis and resolution and importantly, during structural reform of the

market after a crisis, how do we react. how do we act and what kind of foresight did we show, how wise have we been. i personally think there's these four episodes i've listed at the bottom of the slide, these are key in what i would call structural development. that is, this is the way that mortgages that were originated, the way they were serviced, and the way they were held, fundamental changes in market structure. as you can see, we're in one. which is what makes this interesting. it hasn't ended, as we've found out. we're going on. so i could pick any of them. why not pick the 1930s, it's the one that has the most to do with the residential issues that we're looking at today. and so what i would like to do now is look at crisis and reform during the '30s. i want to look at four components of this that i think really define what we can call federalization of the mortgage market in the 1930s which occurred. the fhlb act, federal home loan bank act, and the s&l industry,

an emergency program called a homeowners loan corporation, fha, which has been talked about here. and then the early version of fannie mae, fnma, those are the ones i would like to talk about the most. first, the 1930s housing crisis was bad. peter is correct. in terms of real housing prices, the fall of real housing prices, it wasn't as severe as it was in our most recent. but in terms of the impact on construction activity and home ownership, they're of equal magnitude. and of course we're not used to home ownership rates of just under 46%. then they fell to 41% over a ten-year period. so substantial, substantial disruption in the mortgage market during this period. and you can also see that in the institutional structure of the market. i'll give you similar accounting level stuff for those interested

in such things. this observation was made in january 1953. this is about 20 years after the reforms of the 1930s had been enacted. i'm going to read it, because that's the way i am. since the fhb act passed, there has been very little original thinking about the mortgage system. we have proceed on a crisis to crisis basis until our sense of direction has been blurred if not actually lost. that was by a guy named miles cohen. for those of us who are nerds, he's a guy who we know helped draft and implement the original fha legislation. prolific housing researcher. consultant to the mortgage bankers association. he coined the phrase in the 1950s, urban renewel. he served as the chairman of the president's urban renewal task force in 1969. there was a man who was there, who saw it. this is not a very sanguine

appraisal of where we sat 20 years later. what i would like to do is try to give you some idea of what perhaps went wrong or what went different than wholey unexpected at the time. to understand the fhlb act, this is hoover, not roosevelt, you have to understand the industry of the building and loans in the united states. in 1930 there was almost 12,000 building and loans active in the united states. these were mutual, various strange kind of organizations -- >> jimmy stewart. >> that's right, unfortunately that gets to the contract problem, but other than that it's a perfectly good movie, and certainly adds a little levity to the situation. or maybe it doesn't. 40% of the institutional

residential mortgage debt they held. they operated in every state. they operated in cities of all sizes. they were very local in their orientation. they had a trade group called the united states building and loan league. they were big, active, and they threw their weight around. in 1931, when hoover called a housing conference because of the crisis that was unfolding, he, as he had done in the 1928 campaign, endorsed their call for a home loan discount bank, that they want the federal government to establish for their building and loan associations, to act like a federal reserve, to provide facilities and liquidity for building and loans. well, hoover sees this as an opportunity to kind of give emergency recovery to all lenders in the housing market. so he endorses it. the problem is, the representatives from the usbll, they actually draft the act, fhlb act, and they're

disproportionately in charge of the board of the fhlb when it is appointed. and they go about the business that they're very much committed to, creating what's called the modern saving and loan industry. instead of 12,000 associations, we're down to below 4,000. they're large, they're managerially oriented. the most important thing is the small number of savings and loans. what they wanted to do is create a dominant and protected network of local lenders. and they did. they were very effective in that. so the bottom line at fhlb is regardless of what people thought it be going to be, it was very much industry driven and exclusive to s&ls. 1933, roosevelt takes office. at the end of the first 100 days, they pass the homeowner loan act which establishes a remarkable corporation that some people have written books about. and the holc, in a period of just three years, refinanced a million distressed home loans.

in 1936, they held 20% of the total mortgage debt in the nation. what's even more remarkable is they stopped lending after 1936 and they simply serviced these loans, and actually dissolved in 1951. now, there's a federal program for you to think about. just a second. the research that i and others have done has shown that hlc, when you look at it across counties, what they did was ameliorated the decline in home value and home ownership. what they did not do is stimulate new construction across it. this leads us then to fha. fha comes along, national housing act, 1934, very important act. and it's very hard to read the testimony or any of the argument about the fha, the act, when it was passed, national housing act, without understanding that the main thrust of the legislation was to stimulate

construction, stimulate renovation and construction, rebuilding of homes in certain titles, and then finance new construction as well. builders wanted this. the banks and life insurance companies that were shut out of the hlb wanted it. the hlb opposed it completely. but it was passed. what i want to emphasize is this. in the original fha legislation, there is a sunset on fha debentures, which is the way they paid off, if a house went into default or foreclosure, they would issue their own debenture. those had federal guarantee originally but only for a three-year period. that is until july 1937 came along, at which point the guarantee was extended. the guarantee was extended four more times and finally made permanent in 1946. this is probably what the fha

administrators are think about it. we never intended it to have a federal guarantee but it ended up with one. and that's what i want to say about fha. let's move on to fnma. i personally am a great fan of title 3 of the national housing act. to me it's one of the most ambitious pieces of legislation we passed in the united states. it set up a system of federal charter mortgage banks, very similar to covered mortgage bond banks in europe. they had to be privately financed, at least $5 million of capital. and once they were organized, they couldn't originate loans. but they could purchase, sell, and issue debentures on the basis of mortgage loan collateral they would buy from originators. so what this really was, was a model of a mortgage banking system that was designed specifically to create a secondary market for fha at a very difficult time and try and stimulate mortgage lending and especially construction activity

through this mechanism. well, over the next three years, nobody showed up with $5 million of capital. and it's a very interesting story that i don't think has been totally told yet, although i know, you know, peter and ed pinto know about this and have discussed it. in any case, 1938, finally the government, supposedly to show how experimentally these charters my actually work, do organize and finance one of these national mortgage associations called the federal -- well, first washington, but then federal national mortgage association. and then strangely enough, after that, the valuation of new charters, new charter applications, really are suspended. it's very hard to find out any information about what goes on. what we do know is nobody else was chartered and no other applications for charters were really considered. so what that means, of course, is in terms of the fha, what we got was a system that offered

public guarantees and had public functions instead of a mutual private mortgage insurance program which was where it was supposed to go. and fannie mae -- this is fnma, i have to be careful. what this gave us was a very limited secondary market, specifically on fha loans. and as we'll find out, it was used for a very specific purpose as well, instead of a much broader secondary market facility. so given that, here is some of the legacies. here are three legacies of this story i would like to leave you with. it doesn't mean they're the only legacies, i'm an academic, i need to write lots of books and lots of articles. i don't want to give it all away right now. but here are three. and i'm not going to really tell you what they mean in a way, maybe that's something we can talk about.

first of all, the new deal system, which of course really wasn't a well-designed or a system by design, it was almost a system by -- i wouldn't say accident but certainly it was an unexpected outcome -- was bifurcated and had a heavy local orientation. savings and loans are so important to this system. as you can see here in this chart, they dominate by early 1960s, 40% of the residential mortgage market. the fhlb remains their province. and it provides them liquidity as a secondary market. life insurance companies, mutual savings banks, commercial banks, are all engaged in local lending too. but the first two, lics, mutual savings banks, get into interregional lending. this is what the fha problem and fnma are really used for, because these interregional

lenders formed relationships with mortgage correspondents in various areas in the world, and they specialized in fha lending and used the fnma facilities to try and finance. the second facilities, both of the fhlb and on the other side, the fnma side of the market, they really were only used to finance temporary imbalances. these could be regional imbalances. these could be aggregate imbalances over time. they have very limited function, given what a secondary market could do. they did not try and create new instruments, market credit risk, or market interest rate risk. thanks for joining us what they were about. finally, and i think this is important, throughout this system, whether it's local lenders or through the interregional market, there is a tight connection between origination and servicing throughout the system. and this is one reason, we

think, that a second legacy is this. the experience with this new deal system in the 1950s established a precedent. we can create affordability without creating a crisis. and as you can see here, when we look at the structure of the mortgage market, by 1955, the combination of fha, which of course is guaranteed, as we explained, and nba, which has an explicit federal guarantee, represents 40% of all mortgage debt. so this is a huge expansion of federally underwritten mortgages. as you can see, at the same time what we have is an increase, kind of an historic increase in home ownership rates, from the low end at the end of the 1940s -- sorry, at the end of the 1930s, to over 60% in the 1960s.

are these two connected? i'm relying on recent research by dan fetter who did an excellent job, there's a citation. i'm sure many of you know this, but fha and va loans relative to conventional at the time had higher loan to value ratios, sometimes very low, sometimes zero, and longer maturities and lower interest rates. and eventually they even pushed conventional mortgage loans into those more liberal terms. and what dan shows in his analysis is that this is probably responsible for about 40% of the increase in home ownership after world war ii. and -- about the mechanism is actually people buy homes sooner. it accelerates home ownership. it doesn't really change who ends up with a home. it just ends up accelerating it. like it or not, this happened and it happened without a crisis. i'm not saying -- peter, that's

not an argument against of had you it's just to say that's part of the background where housing goals are very important in any kind of federal program. finally, the way i look at the history after 1970 in this system is that we went through a period of what i would call piecemeal renovation from 1970 to 2000. by late '60s, early '70s, this post war system, its infli inflexibili inflexibilities, the story has been told many ways what goes wrong with the system, it begins to fray. we see step by step a big change in fundamental structures. but these are not really coordinated, these are not planned. the first of course is the redefinition of fhlb and fnma, and freddie and fannie, these gses that are privatized finally

after 35 years of maybe trying to be privatized. and their function and their methods have broadened as well. 1980-'85 is a very important period. it is the epicenter of the saving and loan crisis. we talked a lot about why that happened. to me when you look at these diagrams what you see is there is a very large falloff in the ponce of savings and loans as originators of mortgage loans and as funders of mortgage loans through their net acquisition. and the major change then is who becomes active in the origination, who take the place of independent mortgage companies and who they sell to, or gses, of a variety of different kinds. subsequent to this, 1985 on, and if you read the mortgage banked literature at this time, this industry is going through incredible changes and disruption. and what we see here is a development of wholesale underwriting, and markets for

servicing rights on portfolios of loans where people make loans and then will sell the servicing rights, taking care of them for the next ten years and fees that come from this. this really unbundles two functions that were very narrowly conjoined in the old system. well, we end up, 2000-2008. the system fails to control or be able to resolve credit risk. and we're kind of left with, what are we going to do next? hopefully these legacies will have some vindication. thank you. [ applause ] >> okay. well, i would now ask the panelists whether they would like to make brief rejoineders or go right into question and answer from the audience. yes, peter. >> did you want to go back to yours? oh, okay. i was just putting that out. thanks. yeah, i would like to respond a

little bit, because damon told a story, a compelling story about the fact that fannie mae and freddie mac, if i really correctly, were privatized in 2000, and they had a government guarantee, they were able to make great profits by using their government guarantee, and they raced into these subprime loans because they were going to be very profitable with this government guarantee. the trouble is fannie and freddie were in fact privatized, if you want to call it that, in 1970. and between 1970 and 1992, they were the same firms. they have the same abilities. they had the government support. they could buy mortgages and hold mortgage. and they could securitize mortgages. they did everything the same way. but they insisted during that period, between 1970 and 1992,

on prime mortgages. why did they change? and my point originally was simply that in 1992, the affordable housing goals were imposed on them. now, damon was correct in this, and that is that fannie mae and freddie mac did go into the mortgage-backed securities market. they began to buy private mortgage-backed securities. why did they do that? because in 1995, hud said that if the mortgage-backed security that you bought were backed by subprime loans or loans that qualified for the affordable housing goals, another way to put it, backed by mortgages that qualified for the affordable housing goals, then you got credit for those mortgages. one of the wonderful things for fannie mae or freddie mac is they could buy these mortgage-backed securities and

save themselves a lot of risk, because they bought only the top traunches, the triple-a traun traunches. and most of the real rix were taken by the lower traunches in mortgage-backed securities. so they became very enthusiastic in the early 2000s for buying mortgage-backed securities. why? because they were getting credit then under the affordable housing goals, which without having to take the risks of the mortgages, which were at that point extremely high risk mortgages, because the underwriting standards had been reduced so substantially that the mortgages were dancing. so they began to go into the affordable housing goals by the purchase of privately issued mortgage-backed securities. now, a huge market then developed, because of what fannie and freddie were doing. why is that?

that's because as housing prices go up, and as there is a bubble, defaults go down. it's kind of maybe counterintuitive. the reason is simple. if your house value is going up, you can always refinance if you can't meet your mortgage obligations, because now you have more equity in the home. and that's what people were doing all during the 2000s, as housing prices continued to prize at that extremely high rate that i showed you before. people were able to refinance. what happened at the end is that they couldn't refinance anymore because the market had reached the top and began to decline. that's when all of the defaults came out, because people who couldn't meet their mortgage obligations were unable to refinance. so all of those very high risk

mortgages then began to fail. so that's why we have to look at what the government did here to understand exactly what happened in the financial crisis. fannie and freddie were the same firms they were in 1970, in 1992, except that they were requiring, up to 1992, prime loans. one of the important things to understand is that for 30 years, between 1965 and 1995, the home ownership rate in the united states was about 64% or 65%, right in that range, never changed. between 1992 and 2008, it went up to almost 70%. so there was a real increase in home ownership. the trouble is, as george bush actually said in his autobiography, we didn't really understand the risks we were

creating by forcing this kind of growth in the housing market. okay. so what should we do? let me get to some of the things people were talking about. we have fannie and freddie. we have a whole series of government programs. we know what happened with fannie and freddie and that government program, what's happening now with fha, which is also -- had to be recapitalized a few years ago, will have to be recapitalized again, because it's buying these very low quality mortgages, they're failing, and the taxpayers are going to have to pick it up. what is the problem? the problem is that housing is such an important part of the u.s. economy, that the government has a real stake in making sure that people are able to buy homes. so as long as the government is politically rewarded by allowing people or enabling people to buy

homes, by reducing underwriting standards, forcing down mortgage rates, reducing underwriting standards, the government gets political credit for that. so i'm afraid the only thing i can say, if i'm talking about what the policy of the future should be, is that we will only be able to avoid these kinds of crashes and avoid the taxpayer obligations that result when the government is forcing these mortgages to be made, the only way we can do this is to get the government out of the housing finance business. and it has been in that business, as ken pointed out, since the 1930s. but even when it is in this business, as it was between 1965 and 1995, it didn't increase the home ownership rate. when they really tried to increase the home ownership rate, they created the

conditions for a financial crisis. so if i were making policy, i would say let's get rid of fannie mae and freddie mac. it's probably a good idea to have some kind of government program for people who don't have downpayments, as long as they have good credit ratings and have shown an intention to meet their contractual obligations in other areas. so the fha should probably continue to exist in some way, but on a very limited basis, and only for people who have the special needs. but for the government to mix into the system of forcing new buyers, making mortgages much more available to the public in

general, that is always going to cause us trouble because of the value that that has for political purposes to an administration that's in power. thank you. >> david, would you like to make further comments? >> well, let me just say, we want to transition too more informal structure here, i think, but you know, you've got to watch the sleight of hand. i didn't say fannie and freddie had a government guarantee. i said they had an implicit guarantee. and that i think is not a debatable proposition. in fact it's at the core of the conservative critique of fannie and freddie during this period. secondly, you know, you've got to watch the time frame. peter has given you i think a really excellent explanation for the housing bubble and financial collapse of 1995.

everybody is looking at me so seriously. there was no housing bubble and financial collapse 1995. if you're going to have a causal story you have to link it to the debates in which the event happened. these events happened in the early 2000s. and they happened because the fannie and freddie, the process of the change of governance of fannie and freddie led to them to be equity return driven. the federal reserve stopped paying any attention to whether or not loans being made to poor people were fair. the financial markets, encouraged by the bush administration, stepped into that space. and then fannie and freddie followed. those are the facts. those are the charts that show you the timeline prove indisputably. we can have a conversation based on dates that are not relevant to the dates when these events happened. but the real question you have to ask is, why are we having

that conversation? why are we being shown snapshots that are out of context? why are we discussing dates that are 15 years before the events? there's two reasons. and i think peter is pretty straightforward about what those reasons are. he's got a principled disagreement with the idea that we ought to effectively regulate the financial sector, because i think peter believes that it's self-regulating, and effectively so. now, i would submit to you that we have had an experimental test of this proposition, and that it's not true. financial markets are not effectively self-regulating. but, you know, peter and i have a principled disagreement about this and you can make up your own minds. the second proposition, which really bothers me, is the proposition that the problem here was the effort by public policymakers to varying degrees over a period that began in the

1970s to see to it that poor people, and particularly people of color, got access to housing finance. my family tried to buy a house, and successfully did so, we were white. we tried to buy a house in a predominantly african-american neighborhood in richmond, virginia, in 1973. my father was a university professor with a middle class income and spotless credit. no one would lend him, no one. there were people in that community that we were trying to buy into that owned their own homes, somehow. and those kinds of folks were the people that were targeted by the first step in the process we've just been discussing. those subprime loans were made in 2002, 2003, and 2004, a lot of them made to people who already owned their homes. the financial crisis was in part about trying to promote home

ownership through exploitative means. in part it was about pushing cash into the hands of exist homeowners who didn't understand they were being sold a hand grenade, and then not helping them once the hand grenade blew up. the real explanation for peter's line about the long, slow recovery, in my view, and it's not, frankly, a flattering explanation for democrats, the real explanation for this is the failure to do what was done to some degree in the great depression, which was to give relief to people who had loans that they could not pay. what was the consequence of that? the consequence of that was, and i forgot to say this, and it's in my view the most important thing about all this, the consequence of not providing help to homeowners with loans they could tnot pay, one was, i depressed the housing market and the economy during the period

that peter's long ref. the second thing it did was killed the net worth of african-american and latino families in the united states. so that today as we sit here, the median net worth of african-american/latino families is approximately a third of what it was on the day that lehman went under. and that seems -- that's a very -- that's a very serious and daunting fact. and it was done, it happened that way, because the alternative, and this sort of goes beyond the question of housing, but you've got to understand what was going on, if you had recognized what the loans that were made during this period from 2001 to 2007, during the period when the dynamics i was describing were at work, and by the way, this period is, again, ten years after the things that peter is trying to

ascribe causal responsibility to, occurred. if the loans made during this window were written down to what they're really worth, you would have had to recapitalize the banks. instead, we asked communities of color in the united states to recapitalize the banks for us or to participate in an an elaborate ruse in which we pretended the banks were okay, and we asked the poorest people in the country to carry the weight. that's what happened. it's inexcusable. and for reasons that i think if you think about it are obvious, it's not ever discussed. now, the thing that troubles me about peter's argument, he doesn't make it explicitly, but he seeks to assign responsibility for the financial crisis to a long term effort to try to give people the color and poor people access to credit. that's what these dates about

these targets are really about. this is code. the world that peter would like to return to is the world where my father, a white man, could not get a housing loan because he was trying to buy a house next to black people. that's what this is really about. and let's not kid ourselves that that is what it's about. if you doubt that this is somehow not happening in america today, consider the fact that people in the real estate business today ask facebook to target their loans only to -- not their loans, but their ad, today, real estate ads on facebook are being targeted by race. do not think that these problems go away if you deregulate. they return. >> i think i would like a moment to respond. first of all, you really have to think about why these terrible loans were made, why they were made in communities of color,

latino communities, to low income borrowers and so forth. they were made because the government would buy them. this is a government policy, a government program, fannie mae and freddie mac, that created a buyer for these loans. they needed these loans in order to meet the affordable housing goals, which the government required them to do. and so you can blame anyone you want for what happened here. and damon is completely correct about what has happened to housing values in communities of color and to their net worth and so forth. but they is the result of a very poorly designed government policy that created a market for these loans. so banks and other originators knew that they could make these loans, the 2 and 28s, and they

had a buyer for these loans. and it was fannie mae and freddie mac. so that's what you have to consider about why we had a financial crisis and why the terrible things that damon described just now occurred. it was because of a very poorly designed government program that made it profitable for organizations to make these terrible loans. they had a buyer for those loans. >> ken, any final comments? why don't we open it up for q&a. again, give you questions, let our associate find you with the microphone. one question here and one here. let's start with this one. >> so i have a question for

peter. would the crisis have occurred without the direct encouragement of banks to make lower credit quality loans in certain neighborhoods, instituted through the community reinvestment act so that there was a direct incentive for the banks, in order -- which could be held over their heads if they wanted to merge, get regulatory approval for certain actions, stan leibowitz's thesis. >> yes, the cra, the community reinvestment act, was very small in terms of its impact. i don't even cover it in a substantial way in the book, because there aren't enough -- there isn't enough data about the loans that are actually made under cra rules to connect them to what happened in the financial crisis.

the main problem was the affordable housing goals where fannie and freddie had an incentive to buy these loans. and if cra was a factor, it was very, very hard to identify. people do confuse the two. affordable housing goals and community reinvestment act. but in my view, i've never seen enough data for me to say that the cra has had any impact on the problem of the financial crisis. >> question here? okay. >> first, there are several assumptions that are flawed in this discussion. one the professor addressed is that the crisis goes back to somewhere around 1965 to '70.

the second is that the crisis didn't result from mistakes. they resulted from the incentives and the fact that the model of the financial industry enabled a lot of people, ceos and their immediate associates, to profit from this model without any skin of their own in this game. and third is that dodd/frank doesn't go far enough, because it codifies too big to fail. the question, which i'm sure you want to focus on now, is going forward, one of the things you would have to do is to reexamine the idea that the 30-year mortgage is sacrosanct, and look at mortgage models that are in place in other countries and

entail less risk, and then somehow you would have to get actual capital behind whatever it is you decide to do, which we don't have now. >> ken, do you want authorito t that? >> sure. you bring this up, and one of the things i think is interesting, and i didn't really try to make a big point of it, it seemed strange to me, what worked in the 1950s was we did a good job of assessing and holding credit risks. there can be a lot of reasons why. there was a substantial expansion of these programs which ordinarily you might think would lead to a hazard of some kind. what's interesting to me in the debate now is, when we talk about skin in the game, the skin in the game that started the b&ls, that sustained the savings and loans, were local networks of builders, material suppliers,

real estate agents, appraisers. there's industries in every locality of the united states that are attached to that housing market, not some other. and all of them suffered during a crisis. we have completely disempowered those local networks, those folks who realize somehow on local activity in the housing market. and i think in doing that, then we're left with this problem of trying to demand capital of very large and very dispersed organizations. i think to me there's a natural skin in the game to take advantage of, where we can, which is local lending networks. that doesn't seem to be part of the discussion we're having at this time around reform, and i think that's too bad. >> do you want to make a comment before our next question? >> i think professor snowden's

comment raises a sort of deep issue, right? i mean, if you have -- you could partly hear this conversation as a conversation about the way you have to put different policy instruments together, all right? so that if you're going to have federal support for long term housing credit, then you can't just allow those supports to go to any loan in any circumstance. there has been robust regulation of what the terms of those loans are and under what circumstances do borrowers gain access to them. if you have one without the other, things will go askew. you know, peter and i have different emphases, but we

essentially agree on that. you could say the homestead act was a form of that. certainly the entire time we're talking about, it did that. if you look at other countries in europe, for example, there's a lot less emphasis on individual family home ownership as the sort of central pillar of sort of prosperity, right? so instead i mean, you have -- housing credit is -- fewer people own their own homes. more government resources are set aside for public housing. it's a very different system. there are arguments one could make that those systems are better than ours. but you would have to move -- if you wanted to sustain prosperity, you would have to move to those systems wholesale. you couldn't cherry pick the pieces of them.

and the -- that i think is kind of the fundamental dilemma. just as this dilemma about what to do with the gses now raises these same kinds of issues about, you know, are we going to, you know, there is an approach, and i didn't mention in my remarks, it's a legitimate approach. we could simply say the government is not in the game, with a caveat for people without any savings, peter seems to be more or less saying that. but if you're going to start bringing the government into the game as candidly the large financial institutions very much want, then there has to be rules on the other side. this same principle applies more generally, because this is, again, part of the story to monetary policy. the if you're going to pump liquidity into the economy to stimulate it, you what to have, on the other hand, regulatory structures to ensure that

liquidity doesn't produce simply bubbles. that was the lesson of this period. and some people would argue that those dynamics are present today. and -- but, you know, it's one thing to say, well -- it's one thing to say, as i think peter has said, hands off. that's a position one could argue about, but it's a legitimate position. the position that doesn't work is the one that's actually been applied time and time again, because effectively the political power of finance requires it, which is hands on, but in a way that essentially socializes losses and privatizes profits. that leads to catastrophe. >> we have one more question here. >> i'm actually an alumnus of this esteemed institution. i've been involved in housing finance for over 47 years, i'm saying that not boasting, but to let you know i go way back to the days when i was in the

general counsel's office with george, not mitt, romney, 1969. so i've been around the block a lot on these issues. i was very involved with the community reinvestment act and even to some extent the gse thing, i'm going to mention in a minute. peter is well aware of my critique of what his book as well as his colleague at pinto who i've had numerous e-mails -- i don't have a half hour to go over all that. i'm just going to hit a few points. i'm going to ask peter to pull up that chart that you showed on high risk loans, could you please do that, peter? i want to point out to the audience how i hate to say this, misleading that chart is. it's a fundamental problem i've always had and many other people have had with ed and peter in terms of how they love to lump subprime and all day loans. for those who don't know, all day loans is basically a

euphemism for what's called option arm loans, which are unbelievably toxic, they have negative amortization, interest only. they were the worst performing loans along with s&ls. let me see if i can read this. >> is this the chart you want here? >> he says -- i don't know, my glasses are a little foggy. let's start with loans which fico under 620, that's a $100 billion, is that right? look at loans with fico stores from 620 to 660, that's 230 billion, am i right? let's look at loans with origination ltvs over 90%. what is that? $267 billion. my math is not great, but that seems like it's almost $600 billion of the $837 billion. am i right? it's a huge share. okay. so here is -- i'm speaking now

for gao, on the record. all right. i've done multiple studies for congress on the housing crisis, practical every one i can think of. i've done at least a dozen. doz. you can go on our website, beginning with predatory lending, is what it was called. should you read this, mr. silvers, how the fed told us in 2004, and the chief council told us there. he said gram leech blily prevents us from imposing come sumer protection of nonbank holding company mortgage subsidiaries. some of the worst, subprime and option lenders in history. they wrp the worst. horrible. probably just as bad as new century and free monday and others who are not under that. greenspan and company literally told his examiners to don't go in and look at those loans.

bernanke did it when he was chairman and countwide, had literally no examinations on that. this is public record i will tell you. country wide had a fair lending exam. i looked at it, it was as bad as you can imagine. they jump ship and went to ots. another wonderful failed regulator. hsb was another really bad one. wamu, washington mutual, long beach was horrendously predatory. the chief risk manager told us, this is public information. he said this in congress. they literally preyed on minorities and gave them the worst subprime loans. and guess what? known of the loans, to my knowledge, were sold to the gses. when we looked at the subprime loans, hybrid arms where it

explodes from two years to three years to the rate to plus whatever. it goes from 3% to 11 plnt, those loans and the horrible option loans had 50% to 60 3r7b9 default rates. it defy peter and his colleague, ed, to show me how the other high risk loans even came close to that. they did not. we looked very carefully. yes, high ltvs can create -- here's 9 big problem. and here's a guy who worked on cra for many, many years. there's a big dimpbs between a heighter risk loan, not the 19 07 loans that peter and ed love. but they are not the extraordinarily high risk loans. not entirely but almost all purchased by wall street, not by -- and by the way, one reason

they couldn't buy them, you didn't mention this. why did the market goes from 35% between '073 and '06? they got caught with her hand in the cookie jar. it was called the accounting scandal. where all the executives who were paid bonuses based on certain marks. they literally got caught by their out tors in '03. so their regulators said,er with going to cut a cap on your purchase loans. so as a result of that, id made it very difficult to buy the subprime loans. they were not to securityize them. le and mr. lock hart himself,

lifted that cap in '06, accounted by george bush, he testified in congress, you can find it, the reason why the gses are failing is primarily because they brought the wall street pls securities. not because the lend erps have gone bad. this is? '08. everything didn't fit the fan come politely. they were the biggest purchases of pls in the entire world. that is what was driving them. they were driven by the gold a bit but again, it was money. they borrowed extremely low rates. >> can we wrap up quickly? >> the last thing i want to the ask peter. mark zandy dime your forum, one of the most pre-eminent economists in the country. and former economic adviser to john mccain when he ran for

president. he showed peter his report, dated december 2013 called walter reform and he showed peter, which surprisingly peter had never seen before, how the losses for a pls market for the seven-year period from '06 to '11 on wall street, okay, it was $449 billion. all right, the gses, 13 billion. now, i had admitted to me afterwards when i went up to him and talked to him that he thought he was being a little too conservative because he didn't include all the pls security losses. i have to redo the numbers but i don't think it's going to be much more than double. even if it doubled that, just listen to what i just told you. 449 billion -- by the way, portfolio lend erps in the country lost 218 billion.

so we're talking about -- excuse me, i made a mistake. 12 billion was the first three years. the whole seven years, it was 129 billion. so my point is, realize losses are actual losses. that's what causes crises. not how many loans of this and how many loans of that and delinquencies. they don't always turn into losses. and you said to mark, i'm going to get back to you? i would love to hear your explanation for this? i'm done. >> yeah, mark and i have exchanged e-mails. i disagree with misnumbers. but the whole point here is you have to understand that this was a market that was created by the gses. the pls market was created by the gses because they got credit for the affordable housing goals when they -- no matter how bad

the mortgages were as covered by or backed by -- backing the pls that the gsis were guying, no matter how bad they were, they got the credit for them and they didn't take the losses. because the losses were taking by the subordinated tranches in the loans. that is what happens in a pls. the aaa tranches do not suffer any losses and that's why fanny and freddy bought them. they qualified for the goals. and they didn't take the losses. that's why they built that market. when that market starmted going, everyone got in the picture, as i said before. because defaults declined. housing prices rose and defaults declined. and everybody in the world saw

you would buy a mortgage backed security or a mortgage in the united states and the lickkelihd of default was low. and people ran after it. it was a huge market. you are completely correct. fanny and freddie were the biggest backers. they also bought ordinary mortgages. not backed -- not backing pls but ordinary mortgages which were also poor quality as long as they come plied with the goals. and that's the number over there. you can see that this is 830 -- almost $838 billion in the poor quality mortgages that they had in 2008. and those were responsible for 81.3% of their losses. these are the subprime mortgages. that's what the top line are.

>> don't throw all the other things in, 60% to 70% of what you are showing. >> i think we have to -- end of discussion and allow for -- after the meeting. but i think we can see that this debate goes on, right? it's a very interesting and complicated problem. but we're delighted to have had all of you here. please join me in giving our wonderful speakers a great round of applause. [ applause ] and you're warmly invited to stay after -- [ inaudible question ] i think we have a reception right across the hallway and hopefully the speakers can stay with us a little longer and they would be happy, if so, to talk to you and we invite to you come back to future programs as well. thank you again.

>> c-span's washington journal live every day. thursday morning, bob cusack. what is next with a republican controlled congress. watch live 7:00 eastern thursday morning. coming up on c-span3's american history tv, the 33rd international churchill conference. the