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Peter J. Wallison, a codirector of AEI's program on financial policy studies, researches banking, insurance, and securities regulation. As general counsel of the U.S. Treasury Department, he had a significant role in the development of the Reagan administration's proposals for the deregulation of the financial services industry. He also served as White House counsel to President Ronald Reagan.
Why were people reluctant to admit that Fannie and Freddie were out of control?
Peter Wallison: One of the problems with Fannie Mae and Freddie Mac, in particular, was the fact that they were very, very powerful companies. They were probably the most powerful companies in Washington that -- most powerful companies of any kind that we have ever seen. They had terrific networks between their own staff and the staffs of Congress, between themselves and Congress people, members of Congress, Senators. They had a very shrewed system of giving Congress people credit for the things that Fannie and Freddie were doing, and listening to the requests of the people from Congress. So, it was very hard to break that bond that existed between Fannie Mae and members of Congress.
Another aspect, of course, was campaign finance and they were clever in that they not only make contributions themselves to the most important people to them in Congress, but they organize various groups that depended on them, like the securities industry, the realtors, the home builders, they organized them to contribute to special Congress people who were a help to them. So, they actually built a virtually impermeable shield around themselves in Washington. And no matter how much criticism they received from anyone, it did not result in any significant change in Washington.
I was one of their critics, but obviously not a very important one. But some of the things that I wrote did enlist Alan Greenspan as one of their critics and he, as the Chairman of the Federal Reserve at the time, was an extremely important person. Every time he testified he complained about Fannie and Freddie and the risks that they were creating, but it never made any progress. Occasionaly, there would be a bill that would come out of one of the congressional committes, but it never got to a vote on the floor.
How will Fannie Mae and Freddie Mac be regulated in the future?
Peter Wallison: There actually isn't anything currently in prospect in Congress that will have any affect on them. And one of the reasons for that is that they made themselves into institutions that was so central to the housing finance system in this country that we cannot do without them until the entire housing finance system returns to normal. We are in a crisis there right now, housing prices continue to fall, it's very hard to find financing except through Fannie Mae and Freddie Mac. And so we have to keep them in business, we have to keep them functioning. The government has to keep feeding money to them as they suffer losses, in order to keep our housing finance system operating.
So, there's nothing going on now, and there will be, in my view, nothing significant going on in Congress, or from the administration, until we reach the point where the housing market has returned to normal and we can start thinking about alternative methods of financing mortgages. We can't do it now.
How is the government still entangled in the housing market?
Peter Wallison: There are several ways actually that the government has involved itself. FHA has been, that is the Federal Housing Administration, has been important in supporting low income housing for many, many years, but it was always very small. Fannie and Freddie actually competed with FHA and made it even smaller during the time they were operating because they took away a lot of it's sub prime andother non prime business and used those morgages themselves to satisfy some of the obligations that the government had put on them.
Another significant government involvment in the housing business is something called the Community Reinvestment Act which requires banks to make loans in communities that are said to be underserved. Now to make a loan that qualifies for CRA treatment, that is Community Reinvestment Act treatment, it has to be to someone whose income is 80% to the median income, that is 20% below the median income. That's the way a loan is classified as a Community Reinvestment Act loan. But you can understand that large numbers of such loans would not be prime loans. Many people who are at that level do not have steady jobs, do not have steady income, have blemished credit, and banks are required to make these loans to people in those circumstances because it was government policy to increase housing in this country, and that, in fact, succeeded. We did raise homeownership from about 64% where it had been for about 30 years, to about 69% in the early 2000's. But we did it, of course, by providing financing to people who could never have raised the funds to buy a home before, and probably should have been renters all along. But that's the issue that I think we all have to look at very carefully now because those loans, which are failing at unprecedented rates are part of the reason that we have a financial crisis today.
Is the government more or less involved in the housing market since the financial crisis?
Peter Wallison: Well, much more involved now. All of the things I have talked about before that is Fannie Mae, FAH, CRA, they existed long before I started looking at the housing market and exists, of course, today. But today the governmentis actually involved in the housing market in ways that are exceedingly important because things had gotten so bad there. So, the Federal Reserve is buying the mortgage-backed securities of Fannie Mae and Freddie Mac in order to keep their interest rates low so that they canprovide financing to banks, which in turn will be able to provide financing to homeowners. We're trying desperately to keep a market in homes going in this country. We also have the government attempting, through many programs of various kinds, to get banks and services to negotiate with homeowners that haven't been able to meet their mortgage obligations. Those are all involvements by the government in the housing market that didn't exist ten years ago because they didn't have to exist.
Today, because of what Frannie and Freddie did, because, I think, of government policy, we have had a catastrophe in our housing system and now, the only way to address that catastrophe is to have the government take even a bigger hand. But what I hope will happen, when all of this is over, is the government will completely withdraw from the housing finance system, turn it over to the private sector and we will not have these disasters in the future.
Is more or less regulated than it was in eighties?
Peter Wallison: There is slightly less regulation, but it had nothing to do with the financial crisis. The only really significant deregulation that occurred in the financial industry was the Gramm-Leach-Bliley Act of 1999. And the only thing of significant that that did was it allowed banks, commercial banks, to be affiliated through holding companies with firms that are engaged in other financial activities, such as securities, underwriting, and dealing. Many people say that the Glass-Steagall Act was repealed by the Gramm-Leach-Bliley Act. Not true. The Glass-Steagall Act still applies to banks. They are still forbidden by that Act to buy -- to actually underwrite and deal in securities.
However, what they Gramm-Leach-Bliley Act permitted is for banks to be affiliated with companies that underwrite and deal in securites. That has been blamed for the problems that were encountered by the large investment banks; Goldman Sachs, Merrill Lynch, Lehman Brothers, and Bear Sterns, and so forth. But in fact, had nothing to do with those investment banks. They were never bound by Glass-Steagle and they have never become involved with banks. They are not bank holding companies, they are not engaged in activities that were forbidden to them before the Glass-Steagall Act was amended by the Gramm-Leach-Bliley Act. So, there really is no deregulation has has occurred in our country since, oh, since I've become involved certainly, but even since the '30's and '40's that has had any effect on how the financial market functions today.
Have we gone too far in deregulating finance?
Peter Wallison: No. I think that the opposite is true. We should be deregulating finance even more than we have. One of the problems of banks is that they have lost out in the business of becoming the financial sources for large public companies or even small public companies. If you look at the data of banks, you will find that in 1965 they made about, a little bit less than 25% of their loans were made to the real estate business. That would be commercial and residential real estate. By 2008, that number is 55%. I other words, they are making more and more of their loans to a very risky and cyclical area of our economy and that is real estate, either commercial real estate, or residential. Why are they doing that? The reason they're doing that is that they have lost out in compeition with securities firms for financing public companies; public companies being IBM and many other companies that sell their shares in the public markets and are listed on the securities exchanges.
And why did that happen? It happened because it's far more efficient for securities firms to finance these public companies and for banks to do so. Banks have to hold the debt of these firms on the balance sheets for extended periods of time. It's very costly in terms of capital, whereas, securities firm simply sell the securities of these companies to investors and make a commission, or in some cases, make a spread. But in any event, they don't have to hold large amounts of the debts of these companies on their balance sheets for any length of time and they don't have to hold capital to support those holdings.
As a result, they can operate much, much more efficiently and public companies have found that they can raise money far more easily through selling their debt, selling bonds, selling notes, selling commercial paper in the markets rather than borrowing from banks.
So, we really have a problem with banks and that is that they are so restricted in what they are permitted to do that they are increasingly involving themselves with the more risky kinds of lending. Not only the housing, not only to commercial real estate, but also to small business and in some cases consumer loans, all of which involve far higher levels of risk than lending to public companies.
Recorded on December 21, 2009
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- Chinese health officials are also monitoring a newly discovered type of swine flu that has the potential to develop into a pandemic virus.
Bacteria under microscope
needpix.com<p>Today, bubonic plague can be treated effectively with antibiotics.</p><p style="margin-left: 20px;">"Unlike in the 14th century, we now have an understanding of how this disease is transmitted," Dr. Shanthi Kappagoda, an infectious disease physician at Stanford Health Care, told <a href="https://www.healthline.com/health-news/seriously-dont-worry-about-the-plague#Heres-how-the-plague-spreads" target="_blank">Healthline</a>. "We know how to prevent it — avoid handling sick or dead animals in areas where there is transmission. We are also able to treat patients who are infected with effective antibiotics, and can give antibiotics to people who may have been exposed to the bacteria [and] prevent them [from] getting sick."</p>
This plague patient is displaying a swollen, ruptured inguinal lymph node, or buboe.
Centers for Disease Control and Prevention<p>Still, hundreds of people develop bubonic plague every year. In the U.S., a handful of cases occur annually, particularly in New Mexico, Arizona and Colorado, <a href="https://www.cdc.gov/plague/faq/index.html" target="_blank">where habitats allow the bacteria to spread more easily among wild rodent populations</a>. But these cases are very rare, mainly because you need to be in close contact with rodents in order to get infected. And though plague can spread from human to human, this <a href="https://www.healthline.com/health-news/seriously-dont-worry-about-the-plague#Heres-how-the-plague-spreads" target="_blank">only occurs with pneumonic plague</a>, and transmission is also rare.</p>
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