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Wallison: Of course. The Dodd-Frank Act is an extraordinary piece of legislation. I mean, we’re not talking about an ordinary act that responds to a very narrow set of circumstances. You could think, for example, of the Federal Deposit Insurance Corporation Improvement Act, which was adopted in 1991 after the S&L [savings and loan] collapse. That was directed specifically at the problems that were seen as causing the S&L collapse. So it focused on the banking industry, it focused on S&Ls, it focused on those institutions that insured deposits and then tried to write restrictions based on that. People said, now we won’t have any banking crises anymore because we’ve got this wonderful law in place.
Of course, we had a banking crisis again in 2008. But in this case we got a law—the Dodd-Frank Act—which doesn’t just cover banks; it doesn’t just cover investment banks. It potentially covers the entire financial system, and it turns over to the Federal Reserve the authority to regulate every large financial institution in our system. That is, insurance companies, finance companies, securities firms, hedge funds, God knows what else, because it’s very, very broad. The government can decide that any one of these institutions could, because of its interconnections, cause a financial crisis if it fails, so it has to be very strictly—stringently is the statutory term—regulated.
Well, that is the kind of law that causes the hearts of adventurous entrepreneurs to freeze, because you do not know what kind of restrictions are going to be put on you and you don’t know what regulatory positions the government is going to take in the securities area, in the Commodity Futures Trading Commission area, through the banking, through all the other instrumentalities of government. And so you are waiting to see what the regulations require. While you are waiting, during this period of uncertainty, you are not hiring. So from my perspective, the Dodd-Frank Act is the principal cause of the semi-recession that we are still struggling through.
reason: In what ways is the Dodd-Frank Act potentially hurting the housing industry?
Wallison: There are lots of ways, but the most significant way has to do with the government-sponsored enterprises, Fannie Mae and Freddie Mac, the Federal Housing Administration (FHA), the fact that those are not treated at all in the Dodd-Frank Act, but the Dodd-Frank Act has provisions which make those three agencies the dominant players in the housing market. And as long as those are the dominant players in the housing market, no private-sector group is going to come in and compete with them because you cannot compete with a government agency. Government agencies have credit opportunities that you cannot approach, and as a result there’s no competition. As long as the Dodd-Frank Act is in existence with the advantages it provides to these government agencies, there isn’t going to be a recovery in the housing market.
reason: The Republicans in Congress have over the past year tried and failed a handful of times to convince the larger Congress to address Fannie Mae and Freddie Mac. It’s highly unlikely that they will be addressed in this election year. Do you see any viable path forward to address Fannie Mae and Freddie Mac after the 2012 election?
Wallison: Yes, in fact the 2012 election could make it possible for us to address Fannie Mae [and] Freddie Mac. And the FHA, I might add.
Every Republican presidential candidate has said the cause of the financial crisis was Fannie Mae and Freddie Mac and government housing policy. Now, this is pretty important to me. I happen to know where they got those ideas. And that means that if a Republican beats Barack Obama in the next election, we will have, at least in the White House, someone who accepts the correct narrative about what happened in this financial crisis. Not that it’s greed on Wall Street, not that it’s lack of regulation, but that it’s the result of the U.S. government’s housing policy. Once you establish the right narrative, the answers fall out by themselves. And that means you have to repeal the Dodd-Frank Act because that is impairing our recovery, that is imposing much too much regulation on the financial system when it wasn’t at all necessary. It’s an illegitimate act and has to be repealed.
reason: There are people in the Republican Party who were significantly involved in preventing the reforms to Fannie and Freddie proposed in 2004 and 2005. One of the candidates for the Republican nomination, Newt Gingrich, worked for Freddie Mac. There are even people in the House of Representatives who are Republicans who have introduced legislation to keep Fannie Mae and Freddie Mac around. You seem pretty confident that the Republicans would make the right steps, but history offers some cause for concern.
Wallison: I am concerned about this history, and I’m concerned about these Republicans. I’m not concerned so much about Newt Gingrich because he’s flip-flopped on this issue: He’s now against Fannie Mae and Freddie Mac. But at the time, he was well compensated for what he did to help Freddie. In fact, he was at AEI. I was attacking Fannie Mae and Freddie Mac at AEI in the 2000s, 2004 to 2007, saying that they were a real risk to the country; meanwhile, two doors down from me, Newt Gingrich was helping them persuade people that they weren’t so bad, so we were an ecumenical group, apparently, at AEI.
I am concerned about people who are in Congress today, and that’s for two reasons. One is a very technical reason, and that is: The breakdown between Republicans and Democrats on the key committees, on the House Financial Services Committee and on some of the subcommittees, is very, very close. So one Republican in some cases can tie it up so you can’t actually get legislation out. That’s a problem and I would hope that in the next Congress, the leader, Congressman [John] Boehner (R-Ohio), will change the makeup of the House Financial Services Committee so that there are more Republicans than Democrats and we can overcome the votes of a couple of Republicans who are favorable to Fannie Mae and Freddie Mac.
You simply cannot overestimate the power of Fannie and Freddie and the ideas that underlie them that come from the groups like the realtors and the home builders and in some cases the securities industry, because they all make a lot of money from Fannie and Freddie. These are interests that are very focused on making sure that Fannie Mae and Freddie Mac and to some extent FHA are very much in business, and they have their own influence on people in Congress. And I must say, giving the people in Congress—even the Republicans in Congress who favor Fannie and Freddie—their due, they can always argue, “Well, in my district we need Fannie and Freddie for this reason or that reason, and I’m afraid that if they were no longer present there wouldn’t be any financing for homes in my district.” So they can cover themselves with talking for their district, but in fact if these people say they are conservatives, and many of them argue that they are conservatives, they are not conservatives if they are willing to back Fannie and Freddie.
reason: Would you say that today’s weak economy is a direct result of the financial crisis, or are there other underlying aspects of why the U.S. economy has not bounced back as strongly from the last recession as it normally does after a recession?
Wallison: I actually believe that it was the reaction to the financial crisis, principally the Dodd-Frank Act, that has caused today’s economy to be as weak as it is. Without that, if we had just let the housing market decline, let everything go down to the level where people are willing to come in and start buying, then we would have been in recovery right now. But the government’s actions in trying to prevent that from happening, the government’s actions in impeding the development of new financing sources for housing, have caused the problem we are in today.