Academic Gets Financial Crisis

 

There is at least one academic who understands the roots of the current financial crisis in the United States. Maybe that is because, unlike most pedagogues, he came from the business world.

“Government policy created the crisis,” John Allison, a professor at Wake Forest University said recently in a seminar sponsored by The Fund for American Studies (TFAS).  “We live in a mixed economy.”

“That mixture varies a lot by industry. Technology is probably 20% government, 80% free market,” Allison said. “Financial services is probably 70% government, 30% free market.”

“It’s not surprising that the most regulated segment of our economy is where we’ve had the biggest financial problems.”

Allison retired as chairman of BB&T, one of the top financial holding companies in the U. S., in 2009. Thus, he got to see up close and personal the problems of which he speaks.

“Government policy created a ‘bubble’ in the residential real estate market,” he explains. “That ‘bubble’ burst, as all ‘bubbles’ do, and that was transmitted into the capital markets and into the economy in general, destroying trillions of dollars of wealth and creating high unemployment levels and negative economic growth.”

Specifically, “We overbuilt real estate to the tune of $1 trillion plus,” Allison notes.

“In September 2008, the Director of the Federal Housing Finance Agency placed into

conservatorship two large government-sponsored enterprises, the Federal National

Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation

(Freddie Mac),” the Congressional Budget Office (CBO) reported early last year. “At the same time, the Secretary of the Treasury took a major ownership interest in both entities.”

 

“Even before they went broke, they were leveraged at 1000 to 1,” Allison observed. “That means they had $1,000 of debt for every dollar in equity.” The warning signs were obvious to all who took note of them, save for public officials.

 

“I was on a committee of the Financial Services Roundtable, which is made up of the largest bank holding companies in the United States, for nine years,” Allison remembered. “We were trying to do something about Freddie Mac and Fannie Mae.”

“We looked at the numbers. It was mathematically certain that Freddie and Fannie were going broke. A 15-year-old would have said, ‘Hey, these guys are going broke!’”

“We met with Congress on numerous occasions to discuss this issue with lawmakers,” Allison recalled. “They absolutely would not listen to us.”

“Congress would not listen to us for a number of reasons,” Allison believes. “First, they had a ‘religious’ belief in affordable housing. Second, Freddie Mac and Fannie Mae were the largest contributors to the Democratic Party and one of the largest contributors to the Republican Party.”

Malcolm A. Kline is the Executive Director of Accuracy in Academia.

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