At the Cato Institute’s 29th Annual Monetary Conference (VII)

CLOSING ADDRESS

John A. Allison
Former Chairman and CEO, BB&T, and Distinguished Professor of Practice, Wake Forest University

Problems primarily caused by government policy, loose Fed policy, GSE policies.

Fed jobs: payment systems, bank regulator and monetary policy

Payment system monopoly benefits inefficient small banks.

Regulation: FDIC insurance destroys market discipline.  Financing using FDIC-insured deposits to make real estate loans.

Fed failed to oversee other regulators.

Private deposit insurance a la Bert Ely was possible. (?!)

Now-discredited study Boston Fed on discrimination in lending.  Loosened loan standards as a result.

BB&T fought it and was found not to discriminate.  Still fought it, until Republicans were elected and the investigations was dropped.  Same under Obama administration, until Republicans were elected and the investigations was dropped.

CRA eliminate redlining — banks don’t do well with low-quality lending.  Worked so long as home prices were rising, but gave the rating agencies the wrong loss factors that blew up when the bust happened.

Grossly misregulated during Bush, Jr. Administration — Privacy, Patriot Act, etc.  Only Spitzer caught.  Wasted a lot of management time which lead to less true risk control.

Would eliminate regulations before taxes. (DM: of course, taxes are easier to fuddle)

Regulators don’t catch things proactively.  No surprise, because regulators don’t act during the boom phase because everything is going well.  Describes a junky bank that BB&T passed on, until it went bankrupt.

In the bad times, regulators irrationally tighten.  BB&T no longer will make good loans that they used to.  FDIC was worse now than the early 80s & 90s.  Affects small banks most.

Price controls: no one at Fed believes in it, yet the FOMC triues to regulate interest rates.

Greenspan most regularly ran policy with negative real interest rates, helping to create a bubble, until he finally began his last tightening.  Bernanke inverted the yield curve, banks took more credit risk to compensate, worst loans were made then.

Fed held prices up in the ’20s by holding prices up when they should have been falling.  Hidden asset bubble.  Prices should have been falling in the 2000s with the addition of new labor to the capitalist system from China and India.  The process of inflating incented jobs overseas, aside from home construction jobs.

Fed policy today is destructive and lowering productivity.  Private equity guys he talked to are not changing their hurdle rates.

Current policy robs savers for borrowers.  Humiliating many older savers (DM: makes them take too much risk also).

If Congress can print money via the Fed, they will do so.

Who do enslave via regulation?

Short-term versus the long-term, we pick the short run… leading to inflation away of debts, and loss of responsibility.

Life, liberty and the pursuit of happiness… takes a dig indirectly at the gift and estate taxes… free to give it away.  (DM: perhaps it should have been pursuit of virtue, or serving Christ, but that wouldn’t have fit the Founders)

Self-esteem mainly comes from work? (?!)  An encouragement to do your best.  Welfare lowers self-worth.

Q&A

Why should intervention not have occurred in the credit markets?

After making so many mistakes creating too much credit and a pseudo-boom, it was required after that. After that, the bailouts were not predictable.  The losses were not going to be so big.

Makes a mistake saying the insurance industry would not have been affected by the failure of AIG.

Disses Paulson (investment bank unsystematic), Bernanke (Academic) and Geithner.

Should bank executives have personal liability?

No. Thinks capital ratios should be 25%.

Why did they bail out Bear Stearns?

No good reason, thought it would be one-time.

Big rise in the monetary base?

Inflation, Stagflation coming.  No unemployment in a truly free economy. (?!)