…His main line of reasoning is as follows: “The great commission I chaired found significant numbers of defective mortgage loans and the Department of Justice (DOJ) used this evidence to obtain $40 billion in fines from major financial institutions, so there has to be bankers who committed crimes. There just has to be and I don’t understand how they haven’t been prosecuted. I want them prosecuted!”

Think about this point: If Mr. Angelides had chaired an independent and unbiased financial crisis commission, why would he five years later still be calling for the heads of banking and Wall Street executives? Wouldn’t that ruin any claims you could make about being objective and independent? I think so. So why is he doing it?  I think it’s because the truth is emerging about his highly partisan committee and the real root-causes of the crisis, and the truth isn’t making him look very good. (I also think he might be looking for a job in a Clinton or Bernie administration.)

Read my two blog postings today, from two of Mr. Angelides fellow commissioners: Mr. Douglas Holtz-Eakin (April 27, 2016 – Statement 1165) and Mr. Peter J. Wallison (April 27, 2016 – Statement 1164). They both make clear that Mr. Angelides was a terrible and politically-biased Chairman and that the majority report was nothing more than a liberal Democrat-white wash. That’s why EVERY Republican (four of the ten commissioners) dissented to the majority report and why they wrote two dissenting and far more accurate reports on the crisis. Here is what Mr. Holtz-Eakin said about the FCIC Mr. Angelides chaired:

“After all, taken at face value, it (The Financial Crisis Inquiry Commission) utterly failed in its mission to provide the American public with a clear consensus explanation for what caused the crisis…The real agenda was to deal with the politics of the financial crisis. The Democrats wanted the narrative for the cause of the financial crisis to be that greedy bankers rigged the game in Washington and imposed this crisis on the American people for their own benefit. It remains the prevailing view to this day. It is completely wrong, but it still has a phenomenal amount of resonance with the American people.”

In regards to the $40 billion in settlements, I would note that the government has the awesome power to coerce the Too Big to Fail Banks/Wall Street, whose liabilities and mortgages are mostly guaranteed by the government, to say almost anything they want. That doesn’t make it true. Truth is determined in a court of law, where the facts in dispute are determined and applied to the law. The government settled because they didn’t want the truth to come out in court, where they likely would have lost. In regards to Mr. Angelides claims about defective mortgages, I have blogged a lot about that subject, about it being a false, Red Herring. Here is one blog posting you should read that I believe powerfully refutes this claim:

October 7, 2014 – Statement 410: “Again, the truth is finally emerging. FHA’s audit of mortgage loans insured by them in Q1 2014 apparently has uncovered huge, “material” underwriting error rates. If this is true, it goes a long way to disprove the mainstream view that pre-crisis mortgage underwriting deficiencies were a material cause of mortgage (and mortgage securities) losses during the financial crisis…

Finally, it’s a little nasty, but I have come to believe that Mr. Angelides is really a nasty man, whose sole goal is to further is liberal political career (at the expense of his fellow Americans knowing the truth about the financial crisis) so here goes…it’s true. California’s public pension programs are causing an emerging financial catastrophe for our state and local governments and will result in massively higher taxes for its citizens and/or reduced public services and Mr. Angelides as a former State Treasurer sat on CalPERS board for years and did nothing. Even today, one of his cronies runs CalPERS. When I read the online Sacrament Bee article Mr. Angelides wrote below, I confess that I loved this readers comment: “Phil Angelides should count his blessings that the FBI didn’t put him in jail for the way he mismanaged CalPERS.”, Rick LaBonte”, Mike Perry, former Chairman and CEO, IndyMac Bank, and fifth-generation Californian

…Last year, the number of new mortgages worth $100,000 or less for homes in the largest metropolitan areas in the United States was at its lowest point in a decade, according to CoreLogic, a financial services research firm. “There’s a whole underbelly of real estate that’s not through traditional sale,” said Robert Doggett, general counsel for Texas RioGrande Legal Aid and a critic of contracts for deeds. “It’s not a problem of yesteryear. It’s coming back.”,Alexandra Stevenson and Matthew Goldstein, “Wall Street Veterans Bet on Low-Income Home Buyers”, The New York Times, April 19, 2016

“This is the unintended (and worse) consequence of the government making riskier mortgage loans illegal and/or demonizing them. If they aren’t illegal, they are too risky reputation and litigation-wise for regulated banks and traditional mortgage bankers, so these private, “hard money” folks are stepping in to fill the demand from these poorer Americans, at worse rates and terms. (Think about it. These Contract for Deeds don’t require “foreclosure”, just “eviction”….which somehow, while effectively the same, isn’t the same in the liberal political classes’ eyes.) I don’t think that’s what was intended, but that’s what’s happened.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Wall Street Veterans Bet on Low-Income Home Buyers

By ALEXANDRA STEVENSON and MATTHEW GOLDSTEIN

Daniel Sparks helped create Shelter Growth Capital Partners, which buys homes that were foreclosed on during the financial crisis and later resold to buyers. Credit Brendan Smialowski for The New York Times

As the head of Goldman Sachs’s mortgage department, Daniel Sparks helped make the bank more than a billion dollars betting against the market as housing prices began to crash in 2007.

Today, he is betting on home buyers who no longer qualify for mortgages in the fallout of that housing crisis.

Shelter Growth Capital Partners, an investment firm Mr. Sparks founded in 2014 with two other former Goldman Sachs executives, has been buying homes that were foreclosed on during the financial crisis and later resold to buyers under long-term installment contracts.

The firm has bought just over 200 homes from Harbour Portfolio Advisors, a Dallas investment firm that has specialized in selling homes to lower-income buyers through what is known as a contract for deed. In these deals, a seller provides the buyer with a long-term, high-interest loan, with the promise of actually owning the home at the end of it.

These contracts, a form of seller financing, have ballooned in recent years as low-income families unable to get traditional mortgages have turned to alternate ways to buy homes.

The homes are often sold “as is,” in need of costly repairs and renovations, and many of the transactions end in eviction when buyers fall behind on payments.

The market is growing in part because so many would-be home buyers with damaged credit histories cannot get loans. Banks are unwilling to write mortgages to riskier clients after being fined billions of dollars for pushing borrowers into unaffordable subprime mortgages before the crisis.

Last year, the number of new mortgages worth $100,000 or less for homes in the largest metropolitan areas in the United States was at its lowest point in a decade, according to CoreLogic, a financial services research firm.

“There’s a whole underbelly of real estate that’s not through traditional sale,” said Robert Doggett, general counsel for Texas RioGrande Legal Aid and a critic of contracts for deeds. “It’s not a problem of yesteryear. It’s coming back.”

Other Wall Street veterans have entered the scene nationally, too.

Battery Point Financial, founded by Jeremy Healey in 2013, is focusing exclusively on buying homes in smaller cities to sell them to buyers through contracts for deeds. Mr. Healey, a former mortgage trader at Goldman Sachs, has $40 million in backing from Kohlberg Kravis Roberts & Company, the private equitygiant.

One reason the contract for deed market has become popular among investment firms is that under many contracts, buyers can be evicted if they default on their loans. That is very different from traditional mortgages, under which the foreclosure process can be lengthy and costly.

Shelter Growth, based in Stamford, Conn., has about $500 million under management. The firm says on its website that it is “creating investments to capitalize on the next phase of the U.S. mortgage” market.

Most of the homes Shelter Growth bought from Harbour appear to have been purchased in a bundled transaction in December by the firm’s SG Capital Partners L.L.C. affiliate, according to an analysis by the research firm RealtyTrac. But Shelter Growth has also bought a number of other homes from Harbour this year, with some purchases recorded as recently as last month.

Shelter Growth paid an average of $22,000 for the homes it bought from Harbour, according to public filings and RealtyTrac. Harbour, for its part, bought most of the homes in its portfolio for an average of $8,000, through bulk sales by Fannie Mae.

Senator Carl Levin, center, talking with Senators Tom Coburn and John McCain at a 2010 hearing where Daniel Sparks was asked about mortgage securities. Credit Doug Mills/The New York Times

The homes Harbour sold to Mr. Sparks’s firm are in two dozen states, but most are clustered in Michigan, Ohio, Georgia, Missouri and Alabama, according to RealtyTrac.

One such sale, for $25,500, was for a house in Elyria, Ohio.

In April 2011, Harbour sold a contract for deed on the house for $36,300, according to public filings. Under the terms of that deal, the 24-year-old woman who now lives in the house is required to pay 10 percent interest or a monthly base payment of $314 — a sum that does not include property taxes, insurance or any outlays for repairs or renovations.

Under a contract for deed, a buyer gets the legal title to the home either at the end of the contract, which can run anywhere from 20 to 40 years, or if the buyer is able to pay off the balance owed all in one go.

After the financial crisis, Harbour emerged as one of the larger national players in the contract for deed market. The firm bought more than 6,700 single-family homes, most of them from Fannie Mae.

But in recent months, Harbour has sold more than 600 homes to investment firms like Shelter Growth and individual investors, according to public filings.

A review of some of the homes sold to SG Capital found that the contracts used by Harbour have drawn criticism from some housing lawyers because the documents do not provide buyers with a specified time period to remedy a default, give Harbour the right to immediately convert the agreement to a month-to-month tenancy upon a default, and include an arbitration clause for settling some disputes.

Through his lawyer, Jacqueline Mallett, the founder of Harbour, Charles A. Vose III, declined to comment for this article.

It is unclear whether Mr. Sparks’s firm plans to change the contracts or abide by the terms. Mr. Sparks declined to comment.

Another buyer of Harbour homes with contracts for deeds in place is New York Mortgage Trust, a publicly traded mortgage real estate investment trust, or REIT. The firm has bought at least 130 homes from Harbour through one its asset managers, Headlands Asset Management, adding to the mortgage REIT’s relatively small portfolio of contracts for deeds.

Steven Mumma, chairman and chief executive of New York Mortgage Trust, says the company, which has a portfolio of roughly $763 million worth of performing and reperforming mortgages, is not in the business of foreclosing on people. He says that the contracts acquired from Harbour were signed two or three years ago and that most of the buyers have kept up with their payments.

“We look at it as a loan, not as an opportunity to repossess,” Mr. Mumma said, with respect to contracts for deeds and homes bought from Harbour.

He says the company now uses its own loan-servicing firm to manage the homes and contracts it bought from Harbour, which has partnered with National Asset Advisors, a firm that operates out of a partly empty strip mall on the outskirts of Columbia, S.C.

SG Capital, the affiliate of Shelter Growth that has bought homes from Harbour, is licensed as either a mortgage servicer or a lender in 21 states. The firm’s investments typically have focused on so-called jumbo mortgages, which cannot be sold to either Fannie Mae or Freddie Mac because they are larger than the underwriting guidelines of the two government-backed mortgage finance companies.

Mr. Sparks is much less in the spotlight now than he was six years ago, when he became a target for lawmakers angered over Wall Street’s role in the 2008 financial crisis.

At a 2010 Senate hearing that focused on Goldman Sachs’s sale of securities backed mainly by subprime mortgages, Mr. Sparks was questioned by Carl Levin, then a Democratic senator from Michigan. During the proceedings, Mr. Levin pressed Mr. Sparks on why a Goldman colleague had used profanity in an email describing the quality of one such mortgage security that the firm was selling to institutional investors.

A somewhat uncomfortable-looking Mr. Sparks responded at the time that he interpreted the email to mean that “my performance on that deal was not good.”

A version of this article appears in print on April 18, 2016, on page B1 of the New York edition with the headline: Wall St. Veterans Are Betting on Low-Income Homebuyers.

…One lesson for me was how not to run a commission. I think (fellow commissioner and R Street panelist) Peter Wallison will agree with me that this was demonstrated by the days when 10 commissioners sat in a room for literally a full day while chair, Phil Angelides, encouraged us to come to a consensus – even as he refused to budge on his interpretation of the crisis….It is simply no way to run a commission and very painful…The second thing I learned in the past five years…we knew it at the time but it has become increasingly clear…is that the commission was a political entity. It’s ostensible task was to write an understandable report to the American people detailing the causes of the financial crisis and helping to ameliorate the chances of one happening again. That wasn’t really its purpose. What became the Dodd-Frank legislation was already moving; the administration had made its proposals before we even began to work. So the notion that some of this was informing some sort of legislative and/or regulatory response was never on the agenda. The real agenda was to deal with the politics of the financial crisis. The Democrats wanted the narrative for the cause of the financial crisis to be that greedy bankers rigged the game in Washington and imposed this crisis on the American people for their own benefit. It remains the prevailing view to this day. It is completely wrong, but it still has a phenomenal amount of resonance with the American people.”, Excerpts from “A Political Commission”, Douglas Holtz-Eakin, President of the American Action Forum and commissioner of the Financial Crisis Inquiry Commission, R Street Policy Study No. 56: Sizing Up The FCIC Report Five Years Later, R Street, March 17, 2016

R Street Policy Study No. 56: Sizing Up The 
FCIC Report Five Years Later
March 17, 2016
A POLITICAL COMMISSION
Douglas Holtz-Eakin,
President of the American Action Forum and
Commissioner of the Financial Crisis Inquiry Commission

There have been times when I have tried very hard to forget the Financial Crisis Inquiry Commission. After all, taken at face value, it utterly failed in its mission to provide the American public a clear consensus explanation for what caused the crisis. Today’s event makes it impossible to forget. Instead, I’m going to work through my post-traumatic stress disorder and talk a little bit about what we have learned in the past five years.

One lesson for me was how not to run a commission. I think Peter Wallison will agree with me that this was demonstrated by the days when the 10 commissioners sat in a room for literally a full day while the chair, Phil Angelides, encouraged us to come to a consensus – even as he refused to budge on his interpretation of the crisis. He also envisioned the group of 10 actually writing as a group a report detailing the causes of the financial crisis in the United States. It is simply no way to run a commission and it is very painful. For those of you who may end up in a similar position in the future, here is the lesson: get a chief of staff for your commission who is qualified to actually be a member of the commission. Tell him or her to write a report and then take that report to each commissioner and see what they agree and disagree with until you arrive at a consensus, if there is one.

The second thing I learned in the past five years – we knew it at the time but it is becoming increasingly clear – is that the commission was a political entity. Its ostensible task was to write an understandable report to the American people detailing the causes of the financial crisis and helping to ameliorate the chances of one happening again. That wasn’t really its purpose. What became the Dodd-Frank legislation was already moving; the administration had made its proposals before we even began to work. So the notion that some of this was informing some sort of legislative and/or regulatory response was never the agenda.

The real agenda was to deal with the politics of the financial crisis. The Democrats wanted the narrative for the cause of the financial crisis to be that greedy bankers rigged the game in Washington and imposed this crisis on the American people for their own benefit. It remains the prevailing view to this day. It is completely wrong, but it still has a phenomenal amount of resonance with the American people.

So in terms of politics, I learned a lot about how important it is to have a clean message. The dissent I wrote with Commissioners Keith Hennessey and Bill Thomas discussed 10 causes of the financial crisis. That is not a clean message. It is not something easily communicated to the American people.

On the politics of setting the agenda for a sensible response, I do not think we were very successful.

Then there is the substance of the response, which I and the American Action Forum’s Meghan Milloy addressed in a paper on the good, the bad and the ugly of the policies.

If you look at what the government has done since the commission, there are some things that make sense to me. It is good to see better-capitalized large financial institutions. Holding more capital covers a lot of sins. As banks hold their own capital, their own money is at risk and they will do better due diligence. Moreover, when mistakes are made, you will be able to absorb those loses. So that has been a step in the right direction.

I also think there was a modest step in the right direction with the credit rating agencies. Those agencies were one of the big surprises to me during my time on the FCIC, one of the big things I changed my mind about during the course of the deliberations. I went into the FCIC with a strong bias that the participants in these transitions – large, sophisticated institutions like Goldman Sachs and J.P. Morgan – were easily able to do their own due diligence on the securities, the underlying mortgages and their likely financial performance. The rating agencies would be irrelevant and it would not matter what label agencies put on a security, because the participants would know the truth. That turned out to not be the case. They did not do their due diligence; they just took the ratings. The ratings turned out to be more important than I thought. So closer scrutiny of the rating agencies is a beneficial thing going forward.

There have been some bad responses, as well. The narrative that fancy derivative transactions caused the financial crisis is all wrong. There was only one derivative involved in the crisis, and that was the American International Group credit default swaps. But on the basis of the false narrative, the United States undertook vast regulation of derivatives. The same observation is true for the Volcker Rule. There is no evidence that proprietary trading contributed to the financial crisis. It was not a trading crisis; it was fundamentally a lending crisis, with bad underwriting. The Volcker Rule is one of the most complex rules, expensive to comply with and serves no real purpose as a response to the crisis. The other bad response is a lot of the new disclosure requirements. The poster child for overreach on disclosures is the conflict mineral rule, which has decimated the Congo and done very little else. It is hard to defend those kinds of policies.

Finally, there are the ugly responses. Begin with orderly liquidation authority, which memorializes in statute the government’s capacity to continue to prop up large financial institutions. As a result, it takes the basic bailout instinct of all regulators and now gives them more legal rope. It’s important to remember that the notion of “too big to fail” is not a flaw of the private sector. It is the policymakers who are so risk-averse that they step in and do not allow institutions to fail. This makes it easier for them to do that, and it is a big step in the wrong direction.

The other proactively bad development is creation of the Financial Stability Oversight Council (FSOC). While a bad idea to begin with, its actual operation is almost like a Stalinist court system. Non-bank systemically important financial institutions (SIFIs) have no idea why they are SIFIs, and the court of appeals is simply the FSOC itself. I will go to my grave confused by the MetLife and Prudential SIFI designations, except as purely politicized actions. The FSOC is something I think we are going to wrestle with for a long time.

Lastly, I guess I remain naïve, because I would never have bet that I would be attending a forum on the fifth anniversary of the FCIC and there would have been no substantial reforms (or closure) for Fannie Mae and Freddie Mac. They made no sense in 2003 when I was at the Congressional Budget Office. They were living financial dynamite during the crisis. I thought, surely, that common sense would prevail and there would be no more housing government-sponsored enterprises. It is a real lesson in just how hard it is to get an obvious reform done in Washington.

…The consequences include the 2010 Dodd-Frank Act, which has slowed the economy’s growth, and the absurd fight in the current Democratic presidential race about who will punish Wall Street the most.”, Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute and commissioner of the Financial Crisis Inquiry Commission, “Sizing Up The Report of The Financial Crisis Inquiry Commission Five Years Later”, R Street Policy Study, March 17, 2016 

Sizing Up The Report of The Financial Crisis Inquiry Commission Five Years Later, R Street Policy Study, March 17, 2016

…”Does Mr. Lew, who was a Citigroup executive in 2008 when it required a massive taxpayer bailout, honestly expect us to believe he knows what he is doing when it comes to assessing taxpayer exposure to major financial institutions? The lunatics are running the asylum.” Joseph Bentivegna, Fairfield, Conn., The Wall Street Journal, Letters to the Editor, April 26, 2016

Opinion Letters

Lew and the FSOC: First Do No Harm, Please

Who believes Jack Lew knows what he’s doing when assessing taxpayer exposure to financial institutions?

I had to laugh as I finished Treasury Secretary Jacob J. Lew’s “Why We’re Reviewing Asset Management” (op-ed, April 20) on the Financial Stability Oversight Council’s work to make our country financially sound. Obviously the council is focused on financial institutions. But the gorilla in the room of threats to U.S. financial stability is current monetary and fiscal policy. How do people like Mr. Lew feel about the federal deficit and artificially low interest rates?

The real risk to our system is that politicians continue to expand spending beyond our means. At some point our system could collapse under the pressure of huge federal deficits and higher interest rates. In this environment Mr. Lew’s fellow progressives are expanding entitlements and promising to pay for them by taxing the 1%. Fat chance that works. The real threat to financial stability is Mr. Lew and other progressives’ irresponsible fiscal policy.

Guy Randolph

Savannah, Ga.

The economic illiteracy of this administration continues to create an environment that is hostile to the financial stability it is seeking. The irony in the name of Mr. Lew’s Financial Stability Oversight Council is rich. We are to ignore that the number of banks in the U.S. has dropped from 7,600 to 5,300 in the last 10 years. The workforce percentage hasn’t been this low since 1978. GDP hasn’t risen above 3% for the last 10 years. And Dodd-Frank, the result of partisan legislative overreaction, has kept businesses off balance since its 2010 inception. Mr. Lew says that his council is responsible for “identifying and addressing risks to financial security.” There is no end to this hammer looking for a nail.

Real financial stability comes from an economy where businesses are allowed to operate day to day and plan long term with a minimum of government intrusion. The more we impose regulations to eliminate economic cycles (which are fundamental in a free market) and create soft landings, the more we are ensuring a lackluster, low-employment economy.

Carl Schieffer

Dallas

Does Mr. Lew, who was a Citigroup executive in 2008 when it required a massive taxpayer bailout, honestly expect us to believe he knows what he is doing when it comes to assessing taxpayer exposure to major financial institutions? The lunatics are running the asylum.

Joseph Bentivegna

Fairfield, Conn.

…Much later did the biggest institutions like Citibank and Merrill Lynch become threatened with liquidity panics and regulatory insolvency. The reason: Market uncertainty over how regulators would treat their illiquid holdings of exotic Triple-A mortgage derivatives that, as history would later show, were well insulated from the uptick in subprime defaults. We know this because taxpayers made profits bailing them out from a confidence crisis mostly caused, in circular fashion, by undeft government itself. Big banks aren’t automatically bad or badly managed because they are big, but it’s hard to believe big banks would exist without an explicit and implicit government safety net underneath them. Big banks are government creations. In 2008, these creations were the vehicles by which a maladroit government turned a housing bust in a few U.S. states into a global financial meltdown. They were also the vehicles by which government promptly halted the panic simply by guaranteeing the liabilities of the biggest institutions. None of this has changed since Dodd-Frank, none of it is likely to change….Well, yes. The sentence is a tautology. To halt a crisis caused by fears that government might stop propping up the biggest banks, it would have to prop them up. The “crisis” in this sentence appears immaculately. In fact, we know where the crisis will come from and how it will be transmitted to the financial system. The Richmond Fed’s “bailout barometer” shows that, since the 2008 crisis, 61% of all liabilities in the U.S. financial system are now implicitly or explicitly guaranteed by government, up from 45% in 1999.Citigroup estimates that the top 20 advanced industrial economies, in addition to their enormous, recognized public debts, face unrecorded additional debts of $78 trillion for their unfunded pension systems. Six years after a crisis caused by excessive borrowing, McKinsey estimates that even visible global debt has increased by $57 trillion, while in the U.S., Europe, Japan and China growth to pay back these liabilities has been slowing or absent. In their desperation to avoid the real problem, central bankers lately have started bruiting “helicopter money”—the jokey term for printing money and giving it to consumers, businesses or governments to spend without incurring an offsetting debt. How does this solve any problem when so many businesses and households are already sitting on cash hoards they are afraid to spend or invest? As former Israeli central banker Jacob Frenkel told a conference in Italy two weeks ago, “What they need is not money. What they need is confidence and productive opportunities in front of them.” Exactly. They need to see their leaders taking actions to restore confidence in the ability of the world’s premier economies to grow and to afford their debts. President Obama, it must be said, has been a world-historical disappointment on this score…””, Holman W. Jenkins Jr., “Big Banks Aren’t the Problem”, The Wall Street Journal, April 20, 2016

Opinion

Big Banks Aren’t the Problem

The Richmond Fed says 61% of debts are guaranteed by government.

Bernie Sanders campaigning in Long Island City, N.Y., April 19. PHOTO: ZUMA PRESS

By Holman W. Jenkins, Jr.

Companies fret about “silos” in which employees obsess about the wrong thing and miss opportunities because they don’t see a bigger picture.

Wonkery has its silos too, and one of them is too big to fail.

The 2008 crisis did not begin in a handful of too-big-to-fail banks, but in incentives cast far and wide among home buyers, mortgage brokers, lenders and others to underwrite tax-advantaged, one-way bets on home prices.

Too big to fail was implicated in only one way: Fannie Mae and Freddie Mac were too big to fail in the eyes of their own lenders, including the Chinese government, which did no due diligence on the U.S. housing boom because they expected Washington to bail them out.

Much later did the biggest institutions like Citibank and Merrill Lynch become threatened with liquidity panics and regulatory insolvency. The reason: Market uncertainty over how regulators would treat their illiquid holdings of exotic Triple-A mortgage derivatives that, as history would later show, were well insulated from the uptick in subprime defaults.

We know this because taxpayers made profits bailing them out from a confidence crisis mostly caused, in circular fashion, by undeft government itself.

Big banks aren’t automatically bad or badly managed because they are big, but it’s hard to believe big banks would exist without an explicit and implicit government safety net underneath them.

Big banks are government creations. In 2008, these creations were the vehicles by which a maladroit government turned a housing bust in a few U.S. states into a global financial meltdown. They were also the vehicles by which government promptly halted the panic simply by guaranteeing the liabilities of the biggest institutions.

None of this has changed since Dodd-Frank, none of it is likely to change. Too big to fail is wonkery of surpassing irrelevance.

At the moment, regulators are hand-waving over the inadequacy of the “living wills” that were supposed to make giant banks easier to wind up if they stumble—never mind that living wills are irrelevant to the circumstances that actually cause the solvency of giant banks to be questioned and irrelevant to the (inevitable) government decision to support them.

“The biggest American banks, nearly eight years after the financial crisis, are still too big to fail,” fretted a New York Times front-pager last week after Fed and Treasury stress tests.

“That suggests that if there were another crisis today, the government would need to prop up the largest banks if it wanted to avoid financial chaos.”

Well, yes. The sentence is a tautology. To halt a crisis caused by fears that government might stop propping up the biggest banks, it would have to prop them up.

The “crisis” in this sentence appears immaculately. In fact, we know where the crisis will come from and how it will be transmitted to the financial system. The Richmond Fed’s “bailout barometer” shows that, since the 2008 crisis, 61% of all liabilities in the U.S. financial system are now implicitly or explicitly guaranteed by government, up from 45% in 1999.

Citigroup estimates that the top 20 advanced industrial economies, in addition to their enormous, recognized public debts, face unrecorded additional debts of $78 trillion for their unfunded pension systems.

Six years after a crisis caused by excessive borrowing, McKinsey estimates that even visible global debt has increased by $57 trillion, while in the U.S., Europe, Japan and China growth to pay back these liabilities has been slowing or absent.

In their desperation to avoid the real problem, central bankers lately have started bruiting “helicopter money”—the jokey term for printing money and giving it to consumers, businesses or governments to spend without incurring an offsetting debt.

How does this solve any problem when so many businesses and households are already sitting on cash hoards they are afraid to spend or invest? As former Israeli central banker Jacob Frenkel told a conference in Italy two weeks ago, “What they need is not money. What they need is confidence and productive opportunities in front of them.”

Exactly. They need to see their leaders taking actions to restore confidence in the ability of the world’s premier economies to grow and to afford their debts. President Obama, it must be said, has been a world-historical disappointment on this score, a man who ran on and won a strong mandate for bipartisanship in 2008, who chose instead to concentrate on penny-ante liberal wish-list items, a crybaby who now justifies his choices by citing “Republican intransigence.”

And yet Mr. Obama looks good next to Bernie Sanders or Donald Trump. The question that ought to keep central bankers up at night is whether their ministrations to buy time for the politicians are only buying politicians time to make matters worse.

…Thus the true solution can only be a currency or monetary arrangement that does not encourage predatory currency depreciation. The necessary solution must exclude floating exchange rates, and substitute a system of stable exchange rates without official reserve currencies. But how? Pursuant to the U.S. Constitution (Article I, Sections 8 and 10), the dollar was defined by Congress in law as a weight of precious metals (gold and silver) for most of American history, from the Coinage Act of 1792 until 1971. Dollar-denominated securities have been used as official reserves by many countries at least since the Genoa Agreement of 1922, and by most countries since the Bretton Woods monetary agreement of 1944. Under both agreements, dollar securities were redeemable in gold. But the experience of both the failed interwar and Bretton Woods systems showed that competitive devaluations are only part of the problem. By “duplicating” credit, as the French economist and central banker Jacques Rueff (1896-1978) described it, the official reserve-currency system causes the domestic price level to rise in the reserve-currency country, relative to other countries, even while exchange rates remain (temporarily) fixed. For example, since 1955, producer prices for manufactured goods have roughly tripled in Germany, but more than sextupled in the U.S.—creating never-ending pressure from American industry to devalue the dollar, while causing unpredictable swings in the prices of both countries’ goods expressed in the same currency…. This floating exchange-rate system, combined with the official reserve-currency role of the world dollar standard, explains why free trade has been getting a bad name among Democrats, Republicans and independents. Under the floating exchange-rate reserve-currency system, free trade has become no more than a romantic fantasy. The solution is to establish a level trade playing field with a system of stable exchange rates among the nations of the G-20, or at least the G-7, to which emerging countries will conform. Such a solution would require the next president to bring together the major world leaders to establish stable exchange rates to avoid trade and currency wars that inevitably lead to protectionism and sometimes to real wars. This international monetary solution of stable exchange rates would eliminate the burden and privilege of the dollar’s reserve-currency role. Neither tax, nor regulatory, nor budget reforms, however desirable, will eliminate currency wars. To restore America’s competitive position in production, manufacturing and world trade, stable exchange rates are the only solution tested in the laboratory of U.S. history—from President Washington in 1789 until 1971. Stable exchange rates have proven throughout history to establish the most reliable level playing field for free and fair world trade. There are no perfect solutions in human affairs. But the history of the past three centuries suggests that stable exchange rates, resulting from adoption of currencies mutually convertible to gold at statutory fixed parities, are the least imperfect solution to avoid currency and trade wars.”, Lewis E. Lehrman and John D. Mueller, “Monetary Reform or Trade War, The Wall Street Journal, April 20, 2016

Opinion

Monetary Reform or Trade War

Trump is right that other countries seek advantage by devaluing their money. But the fix isn’t tariffs.

PHOTO: GETTY IMAGES/IKON IMAGES

By Lewis E. Lehrman and John D. Mueller

Almost every candidate for president in 2016 has made the case, none more intensely than Donald Trump, that Americans have lost jobs and industry because of predatory currency depreciation. This neo-mercantilism is practiced by almost every nation that competes with the U.S. What is the solution to this grave problem?

Mr. Trump’s proposed solution is protectionism by raising tariffs as much as 45%. This recalls the Smoot-Hawley Tariff, which triggered a vicious trade war while Congress debated the legislation in 1929 and after President Hoover signed it in June 1930, just as the chaotic interwar monetary system was collapsing.

Ted Cruz seems to agree that currency wars, and currency depreciation by other nations, have had a destructive effect on U.S. industries, but he opposes Mr. Trump’s tariffs. Mr. Cruz has said that the best way to level the playing field of international trade is with his tax plan, which would tax imports but not exports. (He has also advocated “sound money and monetary stability, ideally tied to gold,” but has not explained the relation between the monetary and trade issues.)

Despite the Texas senator’s economic sophistication, it is logically and economically implausible to solve a monetary problem, created by predatory currency depreciation, with a tax plan. A tax problem must be resolved by a tax solution. But a tax reform is neither necessary nor sufficient to rule out currency wars. Floating currencies can be depreciated faster and further than import taxes can be adjusted. Rising import taxes (i.e., tariffs) intensify the very problem of protectionism they pretend to solve.

A currency issue, or a monetary problem, must be resolved by a currency and monetary solution. Today’s monetary problem is the floating exchange-rate system, combined with the dollar’s peculiar global role as the world’s chief official reserve currency.

Foreign countries use expansive monetary policy to depreciate their currencies relative to the U.S. dollar, hoping to gain a trade advantage by exporting unemployment. Thus the true solution can only be a currency or monetary arrangement that does not encourage predatory currency depreciation. The necessary solution must exclude floating exchange rates, and substitute a system of stable exchange rates without official reserve currencies.

But how? Pursuant to the U.S. Constitution (Article I, Sections 8 and 10), the dollar was defined by Congress in law as a weight of precious metals (gold and silver) for most of American history, from the Coinage Act of 1792 until 1971. Dollar-denominated securities have been used as official reserves by many countries at least since the Genoa Agreement of 1922, and by most countries since the Bretton Woods monetary agreement of 1944. Under both agreements, dollar securities were redeemable in gold.

But the experience of both the failed interwar and Bretton Woods systems showed that competitive devaluations are only part of the problem. By “duplicating” credit, as the French economist and central banker Jacques Rueff (1896-1978) described it, the official reserve-currency system causes the domestic price level to rise in the reserve-currency country, relative to other countries, even while exchange rates remain (temporarily) fixed. For example, since 1955, producer prices for manufactured goods have roughly tripled in Germany, but more than sextupled in the U.S.—creating never-ending pressure from American industry to devalue the dollar, while causing unpredictable swings in the prices of both countries’ goods expressed in the same currency.

As the nearby chart shows, U.S. net official reserves were already substantially negative by the 1970s. Moreover, the increase in foreign official dollar reserves is matched by an equal deficit in the U.S. private trade and capital accounts combined—even when private U.S. residents’ books remain near balance with the rest of the world.

Since President Nixon ended dollar convertibility to gold in August 1971, the international monetary system has been based on the world paper-dollar standard. The international monetary system has become, as in the depressed 1930s, a disordered arrangement of floating currencies, whereby any country can depreciate its currency against the dollar. Some countries even fix their exchange rates to the dollar at an undervalued level for long periods, as China did in the early 1990s. This is when China’s industrialization gained momentum as it became the workshop of the world.

The pattern today is for countries, even the European Union, simply to lower the effective real level of wages by depreciating their currencies against the dollar to gain comparative advantages in international trade and by import substitution. In these countries (such as Brazil), local wages are paid in depreciating local currencies, thereby lowering the relative cost of labor. Labor compensation today accounts for one-half to two-thirds of the total cost of production in every economy. Thus American workers have been put at a competitive disadvantage with countries that are depreciating their currencies.

This floating exchange-rate system, combined with the official reserve-currency role of the world dollar standard, explains why free trade has been getting a bad name among Democrats, Republicans and independents. Under the floating exchange-rate reserve-currency system, free trade has become no more than a romantic fantasy.

The solution is to establish a level trade playing field with a system of stable exchange rates among the nations of the G-20, or at least the G-7, to which emerging countries will conform. Such a solution would require the next president to bring together the major world leaders to establish stable exchange rates to avoid trade and currency wars that inevitably lead to protectionism and sometimes to real wars. This international monetary solution of stable exchange rates would eliminate the burden and privilege of the dollar’s reserve-currency role.

Neither tax, nor regulatory, nor budget reforms, however desirable, will eliminate currency wars. To restore America’s competitive position in production, manufacturing and world trade, stable exchange rates are the only solution tested in the laboratory of U.S. history—from President Washington in 1789 until 1971. Stable exchange rates have proven throughout history to establish the most reliable level playing field for free and fair world trade.

There are no perfect solutions in human affairs. But the history of the past three centuries suggests that stable exchange rates, resulting from adoption of currencies mutually convertible to gold at statutory fixed parities, are the least imperfect solution to avoid currency and trade wars.

Mr. Lehrman is the author of “Money, Gold & History” (TLI Books, 2013) and Mr. Mueller is the author of “Redeeming Economics: Rediscovering the Missing Element” (ISI Books, 2014).

…It proves clearly, my long contentions on this blog, that the Treasury OIG report on IndyMac Bank was false and biased, and the FDIC’s civil suit against me (were I denied all of its allegations in the settlement document), was completely bogus, unfair, and un-American.”, Mike Perry, Former Chairman and CEO, IndyMac Bank

IndyMac Bank’s March 21, 2007 Safety and Soundness Examination

IndyMac Bank’s March 9, 2007 Presentation of Examination Findings

For other IndyMac Bank/FDIC Legal documents, the public docket record is available (upon registration) here:

https://ecf.cacd.uscourts.gov/cgi-bin/DktRpt.pl?753658197924624-L_1_0-1

The title of the case is:

UNITED STATES DISTRICT COURT for the CENTRAL DISTRICT OF CALIFORNIA (Western Division – Los Angeles)

CIVIL DOCKET FOR CASE #: 2:10-cv-04915-DSF-CW

This particular docket # is found here:

https://ecf.cacd.uscourts.gov/doc1/031015396282

…So, now let’s look at the Pasadena teacher. She made $25,000 when she started 30 years ago and today she makes $80,000. She’s complaining she is falling behind financially, but that 30 year pay change is a nominal increase of 220% or 3.95% a year, during a period when our government says inflation (CPI) averaged about 2.62% a year. In other words, based on the government’s inflation figures, she earned a real wage increase of 1.33% a year. In real terms, her teaching wage went from $25,000 to $37,200, an increase of 49%. That’s pretty massive, if right. In other words, she should be able to buy almost 50% more goods and services (the items in the CPI index), with her 2016 wage than she was able to when she started as a teacher 30 years ago. Do you believe that’s true or do you believe her? I believe her, so what’s wrong? First, the national CPI index has imbedded in it national costs and a national rent index, certainly not California home prices. But, maybe even the more important issue, is what Ron Paul discusses in his book “End the Fed” (Many libertarian, Nobel Laureate, and Austrian-school economists and financial experts have similar views.) and what I have discussed about Nixon fully taking us off the gold standard in 1971 (remember, since that time Gold has appreciated in dollar terms at over 8% a year). Ron Paul and others believe that the government’s inflation statistics are wrong and that the price of gold (in dollar terms) better reflects the real rate of monetary inflation. I think Mr. Paul and others who agree with him may be right. So let’s go back to our Pasadena teacher. Gold is $1,250 an ounce today, but 30 years ago it was $342 an ounce. In other words, Gold has appreciated 4.41% a year over that timeframe. So, if you assume Gold’s price change is a more accurate interpretation of the real inflation rate, our Pasadena school teacher’s 3.95% annual raise, lost 0.46% a year to annual monetary inflation (4.41%). So, her real wage actually declined from $25,000 in 1986 to $21,800 in 2016, a 13% decline in her ability to purchase goods and services. Doesn’t that seem more like it? If you agree, maybe it is time to “End the Fed” and put us back on a monetary system that is more fixed and stable than the present one. Today, the U.S. dollar is no longer backed by gold, as it had been from the Country’s founding until 1971. It’s backed only by the promise of our government. That’s called a “fiat” (by fiat of the government) currency.” Mike Perry, former Chairman and CEO, IndyMac Bank

http://www.latimes.com/business/la-fi-wage-growth-california-20160408-story.html

What’s your chance of a pay raise? In California, it depends on what you’re doing

Natalie Kitroeff

Presidential candidates from both parties have spent months hammering home the point that wages haven’t budged for American workers. But here in California, there are raises to be had. It just depends on the field you work in.

Fernando Campos is in the right place: high technology. He was paid only $25,000 when he started in his first tech job, in 2011, as a salesman at Betterworks in Santa Monica. The start-up failed about a year after he joined.

“It was brutal. I was really racking up credit card bills,” Campos, 29, said. But then he got a job, and a significant raise, at a Bay Area start-up. In 2014, he left to found his own business, CommerceLabs. Now, he says, he is “making many multiples of what we were making at Betterworks.”

In the last five years, wages per worker have increased 15% in California, faster than the vast majority of the country. Adjusting for inflation, the uptick is about 6%.

Pay has skyrocketed for a small share of Californians, most of whom are in already well-compensated fields. But large swaths of the state’s workforce in lower-paid jobs have seen compensation only inch up, if it has risen at all.

The 482,000 people who work in the state’s tech, publishing, entertainment and other information businesses have seen their average weekly wages rise 44% since 2010 not adjusted for inflation, according to an analysis of data from the Bureau of Labor Statistics. That can include tips, bonuses, paid vacation time and stock options.

Meanwhile, the 5.2 million people who work in education, health and hospitality have gotten modest raises — and in some cases have taken pay cuts.

“The better off are getting better off, and the worse off aren’t getting any better off,” said Alec Levenson, an economist at USC. “Economic gains are not spreading as uniformly across the population as they used to.”

The idea that wages aren’t increasing has become mainstream, thanks partly to presidential candidates Donald Trump and Bernie Sanders, who have outperformed expectations by tapping into deep-seated frustration over pay.

Indeed, from the 1980s through 2014, hourly compensation per worker grew by 0.9% per year, according to a 2015 report by President Obama’s Council of Economic Advisers.

Pay has not been immobile for everyone, though. In the last three decades, inflation-adjusted wages have grown by 35% for the highest earners in the country. Compensation for the lowest-paid workers declined during that period.

In California, where pay has grown at a faster clip than most states, wages have risen only slightly for those in healthcare, hospitality, transportation, construction and education. Outside of professional services, those fields have added the most jobs in California since 2010.

“The fact that those people weren’t gaining [as much] while we were expanding, that’s troubling. It’s an indication of how we are doing as an economy,” Levenson said.

There’s a straightforward explanation for why fast-growing professions do not reward their workers with big raises, Levenson said. Some of the largest industries are heavy with jobs that a lot of people are prepared to do effectively.

“Even if the field is expanding, it’s relatively easy to find people to fill those jobs without raising compensation,” Levenson explained.

A programmer, on the other hand, will be paid more and will tend to get more raises because he or she has less competition in the job market — there are simply fewer Americans who can do that work.

Healthcare workers may also be suffering because of the society-wide push to lower health spending, Levenson said.

Educators in California may also have faced unique pressures in recent years. During the recession, the state cut its per-pupil spending significantly to mitigate a growing budget deficit. After 2012, spending gradually picked up.

That was the year Kathy Anderson, a 54-year-old teacher in Pasadena, got her last raise. Her union negotiated a 3% pay bump.

“A raise of 3% is an insult, frankly,” says Anderson. It was still better than nothing. In the wake of the recession, teachers in Pasadena and other school districts took a pay cut, and agreed to unpaid days off. Before 2012, Anderson had not gotten a raise in six years.

When she started teaching English language arts to high schoolers 30 years ago, Anderson made around $25,000. Now she makes $80,000. That means her pay has gone up by about $1,800 on average for every year she’s been in the classroom.

“I go more into debt every year,” Anderson says. “We teachers say we didn’t get into teaching for the money, and that’s true, but it would really be nice to have money to live a good life.”

Overall, Americans seem relatively optimistic about their pay. Forty-six percent of employees said they expected a raise or an increase in compensation in line with cost of living expenses in 2016, according to a March survey of 2,000 workers by Glassdoor, which tracks salaries. Just 36% of workers anticipated a bump in 2009.

Ben Callaway says he has the privilege of deciding to earn more money this year. The 36-year-old freelance programmer does not have a LinkedIn profile or a website, and he doesn’t advertise his services through recruiters. Still, his work has picked up in recent months, and he sometimes finds himself in a position to turn down jobs.

“There is a glut of work to be done,” Callaway said. A born tinkerer, Callaway spent nearly four years working at a Los Angeles-based media company doing Web programming before deciding to go it alone.

He finds the ease with which he can support himself a little unsettling.

“I think it’s strange when I see my friends who are teachers, something I think is immediately useful, and they can’t find jobs, whereas I have to be really selective about what jobs I take,” Callaway said.

A version of this article appeared in print on April 14, 2016, in the Business section of the Los Angeles Times with the headline “Chasing pay – Some Californians have received big bumps in salary in recent years, but many in lower-paid jobs have seen small or no raises”

…Virtually all of the undercapitalization, overleveraging and “reckless risks” flowed from government policies and institutions. Federal regulators followed international banking standards that treated most subprime-mortgage-backed securities as low-risk, with lower capital requirements that gave banks the incentive to hold them. Government quotas forced Fannie Mae and Freddie Mac to hold ever larger volumes of subprime mortgages, and politicians rolled the dice by letting them operate with a leverage ratio of 75 to one—compared with Lehman’s leverage ratio of 29 to one. Regulators also eroded the safety of the financial system by pressuring banks to make subprime loans in order to increase homeownership. After eight years of vilification and government extortion of bank assets, often for carrying out government mandates, it is increasingly clear that banks were more scapegoats than villains in the subprime crisis. Similarly, the charge that banks had been deregulated before the crisis is a myth. From 1980 to 2007 four major banking laws—the Competitive Equality Banking Act (1987), the Financial Institutions, Reform, Recovery and Enforcement Act (1989), the Federal Deposit Insurance Corporation Improvement Act (1991), and Sarbanes-Oxley (2002)—undeniably increased bank regulations and reporting requirements. The charge that financial regulation had been dismantled rests almost solely on the disputed effects of the 1999 Gramm-Leach-Bliley Act (GLBA). Prior to GLBA, the decades-old Glass-Steagall Act prohibited deposit-taking, commercial banks from engaging in securities trading. GLBA, which was signed into law by President Bill Clinton, allowed highly regulated financial-services holding companies to compete in banking, insurance and the securities business. But each activity was still required to operate separately and remained subject to the regulations and capital requirements that existed before GLBA. A bank operating within a holding company was still subject to Glass-Steagall (which was not repealed by GLBA)—but Glass-Steagall never banned banks from holding mortgages or mortgage-backed securities in the first place. GLBA loosened federal regulations only in the narrow sense that it promoted more competition across financial services and lowered prices. When he signed the law, President Clinton said that “removal of barriers to competition will enhance the stability of our financial system, diversify their product offerings and thus their sources of revenue.” The financial crisis proved his point. Financial institutions that had used GLBA provisions to diversify fared better than those that didn’t. Mr. Clinton has always insisted that “there is not a single solitary example that [GLBA] had anything to do with the financial crisis,” a conclusion that has never been refuted. When asked by the New York Times in 2012, Sen. Elizabeth Warren agreed that the financial crisis would not have been avoided had GLBA never been adopted. And President Obama effectively exonerated GLBA from any culpability in the financial crisis when, with massive majorities in both Houses of Congress, he chose not to repeal GLBA. In fact, Dodd-Frank expanded GLBA by using its holding-company structure to impose new regulations on systemically important financial institutions.”, Phil Gramm and Michael Solon, Excerpt from The Great Recession Blame Game, The Wall Street Journal, April 16, 2016, Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Solon is a partner of US Policy Metrics.

Opinion

The Great Recession Blame Game

Banks took the heat, but it was Washington that propped up subprime debt and then stymied recovery.

PHOTO: SHIVENDU JAUHARI/ISTOCK

By Phil Gramm and Michael Solon

When the subprime crisis broke in the 2008 presidential election year, there was little chance for a serious discussion of its root causes. Candidate Barack Obama weaponized the crisis by blaming greedy bankers, unleashed when financial regulations were “simply dismantled.” He would go on to blame them for taking “huge, reckless risks in pursuit of quick profits and massive bonuses.”

That mistaken diagnosis was the justification for the Dodd-Frank Act and the stifling regulations that shackled the financial system, stunted the recovery and diminished the American dream.

In fact, when the crisis struck, banks were better capitalized and less leveraged than they had been in the previous 30 years. The FDIC’s reported capital-to-asset ratio for insured commercial banks in 2007 was 10.2%—76% higher than it was in 1978. Federal Reserve data on all insured financial institutions show the capital-to-asset ratio was 10.3% in 2007, almost double its 1984 level, and the biggest banks doubled their capitalization ratios. On Sept. 30, 2008, the month Lehman failed, the FDIC found that 98% of all FDIC institutions with 99% of all bank assets were “well capitalized,” and only 43 smaller institutions were undercapitalized.

In addition, U.S. banks were by far the best-capitalized banks in the world. While the collapse of 31 million subprime mortgages fractured financial capital, the banking system in the 30 years before 2007 would have fared even worse under such massive stress.

Virtually all of the undercapitalization, overleveraging and “reckless risks” flowed from government policies and institutions. Federal regulators followed international banking standards that treated most subprime-mortgage-backed securities as low-risk, with lower capital requirements that gave banks the incentive to hold them. Government quotas forced Fannie Mae and Freddie Mac to hold ever larger volumes of subprime mortgages, and politicians rolled the dice by letting them operate with a leverage ratio of 75 to one—compared with Lehman’s leverage ratio of 29 to one.

Regulators also eroded the safety of the financial system by pressuring banks to make subprime loans in order to increase homeownership. After eight years of vilification and government extortion of bank assets, often for carrying out government mandates, it is increasingly clear that banks were more scapegoats than villains in the subprime crisis.

Similarly, the charge that banks had been deregulated before the crisis is a myth. From 1980 to 2007 four major banking laws—the Competitive Equality Banking Act (1987), the Financial Institutions, Reform, Recovery and Enforcement Act (1989), the Federal Deposit Insurance Corporation Improvement Act (1991), and Sarbanes-Oxley (2002)—undeniably increased bank regulations and reporting requirements. The charge that financial regulation had been dismantled rests almost solely on the disputed effects of the 1999 Gramm-Leach-Bliley Act (GLBA).

Prior to GLBA, the decades-old Glass-Steagall Act prohibited deposit-taking, commercial banks from engaging in securities trading. GLBA, which was signed into law by President Bill Clinton, allowed highly regulated financial-services holding companies to compete in banking, insurance and the securities business. But each activity was still required to operate separately and remained subject to the regulations and capital requirements that existed before GLBA. A bank operating within a holding company was still subject to Glass-Steagall (which was not repealed by GLBA)—but Glass-Steagall never banned banks from holding mortgages or mortgage-backed securities in the first place.

GLBA loosened federal regulations only in the narrow sense that it promoted more competition across financial services and lowered prices. When he signed the law, President Clinton said that “removal of barriers to competition will enhance the stability of our financial system, diversify their product offerings and thus their sources of revenue.” The financial crisis proved his point. Financial institutions that had used GLBA provisions to diversify fared better than those that didn’t.

Mr. Clinton has always insisted that “there is not a single solitary example that [GLBA] had anything to do with the financial crisis,” a conclusion that has never been refuted. When asked by the New York Times in 2012, Sen.Elizabeth Warren agreed that the financial crisis would not have been avoided had GLBA never been adopted. And President Obama effectively exonerated GLBA from any culpability in the financial crisis when, with massive majorities in both Houses of Congress, he chose not to repeal GLBA. In fact, Dodd-Frank expanded GLBA by using its holding-company structure to impose new regulations on systemically important financial institutions.

Another myth of the financial crisis is that the bailout was required because some banks were too big to fail. Had the government’s massive injection of capital—the Troubled Asset Relief Program, or TARP—been only about bailing out too-big-to-fail financial institutions, at most a dozen institutions might have received aid. Instead, 954 financial institutions received assistance, with more than half the money going to small banks.

Many of the largest banks did not want or need aid—and Lehman’s collapse was not a case of a too-big-to-fail institution spreading the crisis. The entire financial sector was already poisoned by the same subprime assets that felled Lehman. The subprime bailout occurred because the U.S. financial sector was, and always should be, too important to be allowed to fail.

Consider that, according to the Congressional Budget Office, bailing out the depositors of insolvent S&Ls in the 1980s on net cost taxpayers $258 billion in real 2009 dollars. By contrast, of the $245 billion disbursed by TARP to banks, 67% was repaid within 14 months, 81% within two years and the final totals show that taxpayers earned $24 billion on the banking component of TARP. The rapid and complete payback of TARP funds by banks strongly suggests that the financial crisis was more a liquidity crisis than a solvency crisis.

What turned the subprime crisis and ensuing recession into the “Great Recession” was not a failure of policies that addressed the financial crisis. Instead, it was the failure of subsequent economic policies that impeded the recovery.

The subprime crisis was largely the product of government policy to promote housing ownership and regulators who chose to promote that social policy over their traditional mission of guaranteeing safety and soundness. But blaming the financial crisis on reckless bankers and deregulation made it possible for the Obama administration to seize effective control of the financial system and put government bureaucrats in the corporate boardrooms of many of the most significant U.S. banks and insurance companies.

Suffocating under Dodd-Frank’s “enhanced supervision,” banks now focus on passing stress tests, writing living wills, parking capital at the Federal Reserve, and knowing their regulators better than they know their customers. But their ability to help the U.S. economy turn dreams into businesses and jobs has suffered.

In postwar America, it took on average just 2 1/4 years to regain in each succeeding recovery all of the real per capita income that had been lost in the previous recession. At the current rate of the Obama recovery, it will take six more years, 14 years in all, for the average American just to earn back what he lost in the last recession. Mr. Obama’s policies in banking, health care, power generation, the Internet and so much else have Europeanized America and American exceptionalism has waned—sadly proving that collectivism does not work any better in America than it has ever worked anywhere else.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Solon is a partner of US Policy Metrics.