Phil Cannella – Phillip Cannella News

Phil Cannella: “These mortgage-backed securities…

isn’t this a result of a federal program known as “everyone can afford a mortgage” back in ’03?”

Andrew Huszar: “Yes, I think it goes beyond that. It really goes back to the early 80s in the U.S. when we came up with the new model where, rather than make loans and hold on to them, banks increasingly began to make loans and package them into securities and sell them to investors. So this is really a Wall Street innovation that The Federal Government then got involved in and started ensuring the performance of those bonds. It’s really a combination, I’d say, of Wall Street innovation and the U.S. Government getting in on it as well.”
Phil Cannella: “Is QE 3 one big band aid for failed Federal Government Programs?”

Andrew Huszar: “I think The Federal Government helped grease the skids for what happened, but I still would argue that we really started with banks. Banks are the ones who are making loans and this started again as early as the early 80s, where banks started being much more aggressive about lending and who they were lending to. And over the course of 25 years we saw lending standards progressively deteriorate in America. Some of that was definitely a result of regulation or lack of regulation, and perhaps some incentives put in place in terms of trying to extend lending to more Americans, and some of it was the result of Wall Street just getting addicted to profits from lending and having access to really cheap funding from interest rates being really low, and getting really aggressive about lending because ultimately, in their minds, they weren’t holding on to the risk any more. They were actually selling it to the market, and there was a global market that had developed for these bonds. So I think we’ve gotten to a place just as a country where, we stopped thinking seriously about the risk of lending and that actually encompasses both Washington as well as Wall Street”

Phil Cannella: “Has deregulation contributed to our economic problems?”

Andrew Huszar: “I think if you look at regulation and what we’ve done in America with regulation and how we’re thinking about it, we have slowly eroded some of the very basic and really bright line limitations of what we had around banks. But I also would paint a little bit of a different picture. Let’s look at what’s happening in the U.S. economy overall. So Wall Street as a percentage of the U.S. economy has doubled from the mid 80s to right before the financial crisis. So basically, Wall Street accounted for 20% of corporate profits in America in the mid 1980s, and by the financial crisis it was at 40% of corporate profits, and you also have this idea where… or you have this huge concentration of banks where we allowed our banks to get much bigger. So in the mid 1980s, what 87 banks controlled in terms of the asset size, by 20 years later, 6 banks controlled. So we had this huge explosion in the banking sector and huge explosion in concentration of bank size, and what was that really doing? Well it was compensating for the fact that in the underlying economy we stopped making a lot of the investments in our economy that we need to, whether that’s infrastructure, education, whether we thought strategically about our taxes or our regulation. We started trying to use credit to compensate for the fact that the median… The income of the average American has been basically on a 35-year decline and the answer seems to have been, until those financial crisis, ‘let’s let more Americans have access to credit’, and so the average American from the mid 1980s to the financial crisis, as Wall Street was exploding in size and concentration, the average American became three times more indebted during that period of time.”

Hear more from the interview with Phil Cannella and Andrew Huszar on The Crash Proof Retirement Show®. Saturdays at 11am and Sundays at 1pm on Talk Radio 1210AM, WPHT!