A Capital Writing interview with the author of Shelter from the Storm.
A Capital Writing interview with the author of Shelter from the Storm.
As part of a project for Capital Matters, called Capital Writing, I’ll be interviewing authors of economics books for the National Review Institute’s YouTube channel. This time, I talked to Mark Calabria about his book, Shelter from the Storm: How a Covid Mortgage Meltdown was Averted. Calabria served as the director of the Federal Housing Finance Agency from 2019 to 2021 and before that was chief economist to Vice President Mike Pence. He is currently a senior adviser at the Cato Institute. Below you will find an edited transcript of a few key parts of our conversation as well as the full video of our interview.
Dominic Pino: You were the director of the Federal Housing Finance Agency. You often say that people misunderstand what the FHFA does. What in the world does it do?
Mark Calabria: Great question. Its primary purpose is to be a safety and soundness regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. And the conceptual way to think about this is that markets and government have created an implied guarantee behind them, the GSEs, the government-sponsored enterprises, and that creates moral hazard just as you see with deposit insurance and other things. And so again the job of the agency is to try to contain that moral hazard, to protect the financial system and protect the taxpayer. So it’s really a safety and soundness regulator and you should envision it as an attempt to try to control risk that government itself has created.
DP: One of the things that we talk about with mortgages is always Fannie and Freddie. These are two very strange companies that we always refer to on a first-name basis. That’s really not a thing we do other places, but they’re also weird in the way that they’re set up and in the way that they operate. Can you just sort of explain a little bit, because I don’t think a lot of people really fully get what they do.
MC: Absolutely. The structure of Fannie and Freddie are supposed to be private shareholder-owned companies with charters from Congress. The typical corporation would go to Delaware or another state and get a corporate charter. These are corporate charters that are handed out by Congress. They’re not allowed to buy mortgages from you or me. We don’t go and get our mortgage from Fannie and Freddie. We go get our mortgage from a mortgage originator, typically a lender of some sort. And they sell that mortgage to Fannie and Freddie.
Now they were created to be kind of a lender of last resort, kind of like the Fed in a way, where you could sell them and get liquidity. And it was supposed to be for stress situations, countercyclical, and of course, over time it’s grown to be very pro cyclical. That is, it expands with the marketplace. And so they have a very big footprint, they end up essentially being a duopoly of sorts for much of the mortgage market. They functionally failed in 2008, and have since been in what’s called a conservatorship, which is essentially an administrative government-run bankruptcy. It’s kind of like a chapter seven, but done by a regulator rather than by a judge.
DP: Can we talk about the conservatorship a little bit? Like you said, it’s similar to bankruptcy, but obviously bankruptcy is usually a thing that ends. Fannie and Freddie are still in this conservatorship many years later and with really no end in sight.
MC: We have had a few railroad bankruptcies in American history that actually went for decades, but those are the anomaly. I was on Capitol Hill going into the 2008 crisis, first working for Phil Gramm and then later for Richard Shelby. And so I had the benefit of actually working on and drafting much of the statute that created FHFA and the conservatorship framework. We borrowed from the framework at FDIC. So if you think about the recent bank failures that were taken into conservatorship or bridge banks, that’s largely what we were trying to reproduce. And it wasn’t meant to be never-ending. It was meant to be: the companies fail, you right-size the balance sheets, you clean them up and you get them back out. So it wasn’t meant to be an endless bailout and wasn’t meant to be endless government control.
One of the topics of the book is this kind of frustration of mine of having worked on the statute, but more broadly that frustration I think many of us share: Wouldn’t it be nice if government just followed the law? And that’s a real theme of the book about how the agency over time, and even Fannie and Freddie over time, have drifted away from what the law says and how, running that agency, I tried to get the agency and Fannie and Freddie all back within the four corners of where Congress put them.
I consider myself an Article I constitutionalist. What I mean by that is, the big decisions are made by Congress, not by the regulators. Whether I thought there should be a Fannie or Freddie or not, that’s Congress’s call. My job was to carry out what Congress had dictated to me in the statute. I’m hopeful. We did a lot of work and if it wasn’t for Covid and the election, we would have gotten Fannie and Freddie reprivatized. The clock ran out on us and obviously the pandemic took over many of our agendas. But you know, the plans are there on the shelf. A lot of work was done when I was there. And so I am hopeful that the next Republican administration will finally fix these strange creatures.
DP: You said the next Republican administration. Why is it that Democratic administrations don’t seem to view that as a bigger priority?
MC: It’s a great question because I’d like to think we should all share the philosophy of simply following the law and the decisions that Congress has made. I think the Biden administration, and to a degree the Obama administration, looked at this partly as: We have them now and we’re going to use them for whatever purposes we want. And they’ve become kind of off-budget slush funds, if you will, and they’ve pursued agendas without a real basis in the law. And unfortunately, nobody’s really got an avenue to sue to stop the administration. So it’s one of these things like, “Well, who’s got standing? We’re going to do it anyhow.”
And I think, unfortunately, not a lot of members of Congress really get it. So you don’t get as much pushback. You get pushback sometimes from Republicans, but it’s a complicated set of issues. It’s also complicated by the fact that a lot of people within the real-estate industry who are generally pretty friendly with Republicans aren’t necessarily uncomfortable with the status quo. The taxpayer really is not being heard at the table. And that’s part of the problem. They were heard during the process of drafting legislation, but they really aren’t there pressing it every day. And so I do think there’s a real concern. And again, the Democrats have largely used this as a way to create a slush fund.
There’s also something I mentioned earlier, the concept of an implied guarantee. Now, there’s a degree to which that sounds like a contradiction in terms. I mean, how can it be a guarantee if it’s not on paper? The guarantee is essentially, despite this law saying that there’s no backing and creditors to Fannie and Freddie are at risk, there’s the Wall Street expectation that they will be rescued. And one of the things I found was that the biggest opponents of letting Fannie and Freddie out of conservatorship and reprivatizing them were actually companies like BlackRock and PIMCO because they hold a lot of Fannie and Freddie debt and they want the taxpayer to be behind it. Their argument is essentially that as long as it’s controlled by the government via the conservatorship, then we, the American public, are on the hook. And again, that’s not legally the case. But a lot of this is really in that gray area. So there’s a fair amount of Wall Street opposition to actually fixing the companies, and a fair amount of industry opposition. And again, there’s sort of left-wing advocacy that leaves looks at these as slash funds. The sad truth is that there really isn’t a constituency looking out for the broader American public pushing back on this.
DP: I took you to be saying in the book that you didn’t think the eviction moratorium that was started under the Trump administration and continued under the Biden administration was needed.
MC: Correct. Part of it is we had all of these warnings of so-called eviction tsunamis, and I think it misunderstands a fundamental relationship between the landlord and the tenant. I say this partly as someone who’s been a landlord: A good tenant is golden. Anybody who’s been a landlord knows that all it takes is one or two bad tenants to erode any profits you’ve had. There’s this view that landlords are trigger-happy to throw you out of the house. No. That may be true with a bad tenant or a destructive tenant or a late tenant, but not a good tenant. Also keep in mind, we were in a pandemic. The ability of a landlord to evict somebody, when the courts are closed, and when the sheriff’s deputy doesn’t want to come through the house — and then you think you’re going to easily get somebody else in there? There were very strong incentives for landlords to work with tenants. And we saw that. And it’s one reason why the predictions of eviction tsunamis did not happen.
My view is that I think it was largely politically driven. And one of the things I do talk about in the book is that the eviction moratorium initially really did come from President Trump. It wasn’t something from others in the administration. I find that particularly fascinating, given how much of his career has been as a landlord. It also bears remembering that there was a patchwork of eviction moratoriums across jurisdictions.
A lot of factors here, but one of the themes of the book is that you need to take a data-driven, calm, thoughtful approach in crises and not give in to the panic. Because it’s the panic when people say, let’s spend untold amounts of money and let’s not think about the consequences of it. I hope to have shown that you can have a thoughtful, deliberative, targeted, and cautious approach to crisis response that doesn’t imply you do nothing.
DP: You talk about how you were able to get along with people you disagreed with, even people who had very strongly different political views. But to the extent that there’s a villain in this book, it’s Wall Street. And free marketers like you and me often get accused of being shills for Wall Street. First of all, why do we get accused of that, and second of all, what was it that made Wall Street such a problem?
MC: Partly, I think it’s just laziness by most of the press. You can throw that at somebody. To the extent that one can have a fun moment during a confirmation hearing where you’re getting grilled, there was a moment when New Jersey Senator Menendez was accusing me of being a Wall Street stooge, basically. And my response to him was that one of the proudest moments of my life was to be on the Senate floor standing beside my boss, Senator Shelby, fighting the big-bank bailout TARP. And of course, Senator Menendez voted for TARP. So he immediately was kind of like, oh, wait, I’m the Wall Street bailout guy? I didn’t have to say that, but that was clear.
And the unfortunate truth is there are the Hank Paulsons in the Republican party who are fairly pro–Wall Street. Fortunately, and I think this is less appreciated, from the time I was on Capitol Hill, leading up to 2008, the influence of Wall Street on the Republican Party is considerably less than it was. And in fact, it was funny to watch during the debt-ceiling debates where the Democrats were lamenting that Wall Street has less influence on Republicans. Wall Street has a tremendous influence on the Democrat Party as well, I would argue more.
Some of the complaints from Wall Street is that there was this assumption that there would be rescues. I’m hesitant to paint with a broad brush because there are very hard-working and smart people who actually put money at risk and take the losses in lots of parts of our financial system. And then unfortunately, there are large parts of the financial system where it’s heads they win, tails they want the taxpayer to take the loss. And you see a lot of that on Wall Street.
Wall Street makes a lot of money on underwriting debt securities from Treasury. They make a lot of money off Fannie and Freddie. As I talk about in the book, the Fannie and Freddie debt market is the second-biggest debt market in the world, second only to Treasuries. So this is a tremendous amount of fee income for Wall Street. It really is a sort of feeding frenzy for the financial markets that has no resemblance to actual capitalism, in my view.
I think Republicans need to be honest about what are the parts of the financial system that support free markets and support growth, and what parts of it are cronyism. I’d be the first to say there are gray areas. But there really is an attitude on Wall Street that they should be rescued, that they are so important that they cannot take losses. And of course, my view is that capitalism only works as a profit-and-loss system. You have to have a way to weed out ineffective institutions. In fact, I think the uninsured depositors forcing the closure of Silicon Valley Bank was a good thing, because I can tell you that regulators would have taken another six, twelve months to do anything and the hole would have been deeper. So you need more market discipline. And of course, it’s not just Wall Street. I know, Dominic, you and I think market discipline is important, but it’s also fair to say that not everybody likes to be on the receiving end of market discipline.
DP: One of the things in this book that stuck with me is, at least in the housing-regulatory area, one of the ways to shrink government is just to follow the law as written.
MC: This was a big lesson that I want anybody who serves in government to take away, which is: If all we can accomplish is simply to get the government within the limit of the law, that’s a big accomplishment. In my experience, maybe I had one or two examples of where a member of Congress might have asked me to do something that wasn’t legal. And I said respectfully, “I don’t have the authority to do that, so we’re not going to do that.” Anytime, I think pretty much 100 percent of the time, when lobbyists, advocates came in and asked me to do something we didn’t have the authority to do, once I explained, “Here’s the four corners of law, if you’d like to have this done, you need to go get Congress to do it, and I’ll be happy to carry it out,” nobody really argued with that. They didn’t love it, but they respected it and they understood it. They were at least hesitant to ask you to just violate the law. I picked up the statutes and read.
Another lesson from the book for future political appointees is you cannot micromanage the government bureaucracy, but you also cannot simply delegate to the legal staff. You will sign your name to all sorts of things of questionable legality if you don’t actually pick up the statutes and read them yourself. Even if you’re not a lawyer. I’m an economist, not a lawyer. The number of times where I stumped government lawyers with questions that they really should have known is shocking. You’ll get all sorts of shoddy, half done, half-baked legal advice if you don’t actually do your own work. I also benefited from bringing in a lawyer that I trusted to kind of review the work I got. But you have to double-check it yourself.
I started at an agency where one of the very first actions I had to take was settling the sexual-harassment claim against my predecessor. There was horrible morale at the agency. As you could imagine, the politics of the staff at the agency were not my own. And we really turned the agency around, we turned morale around and we got people to back us. I walked through some of the ways in which we did that in the book. But one of the ways that really resonated was we grounded everything we were doing in the law, the statute.
It was something the staff could understand. Obviously, they could go to law and read it, so they knew we weren’t pursuing our own agenda. And I think it really gave them direction and gave them a sense of “we’re all in this together.” To use a military term, you have to think of the career staff as a force multiplier for you. You will limit your own effectiveness if you can’t get them behind you. You have to be able to get them behind you with a very simple, straightforward message. One that resonates is implementing and following the law. This may not work at every agency, but I found it worked well for me. I found it was something where you’re not engaging with a debate because you can say, “Listen, that’s fascinating, that’s interesting, but that’s not what the law says, and we’re going to do what the law says.”
If you don’t insert yourself into the role of Congress, you save a lot of brain bandwidth. Because you can simply say, here’s a whole set of issues that Congress has decided. I’m not even thinking about that. That is somebody else’s job. I’m thinking about what I can fix. And I can guarantee you there’s enough that you can fix within your own power that you don’t really want to go down the sidetrack of debating the broader issues. As a think-tank employee, my job is to think about the bigger issues, but as a regulator, your job is to follow the will of Congress, to the extent that it is constitutional.
