[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


                     THE DODD-FRANK ACT FIVE YEARS
                     LATER: ARE WE MORE PROSPEROUS?

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 28, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-47
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 28, 2015................................................     1
Appendix:
    July 28, 2015................................................    53

                               WITNESSES
                         Tuesday, July 28, 2015

Gramm, Hon. Phil, Senior Partner, U.S. Policy Metrics; and former 
  United States Senator..........................................     6
Miller, Hon. R. Bradley, Of Counsel, Grais & Ellsworth LLP; and 
  former Member of Congress......................................     7
Wallison, Peter J., Arthur F. Burns Fellow in Financial Policy 
  Studies, American Enterprise Institute.........................     9

                                APPENDIX

Prepared statements:
    Gramm, Hon. Phil.............................................    54
    Miller, Hon. R. Bradley......................................    60
    Wallison, Peter J............................................    63

              Additional Material Submitted for the Record

Capuano, Hon. Michael:
    Written responses to questions for the record submitted to 
      Peter J. Wallison..........................................    80

 
                     THE DODD-FRANK ACT FIVE YEARS
                     LATER: ARE WE MORE PROSPEROUS?

                              ----------                              


                         Tuesday, July 28, 2015

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:06 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Garrett, 
McHenry, Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, 
Duffy, Hurt, Stivers, Fincher, Stutzman, Mulvaney, Hultgren, 
Ross, Pittenger, Barr, Rothfus, Messer, Schweikert, Guinta, 
Tipton, Williams, Poliquin, Love, Hill, Emmer; Waters, Maloney, 
Sherman, Hinojosa, Clay, Lynch, Scott, Himes, Carney, Delaney, 
Sinema, Beatty, and Heck.
    Chairman Hensarling. The Financial Services Committee will 
come to order. Without objection, the Chair is authorized to 
declare a recess of the committee at any time.
    Today's hearing is entitled, ``The Dodd-Frank Act Five 
Years Later: Are We More Prosperous?'' This is the second of 
three hearings examining the impact of the Dodd-Frank Act. The 
first was entitled, ``The Dodd-Frank Act Five Years Later: Are 
We More Stable?'' and the third hearing will be entitled, ``The 
Dodd-Frank Act Five Years Later: Are We More Free?''
    The Chair wishes to alert all Members that the Chair 
intends to close the hearing and adjourn at 1 p.m.
    The Chair now recognizes himself for 3 minutes to give an 
opening statement.
    Under the Obama economic strategy, of which Dodd-Frank is a 
central pillar, our economic--our anemic recovery, rather--has 
created 12.1 million fewer jobs than the average recovery since 
World War II. For more than a year now, the share of able-
bodied Americans in the labor force has hovered at the lowest 
level in nearly 40 years. Small business startups are at the 
lowest level of a generation.
    Had this recovery simply been as strong as average previous 
ones, middle-income families would have nearly $12,000 more in 
annual income, and 1.6 million more of our fellow Americans 
would have escaped poverty. This is simply unacceptable.
    But more than the numbers, my constituents' angst tells me 
all I need to know. One wrote me not long ago, ``There are 
part-time jobs around my area, but always jobs with no benefits 
and less than 40 hours. My son is a disabled Iraqi Freedom 
combat veteran who has lost hope of finding a decent full-time 
job.''
    I suspect most Members of Congress unfortunately still 
receive letters just like these. The painful truth is that 
Dodd-Frank and the hyper-regulated Obama economy are failing 
low- and moderate-income Americans who simply want their fair 
shot at economic opportunity and financial security.
    As we know, a recent Federal Reserve report stated that 
within a few years, roughly one-third of all Black and Hispanic 
borrowers may find themselves disqualified from obtaining a 
mortgage to buy a home because of Dodd-Frank's qualified 
mortgage rule, which is based solely on a rigid debt-to-income 
requirement.
    Because of Dodd-Frank, free checking at banks has been cut 
in half. Furthermore, according to the FDIC, more than 9 
million households don't have a checking or a savings account 
principally because account fees are too high or unpredictable, 
another consequence of Dodd-Frank.
    Dodd-Frank's 2,300 pages launched a salvo of consequences 
that have crippled growth. It was advertised to target Wall 
Street, but instead it has hit Main Street. It has had 
pernicious effects on small businesses and community financial 
institutions, which are the lifeblood of the Main Street 
economy.
    Community banks and credit unions supply the bulk of small 
business and agricultural loans. The combined weight of Dodd-
Frank's 400 regulations is dragging them down. We are losing 
one community financial institution a day.
    But Dodd-Frank goes far beyond banks and credit unions. Its 
corporate governance provisions hit every public company in 
America including grocery chains, cable TV servers, and bowling 
alley chains.
    They didn't cause the financial meltdown but still must 
comply with regulations imposing wage controls, salary ratios, 
and private compensation disclosures made for big Wall Street 
firms. Every dollar these businesses are forced to spend on 
hiring lawyers and accountants to help explain this gibberish 
is taken out of working people's wages and capital expansion.
    No wonder the economy limps along at 2 percent GDP growth--
far below its historic norm. And no wonder low- and moderate-
income Americans lose sleep at night worrying about their 
stagnant wages, smaller bank accounts, and childrens' future.
    Hardworking Americans deserve better than Dodd-Frank.
    The Chair now recognizes the ranking member for 5 minutes 
for an opening statement.
    Ms. Waters. Thank you, Mr. Chairman.
    And welcome, witnesses.
    I would like to acknowledge two distinguished former 
Members of Congress who are with us today: Congressman Brad 
Miller, our long-time colleague on the Financial Services 
Committee; and former Banking Committee Chairman, Senator Phil 
Gramm.
    Today's hearing is focused on whether or not we are more 
prosperous 5 years after Dodd-Frank, which was enacted after 
our Nation suffered the greatest destruction of wealth in 80 
years. Just as the Sarbanes-Oxley Act was enacted in reaction 
to several corporate and accounting scandals--most notably 
Enron--so, too, was Dodd-Frank enacted as a reaction to years 
of deregulation, lax enforcement, and zero accountability for 
the Nation's financial institutions.
    Even the legendary champion of the free market, Alan 
Greenspan, has now acknowledged that he made a mistake and that 
the market did not and cannot police itself. The crisis left an 
indelible mark on our financial system, our housing market, and 
our way of life.
    We all know the numbers: 9 million Americans lost their 
jobs; 5 million homeowners lost their homes to foreclosure; and 
$16 trillion in household wealth was destroyed.
    We have come a long way since those dark days. A new staff 
report released by committee Democrats shows unequivocally that 
Dodd-Frank has made our financial system more transparent, more 
stable, and more accountable.
    The Consumer Financial Protection Bureau (CFPB) has 
returned $10.8 billion to 17 million defrauded consumers. Over-
the-counter derivatives, once traded in the shadows, are now 
more transparent, and regulators are getting tougher on banks 
to ensure that their failure doesn't endanger the wider 
economy.
    The stability created by Dodd-Frank has allowed us and our 
Nation to once again prosper. The housing market is improving, 
the economy has added nearly 13 million private sector jobs 
over 64 consecutive months of job growth, and the unemployment 
rate has plunged down to 5.3 percent. Moreover, the average 
401(k) balance reached a record high last year, and the S&P 500 
has risen by more than 250 percent since February 2009.
    So we are more prosperous, but there is much more work to 
be done.
    The crisis exacerbated what was already an unacceptably 
large wealth gap between white and minority households. The 
current wealth gap between African-Americans and whites has 
reached its highest point since 1989. The current white-to-
Hispanic wealth ratio has reached a level not seen since 2001.
    We need to make sure that it is not just Wall Street 
bankers who are becoming more prosperous, but also the millions 
of Americans who are worried about a roof over their head, 
worried about getting a job that pays a living wage, and 
worried about being able to afford the high cost of college.
    Let me be clear: Recent history demonstrates that 
deregulation of our largest financial institutions, coupled 
with systemic disinvestment from low-income, middle-class, and 
minority neighborhoods is no way to ensure that prosperity is 
widely shared.
    In fact, later today we will mark up 14 proposals which, in 
many cases, loosen the rules for large banks whose prosperity 
doesn't need any more assistance from this committee. Instead, 
we should be focusing on the residents of public housing, the 
cities and towns still devastated from the foreclosure crisis, 
and the community banks and credit unions that need relief.
    Finally, Senator Gramm, you are the namesake of the so-
called Gramm-Leach-Bliley Act, which you don't mention in your 
testimony, but which turned our Nation's biggest banks into 
megabanks and dramatically intensified the effects of the 
crisis. Opposing that measure is among the proudest votes I 
have taken as a Member of Congress. And in the aftermath of the 
crisis, some of that law's most fervent supporters very 
publicly reconsidered their support.
    So I am very interested in hearing you discuss, after 
watching the harm and heartache of the 2008 crisis, if your 
views have at all changed.
    I thank you, and I yield back the balance of my time.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, chairman of our Monetary Policy and Trade 
Subcommittee.
    Mr. Huizenga. I am very pleased to have this conversation. 
As a former licensed REALTOR, I have seen firsthand the 
effects of Dodd-Frank in a lot of areas where frankly, people 
kind of said, ``Wait a minute. How did this Wall Street 
collapse come about through our community banks, our insurance 
companies, our small local lenders, our local REALTORS when we 
are dealing with some of the mortgages?''
    But I want to touch on a couple of things today.
    First and foremost, as I sort of dub them, the window-
dressing provisions of Dodd-Frank, and things like pay ratio. 
The Wall Street Journal had an article today stating that the 
SEC looks like it is imminent in its execution of one of its 
duties that had been foisted--a priority foisted upon them by 
Dodd-Frank, which was to come out with rules regarding pay 
ratio.
    And as we look at this--I have a bill to try to address 
that--we wonder, who does it cover, how is it calculated, why 
is it even in there, does it tell us why the collapse happened, 
and is it going to keep us from--keep it from happening again? 
Nobody has been more critical of the shortsightedness of 
business when it comes to dealing with their stock price being 
more of a focus than their long-term health, but it seems to me 
and so many others that this absolutely does nothing to get us 
further down that path.
    Another one of those window-dressing provisions would be 
conflict minerals. I chair our Monetary Policy and Trade 
Subcommittee, where we deal with the conflict minerals. And I 
think the question is, is it working, and is it workable, 
especially as we look at things like gold that are affecting 
our manufacturers? And maybe more importantly, is it helping 
those whom it was intended to help?
    And we have had continued testimony that, no, it is not. It 
is not actually helping those folks in those conflict areas 
throughout the world.
    So I look forward to having those conversations today, 
talking about qualified mortgages and what is or isn't 
happening there. And as we look into this, I think many of us 
are convinced that Dodd-Frank was more of an agenda waiting for 
a crisis than an actual solution to a problem.
    With that, Mr. Chairman, I yield back.
    Chairman Hensarling. The gentleman yields back.
    I ask unanimous consent that the gentleman from Missouri be 
yielded 1 minute. Without objection, the gentleman is 
recognized for recognition.
    Mr. Clay. Thank you, Chairman Hensarling, and Ranking 
Member Waters.
    Today, I am in a different kind of role. I am playing tour 
guide today and I brought a group of St. Louisians here--young 
ladies between the ages of 14 and 15 years old who are part of 
the St. Louis Eagles Basketball Club, and are here this week 
for a tournament. I understand they did pretty well.
    But they come from the St. Louis region and I will be 
taking them on a tour. I wanted them to get some exposure to 
what we do on a day-to-day basis in this committee, and if the 
committee could welcome them, I would appreciate it. Thank you.
    [applause]
    Thank you, Mr. Chairman. I yield back.
    Chairman Hensarling. The gentleman yields back.
    Today, we welcome the testimony of three distinguished 
panelists.
    I am especially happy to recognize and introduce the 
Honorable Phil Gramm, who is a senior partner at U.S. Policy 
Metrics. He served with distinction in the House for 3 terms, 
and in the United States Senate for 3 terms, where he authored 
such landmark laws as Gramm-Latta, Gramm-Rudman, and Gramm-
Leach-Bliley.
    Previous to his public service career, he taught economics 
for 12 years to Texas Aggies, including yours truly. He holds a 
Ph.D. in economics from the University of Georgia.
    Next, the Honorable Brad Miller, who is Of Counsel at Grais 
& Ellsworth, LLP.
    We welcome you back, sir.
    Brad Miller served in this committee room as a Member of 
the House for 10 years, including as a member of our committee. 
He is a former chairman of the House Science Committee's 
Investigations and Oversight Subcommittee.
    Prior to his election to Congress, Congressman Miller 
practiced law for more than 20 years. He holds a J.D. from 
Columbia, a master's degree from the London School of 
Economics, and a B.A. from the University of North Carolina at 
Chapel Hill.
    Last but not least, Peter Wallison is the Arthur Burns 
Fellow in Financial Policy Studies at the American Enterprise 
Institute (AEI). He is the author of many scholarly works, 
including his latest book, ``Hidden in Plain Sight,'' which I 
believe to be the definitive work on the cause of the 2008 
financial crisis.
    Prior to joining AEI, Mr. Wallison practiced banking and 
corporate and financial law at Gibson, Dunn, and Crutcher. And 
from June 1981 to January 1985, he was General Counsel at the 
U.S. Treasury Department.
    He received his undergraduate degree from Harvard and his 
law degree from Harvard Law School.
    For you two former Members of Congress, just in case you 
are a little rusty on the lighting system: green means go; 
yellow means you have a minute to go; and red means the Chair 
would really prefer for you to stop.
    Mr. Wallison, we know that you have been a frequent witness 
before us.
    So at this time, Senator Gramm, welcome once again. You are 
recognized for 5 minutes to summarize your testimony.

  STATEMENT OF THE HONORABLE PHIL GRAMM, SENIOR PARTNER, U.S. 
        POLICY METRICS; AND FORMER UNITED STATES SENATOR

    Mr. Gramm. Chairman Hensarling, Ranking Member Waters, it 
is quite an honor for me to be here today.
    I had the distinct pleasure of having a long and rich 
relationship with your chairman. Long ago and far away at Texas 
A&M I taught him money and banking. And as any old teacher 
would, I have taken great pride in what he has accomplished and 
the man he has become.
    Let me begin by answering the question about the economy. 
By any measure, we are experiencing the poorest recovery in the 
post-war history of America. If we had simply equaled the 
average of the 10 previous recoveries in the post-war period, 
14.4 million more Americans would be working today, and the 
average income of every man, woman, and child in the country 
would be over $6,000 higher.
    Five years after the enactment of Dodd-Frank, the cause and 
effects of the failed recovery can be seen throughout the 
banking system. Monetary easing by the Fed has, in fact, 
inflated bank reserves, but it has hardly had any impact on 
bank lending.
    Remarkably, today banks hold $29 of reserves for every $1 
they are required by law to hold. I don't know of a single 
instant in American history when we have remotely approached 
this situation.
    According to the FDIC, there are 1,341 fewer commercial 
banks today than there were when Dodd-Frank became law. 
Remarkably, only 2 new bank charters have been granted in the 
last 5 years. By comparison, even in the depths of the Great 
Depression, 19 bank charters a year, on average, were issued.
    As regulatory burden has exploded under Dodd-Frank, 
community banks have hired 50 percent more compliance officers 
while total employment in the industry has grown by only 5 
percent and, in fact, is still below the pre-crisis level.
    According to a study by the American Bankers Association 
that was issued last week, increasing regulatory burden has led 
almost half of all commercial banks in America to reduce their 
offering of financial products and services.
    In the Securities Exchange Act of 1934, and most subsequent 
banking law prior to Dodd-Frank, the powers granted to 
regulators by Congress were fairly limited, and were generally 
exercised by bipartisan commissions where major decisions were 
debated and voted on in the clear light of day. Precedents and 
formal rules were known by the people who were regulated, and 
regulators were generally responsive to Congress, which, after 
all, still controlled their appropriations.
    These checks and balances weren't perfect, but they 
produced a general consistency and predictability in Federal 
regulations.
    All of that changed under Dodd-Frank.
    The Consumer Financial Protection Bureau (CFPB) was 
structured with no bipartisan commission. It had automatic 
funding as an entitlement, which virtually eliminated any real 
ability for lawmakers to have any check on its actions. In the 
process, consistency and predictability were replaced by 
uncertainty and fear.
    Since the Financial Stability Oversight Council (FSOC) 
meets in private and is made up exclusively of the sitting 
President's appointed allies, bipartisanship and sunshine, the 
historic checks on regulatory abuse, have been lost.
    What constitutes a systemically important firm or what is a 
passing grade on a living will are not defined in law and, in 
fact, the regulators have almost total discretion in deciding 
what ``systemically important'' means and what is a passing 
grade on a living will.
    What does the stress test test? Not only does no one know, 
but regulators see the fact that no one knows as a virtue.
    You probably saw the statement that was made by the Vice 
Chair of the Fed that if you gave people a roadmap as to what 
was being tested, it would be easier to game the test. Does 
nobody realize that the fact that compliance is easier when you 
know what the law is, is why we have laws in the first place?
    To limit the abuse of rulers, the Romans long ago 
instituted the revolutionary practice of writing the law down 
so that people could go and read the law. Under Dodd-Frank 
today, the conditions of Roman law no longer exist in the 
United States of America.
    The rules are now whatever regulators say they are. This is 
not the rule of law; this is the rule of government. It is 
shackling economic growth. And what is even more important is 
that it is threatening our freedom.
    Thank you, Mr. Chairman.
    Oh, by the way, I still have a minute and 43 seconds.
    Chairman Hensarling. No, you are a minute and 43 seconds 
over.
    Mr. Gramm. Darn. I'm sorry.
    [laughter]
    Mr. Gramm. All right. Well, it was a good effort.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Gramm can be found on page 
54 of the appendix.]
    Chairman Hensarling. But as far as this chairman is 
concerned, you were on a roll.
    Congressman Miller, again, welcome back to your home. It is 
good to see you again. You are now recognized for your 
testimony.

STATEMENT OF THE HONORABLE R. BRADLEY MILLER, OF COUNSEL, GRAIS 
         & ELLSWORTH LLP; AND FORMER MEMBER OF CONGRESS

    Mr. Miller. Thank you, Mr. Chairman. I never quite regarded 
this as my home.
    But as the chairman said, I did serve for an eventful 
decade as a member of this committee. I introduced legislation 
in 2004 to prohibit predatory subprime mortgage lending.
    According to the industry and their many allies on this 
committee, I probably meant well, but dreary rules like those I 
proposed were relics from a distant time when the financial 
industry did not perfectly understand and manage risk, and 
would deny low-income and minority borrowers the dream of home 
ownership.
    Subprime mortgages, they said, and many of you said, were 
the triumph of the innovation that comes from unfettered 
capitalism. I have not heard that argument since the financial 
crisis.
    But since then, I have heard another argument that I never 
heard before, that liberals bullied innocent banks into giving 
foolish mortgages to low-income and minority borrowers. It was 
government, they said, that caused the crisis.
    Scholars have repeatedly demolished that argument, but I 
did not believe it the first time I heard it because of what I 
know about the law of evidence. When a witness' statement is 
self-serving, the witness made prior inconsistent statements, 
and the witness cannot or will not explain the inconsistency, 
you can decide not to believe a word the witness said.
    The Dodd-Frank Act is the response to the worst financial 
crisis and the worst economic downturn since the Great 
Depression. The Act includes a version of the home mortgage 
rules that I first introduced in 2004. The Act created the 
Consumer Financial Protection Bureau to protect against other 
abusive practices and to skeptically examine industry arguments 
that new lending practices that may appear predatory are really 
marvels of innovation.
    The Act requires banks to have more capital and gives 
regulators authority to require large financial institutions to 
show that they won't bring the entire financial system down if 
they get in trouble--if they fail, and to make changes if they 
can't. Trading in derivatives is more transparent than it was 
before, although that is a pitifully low standard.
    Dodd-Frank was a compromise and probably the most that was 
possible at the time, given the industry's continued enormous 
clout in Washington, even while the industry stood in complete 
disrepute among the American people. We are better off and more 
prosperous than we would have been without it.
    But we have a financial system that still needs reform. The 
industry is too crooked, too large, and takes too much of the 
economy at the expense of people trying to make an honest 
living. Instead of a smooth flow of money from savers to people 
who can put money to productive use, far too much money 
coagulates on Wall Street.
    First, there has been no end to scandals: pervasive 
misrepresentation of the mortgages that backed mortgage-backed 
securities; manipulation of LIBOR and the other BORs; 
manipulation of electricity and other markets; rigging foreign 
exchange markets, and on and on.
    According to a recent survey, almost half of financial 
industry professionals said they thought their competitors were 
cheating, and 22 percent said they had personal firsthand 
knowledge of misconduct in the workplace.
    According to a 2012 poll, 68 percent of Americans disagreed 
with the statement, ``In general, people on Wall Street are as 
honest and moral as other people.''
    William Dudley, the head of the New York Fed and a Goldman 
Sachs alum, said last year that the repeated scandals were not 
the work of a few bad apples but the product of the culture of 
Wall Street, and were a threat to financial stability.
    And some, to quote the Republican frontrunner, I assume are 
good people.
    Second, the financial sector has more than doubled in size 
as a percentage of the economy since 1980. Largely because of 
the desperate mergers during the crisis, on top of the 
deregulation of the 1990s, including Gramm-Leach-Bliley, the 
biggest banks are even bigger.
    Some on this committee have pointed to that consolidation 
as evidence that Dodd-Frank has made the system less stable, 
but have not supported any legislation to break up the biggest 
banks. I introduced legislation to break up the 6 biggest banks 
into at least 30 banks by capping the overall size.
    I do not recall any support for that proposal among critics 
of the banks. Instead, Congress repealed the provision of Dodd-
Frank that required the riskiest swaps to be traded in a 
separately capitalized subsidiary to protect taxpayer-insured 
deposits and our economy's payment system.
    Most of the debate on the size of the financial system have 
been about what would happen if things go wrong, like the 
London Whale trades. What happens when things go right is just 
as big a problem. When things go right, there is a harm that 
often goes undetected, like a patient with a parasite who does 
not understand why he is always tired.
    The Whale trades were in JPMorgan Chase's synthetic credit 
portfolio. Synthetic credit is a bet whether a borrower 
defaults on a debt to someone else. The contribution to the 
economy of synthetic credit appears to be approximately the 
same as the nutritional value of plastic fruit.
    After the financial reforms enacted in the New Deal, the 
economy grew by 8 percent a year for the first 4 years of the 
Roosevelt Administration before the recession of 1937 and 1938. 
That will be hard to replicate.
    But the reforms ended frequent financial crises, and 
America had a steady growing economy that lasted for well more 
than a generation and created widely spread prosperity. The 
prosperity extended to many Americans who had been left out 
before.
    Yes, I want to avoid another financial crisis, but I also 
want an economy that grows and creates more prosperity for more 
Americans. To accomplish that, we still have work to do.
    [The prepared statement of Mr. Miller can be found on page 
60 of the appendix.]
    Chairman Hensarling. Mr. Wallison, you are now recognized 
for a summary of your testimony.

   STATEMENT OF PETER J. WALLISON, ARTHUR F. BURNS FELLOW IN 
    FINANCIAL POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE

    Mr. Wallison. Thank you, Chairman Hensarling, Ranking 
Member Waters, and members of the committee.
    As Senator Gramm noted, the recovery of the U.S. economy 
since the financial crisis has been by far the slowest since 
the mid-1960s. The slide now on the screen shows how the 
recovery since 2009--that is the red line--lags the average of 
all recoveries since the mid-1960s.
    We can find the reason for this slow growth in the 
excessive regulation that the Dodd-Frank Act imposed on the 
banking system beginning in 2010. One example is the 
requirement that banks with more than $50 billion in assets be 
treated as systemically important financial institutions 
(SIFIs). SIFIs not only receive stringent regulation by the Fed 
but are also required to file living wills and participate in 
stress testing.
    These add substantial costs, particularly by requiring 
these banks to hire more compliance officers and fewer lending 
officers. The result is less credit and more expensive credit 
for business firms that borrow from banks.
    The reason for requiring $50 billion banks to absorb these 
costs was the fear that if such a bank failed, it would cause 
another financial crisis. This seems highly implausible.
    The U.S. banking system has assets of $17 trillion. A $50 
billion bank has 0.3 of 1 percent of all U.S. banking assets, 
which is a tiny amount. Indeed, a $200 billion bank has only 
1.2 percent of all banking assets, and a $500 billion bank has 
only a little more than 3 percent.
    It is absurd, I think, to believe that the failure of an 
institution or institutions of this size will cause instability 
in the U.S. financial system, which itself has $85 trillion in 
assets.
    In enacting Dodd-Frank, Congress sought to create stability 
through additional regulation, but they seriously overshot. The 
cost-benefit calculation was wrong.
    Very little benefit in the form of stability was gained by 
forcing more costly regulation on banks between $50 billion and 
$500 billion in size, but a lot of economic growth has been 
lost.
    The same is true for banks smaller than $50 billion and for 
community banks. They have also been hit with new and costly 
regulations under Dodd-Frank, and that has caused them to 
reduce their lending and to charge more for what they do lend.
    How did this additional regulation reduce economic growth? 
The reason is the cost of reduced bank credit fell 
disproportionately on small business. Smaller firms need bank 
credit.
    Larger firms have access to the capital markets. They are 
able to register their shares with the SEC and file regular 
financial reports. They can obtain the financing they need by 
issuing bonds, notes, and short-term credit instruments in the 
capital markets.
    In fact, about two-thirds of all credit--I have another 
slide there--for businesses in the United States comes through 
the capital markets. This slide shows that only about one-third 
comes through the banking system, and that percentage is 
declining relative to the capital markets.
    Because smaller firms can't access the capital markets, 
they are dependent on bank credit. The result has been what we 
might call a bifurcated economy. Larger firms are growing at a 
pace consistent with past recoveries, but smaller firms are not 
growing much at all.
    The combination of the two has created this very slow 
recovery.
    In my prepared testimony, I reported on a recent Goldman 
Sachs study. This showed that firms with $50 billion or more in 
revenues have been growing at a compound rate of about 8 
percent, well in line with past recoveries, but firms with less 
than $50 billion in revenues were growing at about 2 percent a 
year.
    Also, all firms with more than 500 employees added an 
average of about 42,000 jobs a month between 2010 and 2012, 
while firms with fewer than 500 employees declined by about 700 
employees a month during the same period.
    Since we know that it is small business and business 
startups that provide most of the growth in our economy and 
most of the new employment, the inability of smaller firms to 
get sufficient credit from banks has had a disproportionate 
effect on overall economic growth.
    To change this situation and restore economic growth, 
Congress should make sure that Dodd-Frank's excessive 
regulatory burden applies only to the very largest banks.
    Thanks very much. I look forward to your questions.
    [The prepared statement of Mr. Wallison can be found on 
page 63 of the appendix.]
    Chairman Hensarling. The Chair now recognizes himself for 5 
minutes.
    Senator Gramm, you are the coauthor of the budget that 
helped ignite the Reagan recovery, and I know that you have 
written on the subject of the Reagan recovery versus the Obama 
recovery.
    If we could go back to Mr. Wallison's first slide, we know 
that during the recession of 1982 we had deeper unemployment, 
we had an even greater recession, as far as negative GDP was 
concerned. And yet, we know that the Reagan recovery came back 
quicker and stronger.
    What is the difference? What is the tale of the two 
recoveries?
    Mr. Gramm. Mr. Chairman, first of all, the difficulties 
went beyond unemployment and the depth of the recovery because 
we had very tight monetary policy trying to break the inflation 
of the 1970s, so interest rates peaked at 21.5 percent. 
Inflation was 13.5 percent. Those were the headwinds faced by 
the Reagan recovery.
    Reagan's basic approach was that the problem was 
government. That was his diagnosis. And his solution to the 
problem was to have less of it.
    He reduced government spending except to defense. We were 
at that point losing the Cold War, which changed. He cut taxes. 
There was strong bipartisan support for his budget and his tax 
cut.
    He reduced the regulatory burden. And, as they say in the 
history books, the rest was history.
    If the Obama recovery had matched the Reagan recovery 
during the same period of time--that is, over a 7-year period--
we would have produced 19.9 million more jobs than the Obama 
recovery created, and per capita GDP would be $9,100 higher. 
That is $9,100 a year for every man, woman, and child in 
America in the Reagan recovery, as compared to the Obama 
recovery.
    In the Obama recovery, not only did the poor, working, 
middle-income Americans, including women and minorities, lose 
in the recession, but they have lost in the recovery as well, 
something that has no precedent in the post-war period. The 
Reagan recovery, on the other hand, caused a decline in poverty 
and every one of those groups benefitted.
    So, I guess the difference was I think Reagan had the 
prescription right that the problem in the 1970s was the 
government was too big, too powerful, too expensive, and 
exerted too much control over the economy.
    I think the problem in the Obama recovery has been that the 
diagnosis was false. Sure, there is greed on Wall Street and 
everywhere else.
    But what caused the financial crisis was the pressure on 
banks to make subprime loans through CRA, and the fact that 
there were HUD housing quotas on Freddie Mac and Fannie Mae 
requiring that they hold subprime loans starting out at 25 
percent of their portfolio and going up to 57 cents of every 
dollar they held. When the bubble finally broke, what happened 
was described accurately in President Obama's economic analysis 
in each of his budgets in 2010, 2011, 2012, and 2013, and I 
quote: ``In August of 2007 the United States subprime market 
became the focal point of a worldwide crisis. Subprime 
mortgages are provided to borrowers who do not meet the 
standard criteria for borrowing at the lowest prevailing 
interest rate because of low income, poor credit, lack of 
downpayment, and other reasons. In the spring of 2007 there was 
$1 trillion dollars of such outstanding mortgages and, because 
of falling home prices, many of these mortgages were on the 
brink of default.''
    Now if you were counting, and of course I was, he mentions 
mortgages six times, subprime twice, but he never mentions 
deregulation, Glass-Steagall, Gramm-Leach-Bliley, credit 
default swaps, or Wall Street greed. And this is not a campaign 
document. This is the budget of President Obama.
    So I think the diagnosis was wrong and it produced this 
massive increase in regulation, which choked the recovery.
    Chairman Hensarling. The time of the Chair has expired.
    The Chair now recognizes the ranking member for 5 minutes.
    Ms. Waters. Brad Miller, back in 2005, joining with former 
Congressman and now Federal Housing Financial Agency Director 
Mel Watt, and former Chairman Barney Frank, you attempted to 
end predatory mortgage lending by putting forth a bill modeled 
on North Carolina law that would have curtailed abuses in the 
subprime mortgage market.
    At the same time, Republicans opposed that bill with 
members like my chairman, Chairman Hensarling, noting, and I 
quote, ``With the advent of subprime lending, countless 
families now have their first opportunity to buy a home or 
perhaps be given a second chance.''
    How did Republicans feel about subprime lending back in the 
first half of the last decade when they were in control of the 
House? Did any Republicans help you to advance your bill? Were 
any Republicans worried about the growing abuses in the 
subprime mortgage market?
    Can you discuss the tremendous amounts of lobbying that 
took place in opposition to your bill at the time? 
Specifically, how and why did companies like Bear Stearns, 
shortly before the collapse, lobby in opposition to your bill? 
Help us understand what was going on.
    Mr. Miller. Yes. There was a great deal of lobbying against 
it. There were not many Republicans who favored it. I did have 
some discussions with Spencer Bachus that appeared to make 
progress for a while, which kind of fell apart.
    But the arguments that we have heard since then, we never 
heard at the time. And what we heard at the time was also not 
true. What we have heard since then is not true, but what we 
heard at the time was not true either.
    Subprime mortgage lending was never about home ownership. 
The subprime mortgage model was to lend to people who already 
owned their own homes--70 percent were refinances and had a lot 
of equity in their home--and the mortgages were designed to 
catch them in a cycle of borrowing and borrowing again with 
tricky little things buried in the legalese to strip their 
equity in their home.
    It also was not about helping people who otherwise could 
not have gotten a prime loan. Every study of subprime mortgages 
during that period shows that people who got subprime mortgages 
qualified for prime mortgages but got talked into subprime 
mortgages.
    That is why the foreclosure crisis has been so much worse 
on the African-American community and on the Latino community. 
It has almost been an extinction event of the African-American 
and Latino middle classes because of the extent to which they 
were targeted by subprime mortgages.
    The typical terms would be a 2/28 or 3/27. There would be a 
teaser rate at the beginning, which was probably the only thing 
that the home owner understood when they walked out of the 
closing or settlement, as it is called in a lot of States. They 
walked out knowing what their monthly payment would be. Well, 2 
years later or 3 years later it jumped by 40 percent.
    And then to get out of it--which they couldn't begin to do 
because they couldn't afford to pay a 40 percent increase in 
their mortgage--they had to pay a prepayment penalty, which was 
3 percent.
    And it all worked fine for the lenders and for all the 
mortgage establishments, including Wall Street, including Bear 
Stearns, including all the banks that brought that stuff and 
put them in mortgage-backed securities and sold them to 
guileless investors in the United States and all over the 
world.
    The explanation at the time was not true. The explanation 
since then is not true.
    Yes, this was caused by greed. This was caused by the lack 
of regulation. This was caused by the lack of agility of the 
Federal Government in responding to new practices.
    Congress did pass legislation designed to get at predatory 
mortgage lending in 1994, the Home Ownership and Equity 
Protection Act (HOEPA). And sure enough, the industry stopped 
those particular practices, but the requirement of that statute 
that the Federal Reserve issue new regulations to address new 
practices never happened.
    Yes, it was the result of greed. It was equity-stripping. 
As the bubble inflated, as when the bubble collapsed, home 
owners could not begin to pay their mortgages, could not sell 
their houses because they owed more than the houses were worth. 
And then it started a continuous spiral that has still not been 
completely broken.
    Ms. Waters. Mr. Miller, you described some of what was 
going on. The no-doc loans, the interest-only loans, all of 
these exotic products were part of the predatory lending 
scheme, isn't that right?
    Mr. Miller. Yes. They were all part of predatory lending.
    There were some non-prime loans that were not so 
unwholesome that really did seem to be designed to address 
differences in borrowers' creditworthiness, but those got into 
a lot of trouble too when the entire--when home values 
collapsed.
    Ms. Waters. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, chairman of our Monetary Policy and Trade 
Subcommittee.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And I would love to continue the housing discussion but I 
need to hit on a couple of things. I want to talk a little bit 
about pay ratio and conflict minerals and what I would describe 
as these window-dressing provisions of Dodd-Frank.
    I want to start off with a quote from SEC Chair Mary Jo 
White, where she was talking about conflict minerals and about 
how the Commission's mandatory disclosure powers seemed more 
directed at exerting societal pressure on companies to change 
behavior rather than to disclose financial information that 
primarily informs investment decisions.
    After she said she may, as a private citizen, 
wholeheartedly agree with some of these objectives, she added, 
``But as Chair of the SEC, I must question as a policy matter 
using the Federal securities laws and the SEC's power of 
mandatory disclosure to accomplish these goals.''
    She is talking specifically about conflict minerals, which 
I want to touch on, but it seems to me that also applies to the 
pay ratio situation and the requirement that, as was mentioned 
earlier, The Wall Street Journal said was imminently coming out 
of the SEC.
    And Dr. Gramm was talking about those who have been left 
behind--minorities and women and so many others. And in that 
Wall Street Journal article, the AFL-CIO's study is quoted: 
``In 1980, 42 times was the ratio of, typically, the average 
worker to the CEO; it is now in 2014, 373 times.''
    Let's assume that those numbers are right. Some of that has 
been what I have been very critical of, performance based on 
stock price versus a long-term view, oftentimes is it, or maybe 
the options have grown that ratio.
    I think we have agreed that there are maybe some things out 
of balance, but isn't this more of a symptom rather than the 
root cause of this? And if it is not the root cause, why in the 
world are we having the SEC go through all the machinations of 
this?
    Mr. Wallison, I am going to give you first crack at this, 
specifically in these two areas.
    Mr. Wallison. I think one of the problems that we face here 
is that enormous costs were placed on the financial system by 
the Dodd-Frank Act, and these two you mentioned, the pay ratio 
issue and also conflict minerals, are examples of costs that 
are added to the financial system and added to the economy in 
general.
    And every time you add these additional costs, you reduce 
the amount of credit that is going to be available for 
businesses to--or you are requiring businesses to respond to 
costs which mean that they cannot then produce the kinds of 
goods and services that they are supposed to be producing.
    Mr. Huizenga. It strikes me that the question we really 
need to have is, ``To what end and to what benefit? And who is 
this benefitting?''
    And it seems to me that we are just surely generating 
paperwork to generate paperwork. We know that the costs of 
this--the SEC itself has estimated that the pay ratio rule 
would impose 545,000 annual hours of paperwork, and that this 
could add up to annual costs on the private sector of $710 
million with an annual compliance time of 3.6 million hours.
    Dr. Gramm, would you care to comment on this?
    Mr. Gramm. Look, it goes way beyond paperwork. What all 
this is about is demagoguery. It is the one form of bigotry 
that is still allowed in America, and that is bigotry against 
the successful.
    Why do people pay executives a lot of money? Why do CEOs 
make these huge salaries? Because they add value.
    If somebody takes over a company and it succeeds, they get 
rewarded. If it fails, they get fired.
    It is not the government's business. As a shareholder, I 
own the company, not the government. It is my money, not the 
government's money.
    So if I just want to give it away, then I ought to be free 
to do so. Now, maybe the government should assess a gift tax. I 
don't want to suggest that to anybody.
    But the point is, people pay for performance. And there are 
some people who are able to add tremendous value.
    Joe Namath did as quarterback for the New York Jets. He is 
the most exploited football player in history even though he 
made the highest salary, because he added more value than he 
got.
    My friend Ed Whitacre at AT&T, if there has ever been an 
exploited worker--even though they made a big deal about him 
getting $75 million when he retired, the man added billions of 
dollars of value. He was exploited. It was an outrage.
    But nobody is raising hell about it. They are raising hell 
about the fact that he made a lot of money and other people 
would like to have the money. And even if they don't want it, 
they don't want him to have it. I don't get it.
    Mr. Huizenga. Mr. Chairman, I think most of us have 
concluded that Dodd-Frank--or the SEC needs to deal with much 
more important issues than some of these window-dressing items. 
So with that, I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, ranking member of our Capital Markets Subcommittee.
    Mrs. Maloney. Thank you so much, Mr. Chairman, for calling 
this hearing.
    And I welcome our distinguished panelists. It is good to 
see two former Members here.
    Welcome back.
    Dodd-Frank was a landmark bill that overhauled the 
regulation of financial services in this country. But it was 
not written in a vacuum.
    It was a response to a devastating crisis which cost this 
economy $16 trillion in household wealth. Unemployment reached 
10 percent, the highest level in 25 years, 9 million people 
lost their jobs, and 4 million Americans lost their homes.
    And while there were many factors that led to the financial 
crisis, it had its roots in predatory subprime mortgages. And 
these were loans that never should have been made and that 
ended up harming the consumers and the lenders and the overall 
economy.
    Because so many of these toxic mortgage loans were made, 
and so many of them were packaged into securities and sold to 
investors all around the world, the implosion of the subprime 
mortgage market had ripple effects throughout the global 
economy.
    Now, 5 years after Dodd-Frank was passed, those kinds of 
toxic predatory mortgage loans are prohibited, and it is hard 
for me to see or understand how this is anything other than a 
benefit for consumers, banks, and the overall economy. So I, 
for one, think that the fifth anniversary of Dodd-Frank is a 
reason for celebration.
    There was a chart up here earlier which showed what I call 
the deep red valley, where we were losing 750,000 jobs a month 
when President Obama took office. And Christina Romer, the 
former head of the Council of Economic Advisors for the 
President, testified before this body and others that the 
economic shocks from the economic downturn were at least 3 
times worse than the Great Depression.
    This particular chart--I wish they would put it up there 
again--shows that when Dodd-Frank was put in place, the blue 
starts growing, which is jobs and a growing economy.
    So I would like to ask my former colleague, Brad Miller, 
who was very active in this subprime battle, and had his own 
legislation, and took leadership in all the debates, 
Congressman Miller, as you know, many of our colleagues on the 
other side of the aisle like to say that the sole cause of the 
2008 crisis was the fact that far too much credit was extended 
to low-income people. And yet, they also opposed the CFPB's 
rule that requires lenders to verify a borrower's ability to 
repay a mortgage loan before they extend credit--the so-called 
qualified mortgage.
    Shouldn't they support such a commonsense proposal? If this 
proposal had been in effect prior to the crisis, would so many 
toxic mortgage loans have been made?
    Mr. Miller. Pointing out hypocrisy by politicians is too 
easy. It is almost not fair.
    But yes, if we had had sensible regulations in place to 
prevent subprime mortgage lending, and particularly the kind 
that we had which created an unsustainable mortgage that people 
could not get out of when property values declined, we would 
not have had the bubble, we would not have had the burst of the 
bubble, we would not have had so many--liquidity is frequently 
praised but liquidity just means the ability to borrow money 
freely. And when you borrow money freely to buy an asset that 
goes down in value, a lot of liquidity proves to be a problem a 
little bit later on. And that is essentially the problem we 
had.
    It was the same problem. The bubble in the Great 
Depression, or that led to the Great Depression was the bubble 
in the stock market.
    Liquidity is a really good thing to have until it isn't.
    Mrs. Maloney. We also heard many testimonies from 
economists who said this was the first economic downturn in our 
history that could have been prevented because it was created 
by the mismanagement of the financial system. I, for one, 
believe markets run more on trust than on capital. And Dodd-
Frank imposed regulation that put more trust back into our 
markets, which is one of many reasons why our economy is 
improving.
    My time has expired. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett, chairman of our Capital Markets Subcommittee.
    Mr. Garrett. I thank the chairman.
    I will start with Mr. Wallison.
    Would you agree with this premise or statement that it is 
intolerable when any class of people--minorities or the poor--
are intentionally discriminated against, when they are unfairly 
targeted in the financial markets, in the housing markets, by 
illegal, unconscionable, unfair practices in that marketplace? 
Do you agree--
    Mr. Wallison. Yes. Of course, I agree with that.
    Mr. Garrett. And is it for that reason that this committee 
meets regularly to make sure that we do have adequate laws both 
on the Federal level and also on the State level to target 
those bad actors--and you agree that there are bad actors in 
this marketplace?
    Mr. Wallison. Absolutely.
    Mr. Garrett. And that is why we meet to target--have 
legislation to target those bad actors, and to address those 
unfair practices. Do you agree with that?
    Mr. Wallison. Yes, I do.
    Mr. Garrett. All right.
    Now, Mr. Miller, I am bad at quotes, but there is a quote 
by Winston Churchill that goes something like, ``History is 
going to be kind to me because I intend to write it.'' I don't 
know what history you are writing, but you wrote today's 
statement so it would be kind to past practices of the Obama 
Administration in this area.
    One of your comments was that scholars have said that there 
was no problem with forced regulation--or regulation forcing 
the banking industry to commit these or execute these subprime 
loans. That may be what scholars wrote from their ivory towers, 
as far as whether regulation was a cause of this or not, but I 
can tell you this committee had numerous hearings where we 
didn't listen to scholars but we listened to the actual people 
in the field--the actual bankers--who told us repeatedly that 
regulation was a driving force behind their writing of subprime 
loans, that regulation told them how to do the underwriting, 
starting way back whether it was the Boston Fed describing what 
income and assets would be considered, to the actions of the 
Fannie Mae and Freddie Mac, all the way along the line, and the 
other regulators as well.
    I think the actual people on the front line best describe 
what effect a regulation had on a marketplace.
    So we know that--well, I will close on this, Mr. Wallison--
you admitted--or you say that there were some bad actors in the 
marketplace, but you also in your testimony, and also your 
report after the last crisis indicated that regulation was a 
factor, as well, if you would like to comment on that briefly?
    Mr. Wallison. Yes, I would. If I have the time, I would 
like to say a number of things about this subject, but you are 
questioning it, so go ahead.
    Mr. Garrett. Your report indicated that regulation played a 
role. That is history. Now we have to look to see what effect 
our current laws will have going forward, both on the minority 
and the poor populations, as well.
    So let me just ask this: The E.U. commissioner for 
financial services, Jonathan Hill, said that he would look at 
the combined effect of all the laws that have been passed to 
make sure we have the balance right between reducing risk and 
fostering growth, and where we haven't got it right, we should 
have the self-confidence to make changes.
    Has anyone in this Administration, to the best of your 
knowledge--or Senator Gramm, you can comment on this, as well--
said that this Administration is going to do a review of all 
the laws on the books to see that there will not be a negative 
impact upon the minority population or the poor population, to 
see the cumulative effect that it may be degrading their 
ability to get a loan and get a mortgage?
    Both gentleman may respond.
    Mr. Gramm. Let me respond in the following way: There was 
one provision of Dodd-Frank related to mortgages that I thought 
was a very good provision, and it was what I would call the 
skin-in-the-game provision. It basically said if you make a 
mortgage, you have to hold a certain percentage of that 
mortgage, and you had to take the first loss, generally 
discussed at the 5 percent level.
    What happened to it? What happened to it is that this 
Administration would not enforce that law.
    Now, I thought it was a good law--that provision--because 
it basically said if you make a bad loan and it goes bad, even 
though it is securitized and some retirement fund has borrowed 
it--bought the security, you are going to take the first 5 
percent of the loan.
    I don't see any evidence that this Administration has taken 
the lessons of the subprime crisis seriously. They are pushing 
CRA again and requiring banks to make loans. They are lowering 
downpayments.
    It seems to me they are determined to go back to the same 
system that created the problem. And forgive me for--there were 
bad actors. There were predatory loans. But there were 100 
predatory borrowers for every one predatory lender.
    The law required the loans to be made. It required people 
to make subprime loans. It required Freddie and Fannie to hold 
subprime loans. If these loans were so good, why did you have 
to make them make them?
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Hinojosa.
    Mr. Hinojosa. Thank you, Chairman Hensarling and Ranking 
Member Waters, for holding this important hearing.
    And thank you to my former and distinguished colleagues and 
the other panel member for your testimony and appearance here 
today.
    In the wake of the worst financial crisis since the Great 
Depression, the whole of our financial banking system teetered 
on the brink of collapse. To prevent such a calamity from 
happening again, we enacted the Dodd-Frank Act.
    This Act has strengthened oversight of Wall Street, given 
regulators the tools to end too-big-to-fail banks, and brought 
much-needed transparency to markets by eliminating loopholes 
that allowed risky and unfair and abusive practices to go 
unnoticed and unregulated.
    Importantly, Dodd-Frank restored confidence in our markets 
and has brought our economy back from the depth of the deep 
recession. In the longest-running job creation streak in our 
history, we have added millions of jobs, lowered the 
unemployment rate, and added back $30 trillion to our Nation's 
wealth.
    My first question goes to my good friend, Congressman 
Bradley Miller. It is undisputed that the widespread use of 
predatory and subprime mortgage products like adjustable rates, 
coupled with lax underwriting, caused a mortgage crisis when 
borrowers began defaulting in mass. However, many contenders 
like to ignore the fact that the mortgage crisis became a 
financial and economic crisis of epic proportion only because 
of a completely unregulated and opaque world of derivatives, 
such as credit default swaps.
    How did the Commodity Futures Modernization Act of 2000 
create a situation which fueled that financial crisis of 2008, 
and what rationale was used to pass said law?
    Mr. Miller. I wasn't around when that was enacted; I was in 
the State legislation of North Carolina dealing with entirely 
different issues. But the Commodity Futures Modernization Act 
prohibited any regulation of derivatives either at the Federal 
or State level, and in the first 6, 7 years I was a member of 
this committee, there was never a hearing that talked about 
derivatives at all.
    According to the testimony in the recent trial about the 
AIG bailout, if AIG had not been bailed out, if they had not 
paid 100 cents on the dollar without getting anything for it on 
credit default swaps, which galled me at the time, and I said 
so, as a member of this committee, that Morgan Stanley would 
have gone down immediately, and Goldman Sachs would not have 
been long behind. It would have brought the entire financial 
system down.
    And then Morgan Stanley and Goldman owed a lot of people 
money, and if they couldn't pay that a lot of people were going 
to be--a lot of financial participants--industry participants 
would have been out of business.
    Derivatives also create both a motive and a mechanism for a 
great deal of gamesmanship in the economy that is entirely 
useless, that really--I have yet to hear a remotely persuasive 
explanation of the benefit that they bring--that the physical 
markets for the referenced data assets are like this; the paper 
markets, the derivative markets are like this, and there is a 
huge amount of gamesmanship.
    There is now in the bankruptcy--
    Mr. Hinojosa. Time is running out on me.
    Mr. Miller. All right.
    Mr. Hinojosa. I like what I hear from you. I agree with 
you.
    Tell me, how has the Dodd-Frank Act addressed these two 
issues of proper underwriting of the mortgages and the 
transparency and safety in the derivatives market?
    Mr. Miller. On the underwriting of mortgages, there are now 
rules that require that mortgages be--that there is an ability 
to repay not just in the first 2 years, not just in the first 
little bit, but across the life of the mortgage. That will 
prohibit a lot of the worst practices of the last decade. And 
there are other provisions that are real reforms in the kind of 
practices we have.
    With respect to derivatives, there is now more of a 
requirement of transparency. They are traded mostly on 
exchanges.
    That means that you can--someone who wants to buy a 
derivative--God only knows why anybody would want to, but if 
you want to buy a derivative you can call up on your computer 
screen and see what the yields--what the spread is. And there 
is a great deal more transparency about it and real market 
forces.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, chairman of our Housing and Insurance 
Subcommittee.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. Wallison, I am in the process of reading your latest 
book, and it is quite informative and I certainly enjoy it. It 
makes the long hours back to Missouri on a plane more bearable.
    But a quick question for you with regards to the GSE 
situation that you discuss and the history of it there. It 
looks to me like Dodd-Frank is steering the mortgage lending 
away from banks and private lenders back into the GSEs, which 
we have tried to get away from, but it looks like we are going 
the other direction.
    And so, I would like for you to comment on what effect you 
think Dodd-Frank has had with regards to that, and is that a 
good thing or a bad thing?
    Mr. Wallison. First of all, there has been so much myth 
recited here. I would like to just go back and say one thing 
about the financial crisis so that we understand a little bit 
more about it.
    Now, predatory lending now doubt occurred, but the 
Financial Crisis Inquiry Commission was unable to find enough 
data to show that it was significant. What we learned from the 
financial crisis is that in 2008, more than half of all 
mortgages in the United States were subprime. And of those, 76 
percent were on the books of government agencies--primarily 
Fannie Mae and Freddie Mac, FHA too.
    The point is that the government had required certain 
quotas to--of mortgages to be made to people below median 
income. Now, there was no reason why that was a bad idea except 
for the fact that if you make those quotas too high, then the 
GSEs had to reduce their underwriting standards, which they 
did. That is why 81 percent of all of the losses that Fannie 
suffered, they reported as coming from subprime and other low-
quality mortgages.
    So in any event, the important point here is that we have 
to keep our underwriting standards high, and what we have done 
recently was to reduce those underwriting standards again, 
because it is always in the interest of the government to 
reduce underwriting standards. It increases home purchases and 
that improves the market. But in the end, we ultimately always 
have a crash.
    Mr. Luetkemeyer. Thank you.
    Senator Gramm, you, in your testimony a while ago, talked 
about SIFIs and living wills. You made the comment that they 
are not defined in law, and I thought that was an interesting 
comment from the standpoint that we had Barney Frank in here a 
little over a year ago, and he was the author of Dodd-Frank, 
and the problem with SIFIs, in his own words, was an unintended 
consequence. He believed he wanted the biggest banks to be 
regulated, but it seems the regulators are allowing these 
regulations to flow downhill now to the mid-sized and regional 
banks, and even to the community banks, in a very negative way.
    And so I was wondering if you would comment--it seems like 
the regulators are creating law instead of enforcing existing 
law, and trying to make stuff up here, and your--and the 
effects that it is having on the banking system.
    Mr. Gramm. Let me first say, you asked about Dodd-Frank, 
was it a good law. The biggest problem with Dodd-Frank is it 
didn't write the law. The biggest problem with Dodd-Frank is 
the same problem with Obamacare. When the speaker said, ``We 
need to pass it so we can find out what is in it,'' she 
misspoke. She really should have said, ``We should pass it so 
we can decide what is in it.''
    Dodd-Frank grants broad powers. It doesn't define its 
terms. And so as a result, the regulators decide.
    Now, our system works that you write the law and then the 
regulators implement the law through a process, generally 
bipartisan, in sunshine, where there is debate, where people 
know what the rules are in general, and they basically 
implement them. What happened here was the law was never 
written in the first place. It granted huge powers to the 
regulators who make all of these decisions, and so you have 
become a bit player in the process.
    How many people thought that they were giving the 
regulators power to implement international regulatory 
standards that were written in Basel in the United States 
without Congress ever approving them? I don't believe Democrats 
thought that. But they are doing it today because they do 
whatever they want to do.
    And in the case of the good provision of Dodd-Frank about 
the 5 percent skin in the game, they just decided not to 
implement the law.
    The Constitution says that the President should faithfully 
execute the laws, but in this case and many other cases, this 
President does not execute the law.
    Mr. Luetkemeyer. Thank you. And we now seem to have a 
regulatory system instead of a shadow banking system. I thank 
you, Senator.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now declares a 5-minute recess.
    [recess]
    Chairman Hensarling. The committee will come to order.
    The Chair now recognizes the gentlelady from Ohio, Mrs. 
Beatty, for 5 minutes.
    Mrs. Beatty. Thank you, Chairman Hensarling, and Ranking 
Member Waters.
    And thank you, to our witnesses today. I was getting ready 
to say I am a freshman member, but now that I am a sophomore 
member of this committee, I certainly appreciate the varied 
history that we have had here, and especially from the two 
witnesses who have served here.
    We have talked a lot about history, and in some of the 
opening remarks from my ranking member, she gave us a history. 
So let me fast-forward to where we are today, hearing that 
history on housing, and certainly, we have heard many people 
talk about that crisis and what happened in the 2008 financial 
crisis.
    But as we talk about housing now, just this past week 
Bloomberg News reported that America's housing market recovery 
is in full swing; there are sources across the Internet saying 
that housing ownership has dropped to a 48-year low.
    So my question to the three of you is, when we look at 
housing today, either in full swing or in the last 24 hours 
dropping, my concern is, what do we do as it relates to 
communities that are represented by minorities or those who are 
living in poverty? We know what happens to the communities that 
many of our constituents or that we live in, but what do you 
think we should be looking at to help the recovery of this 
lagging market for minorities?
    Mr. Wallison. I think the data that you cited can be 
consistent, and that is there is a return of the market. There 
are many more sales going on right now, and the reason for 
that, unfortunately, is that the government is continuing to 
reduce underwriting standards.
    This is not good for minority buyers. It is not good for 
non-minority buyers. Because in the end, what happens when you 
are selling homes to people who cannot afford to carry those 
homes over an extended period is that we are going to have the 
same kind of crash we had in 2008.
    My solution for solving this problem is to get the 
government out of the housing market because it has an 
incentive to reduce underwriting standards, and as long as the 
government is in control of the market, that is what it will 
do.
    Mrs. Beatty. Mr. Miller?
    Mr. Miller. I have been critical of the efforts at 
addressing the housing market. Perhaps the Republicans on this 
committee don't know that, but the RNC does. When I wrote an 
article in Salon in 2012 that criticized the lack of real 
policy urgency about the collapse of home values and the 
foreclosure crisis, the RNC trumpeted excerpts from my article 
all over their website. State Republican parties trumpeted it 
also on their websites, as if Mitt Romney would have done 
anything different.
    This recovery was going to be hard. It was going to be hard 
for a number of reasons.
    One is it was a balance sheet recovery. Americans--
households and businesses, but especially households, were 
deeply in debt and had to get out of it and were going to 
consume less until they were in better shape.
    We had a bubble in the housing market, which led to a great 
deal of overbuilding, and so when we have had recessions in the 
past, usually housing--residential real estate, residential 
construction--dips, there is enough demand, and then that sort 
of gives extra juice to the recovery. That was not going to 
happen in this recovery.
    The natural demand for new housing during that period was 
probably about 1.4 million units. Instead we had a couple of 
years when we built 2 million. So that wasn't going to happen.
    Protecting against the kind of predation we saw will help a 
lot. It will help preserve the wealth, because that is one of 
the ways that middle-class families have built wealth is by 
faithfully paying off a mortgage--getting a mortgage on a home, 
buying a home, paying off a mortgage over time, and not 
allowing the kind of predation that we saw in the last decade.
    Mrs. Beatty. Okay.
    And I don't have enough time, Senator Gramm, to ask you to 
comment.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, chairman of our Oversight and Investigations 
Subcommittee.
    Mr. Duffy. Thank you, Mr. Chairman.
    I am going to take a stab at Mrs. Beatty's question. I 
think the way we help out lower-income and minority communities 
is by growing the economy, and making sure that they can access 
opportunity and access jobs.
    In my community, two of the biggest employers--one is 
regional and one is nationwide, and they started their 
businesses in the late 1960s and early 1970s--have separately 
said, ``If I wanted to start my business today, I couldn't do 
it because of all the rules and all the regulation. I couldn't 
get a bank to partner with me in our community to give me a 
loan to start the business that now employs tens of thousands 
of people with good-paying jobs.''
    And so, when we have a debate today, where is the next 
Menards? Where is the next Ashley Furniture? Where is the next 
Google, if you can't start your business and employ people in 
Mrs. Beatty's community and in my community?
    There was a graph that we had at the Joint Economic 
Committee--I used to serve on that committee--and it compared 
the historic declines, and then the historic recoveries.
    So if you had a slow-sloping decline, you would have a 
slow-sloping recovery. The decline would match the recovery. 
And if you had a steep recession, you would have a steep 
recovery. They would mirror each other.
    But if you look at this decline--which was very steep--and 
you look at this recovery, they don't match the prior examples 
of recoveries.
    To the panel, have you noticed that this has been a 
lackluster recovery compared to others? Shouldn't we have had, 
with a steep decline, a steep economic recovery, but we haven't 
experienced that?
    Dr. Gramm?
    Mr. Gramm. We have had a bad recovery because we had a 
dramatic change in policy, and the policy was one of more taxes 
and more government control. You saw the graph that they had 
at--the chart they had at the Joint Economic Committee about 
new business starts. It is a perfect example.
    And let me say on the home ownership question, I think one 
of the things we could do that could help home ownership is to 
let banks make character loans again. Everything now is so 
rule-based that we don't give the banker the ability to figure 
out who will pay this money back and who won't.
    My mama didn't graduate from high school. She was a widow. 
And she got a subprime loan, and no government guaranteed it. 
But by the time she died, any banker in Columbus, Georgia, 
would lend her money. Anybody.
    Why? Because she paid the money back.
    And I think we go too far now on these formulas. We don't 
help people when we lend them money that they can't pay back or 
they won't pay back, but there are a lot of people who would 
work and struggle to make sure they paid the loan back, and I 
think getting back to some character lending would be a good 
idea and it would help deal with the problem that the 
Congresswoman from Ohio raised.
    Mr. Duffy. We have now gone to check-the-box banking.
    Mr. Gramm. We have not had a good recovery because we have 
implemented policies that have stifled the system which created 
the prosperity we have known.
    Mr. Duffy. I would just note that--I am going to go to Mr. 
Wallison in a second--means we have 14.4 million less jobs and 
$6,000 less per family, Mr. Gramm.
    But Mr. Wallison, you--
    Mr. Wallison. Yes. I would like to put up the chart that I 
had, my first chart. If you can find that again and put that up 
on the screen, because I think it tells us something very 
important.
    While we are waiting for it, it shows the recovery that we 
have had since 2010--actually, since 2009, and in comparison to 
all recoveries we have had since the mid-1960s. The important 
thing about it is that for the first three-quarters of the 
recovery from 2009, it was in line with the usual recoveries, 
as you can see. When the Dodd-Frank Act was passed in 2010, you 
can see what happens to the red line, which is the line that 
shows the current recovery.
    So the market was recovering in the usual pattern after 
2009, but once the Act was passed, everything stopped. And that 
is the point that I think you were trying to make and what I 
think is important for the committee to understand.
    Mr. Duffy. That is a very good point, and I thank you. And 
I just want to point out that my friends across the aisle have 
been wearing pins in celebration of Dodd-Frank, and I would 
just note that is a celebration of a racist and sexist CFPB, a 
CFPB that is now setting rates in the auto industry. It is 
collecting data against the knowledge of consumers.
    Lack of oversight for this--I am getting gaveled down so I 
am going to yield back, Mr. Chairman.
    Chairman Hensarling. He was regrettably gaveled down.
    The Chair now recognizes the gentleman from Washington, Mr. 
Heck, for 5 minutes.
    Mr. Heck. That is quite an act to follow.
    Thank you, Mr. Chairman.
    I guess I want to begin by just registering my heresy here. 
I, frankly, as a relative newcomer here, have grown 
unbelievably tired of the finger-pointing. We seem to have 
points of view that suggest it is all the government's fault--
for incenting, cajoling, and strong-arming those poor, weak-
kneed bankers into making loans they didn't want to make.
    At the same time--here comes the heresy from my side of the 
aisle--we seem to be suggesting that every consumer was somehow 
duped into doing this and had no capacity whatsoever to make a 
well-informed decision for themselves.
    So it is all the government's fault, or all the consumer's 
fault, or all the banker's fault. And I don't know why it is so 
hard around here just to acknowledge that there is plenty of 
guilt to go around.
    The fact of the matter is there were consumers who were 
getting loans, who should have known better, did know better, 
but bet that the real estate increase in values would continue. 
The fact is that there were some bankers applying the can-you-
fog-a-mirror rule to making loans. And the fact is that the 
government was compliant in some fashion with this big run-up 
and this big crash.
    I don't know why that is so hard for us to acknowledge. And 
I don't know what the proportion of that culpability is, but I 
am convinced that there is some to go around to everyone.
    Now, with that preface, I want to ask a question of all of 
you and ask Congressman Miller to begin. There are two people 
here who don't like Dodd-Frank and one person who largely does, 
all right?
    I am not from Missouri, but show me. Can you cite another 
country in the world that during the midst of the Great 
Recession took actions, and adopted policies that better 
benefitted their economic growth curve than the United States 
did with the adoption of Dodd-Frank? If Dodd-Frank wasn't 
perfect--and even you, Congressman Miller, suggest it wasn't 
perfect--who did it better? What country did it better?
    Mr. Miller. Actually, we did better. I have been critical 
of the policies that made the priority protecting banks from 
the consequences of their own conduct, of allowing them to 
privatize profits and socialize risk, of not taking them 
through receivership when they were, in fact, insolvent, which 
has been the standard playbook for dealing with a financial 
crisis.
    And none of the recessions since the Second World War began 
with a financial crisis. This is the only one.
    Around the world usually crises that, again, in the 
financial sector are a lot harder to get out of, and the 
standard playbook since the late 19th Century is take insolvent 
banks through insolvency and get them back operating with a new 
set of owners so they are not really being bailed out, and a 
clean set of books so they can actually do sensible things and 
not pretend to be solvent until--
    Mr. Heck. So you don't know of another country that had a 
better response which helped their economy?
    Mr. Miller. Most of the developed world, certainly Europe, 
has done less well than we have.
    Mr. Heck. Senator Gramm, do you know of another country 
whose policy response--
    Mr. Gramm. Yes, I know several. Poland was instituting a 
major move toward private property and a market-based system. 
Their economy was growing so strongly that they actually did 
not have a recession, and their growth has been strong since.
    If you compare growth prior to the recession to growth 
after the recession, I think you could make a case that both 
Germany and Britain did a better job than the United States.
    Mr. Heck. But their growth after the beginning than the 
recession was no better than ours.
    Mr. Gramm. But their growth before was a lot worse. So if 
you are going to look at the impact of the financial crisis, I 
think you have to look at what they were doing before and what 
they did after. The hallmark of our disappointing recovery has 
been that it was so different than our previous recoveries, and 
I do think that policies which were implemented had a lot to do 
with it.
    Now, look, there are two sides of every story. As Jefferson 
said, good men with the same facts are prone to disagree.
    But my basic view in looking at this is that we instituted 
a bunch of policies which affected investor confidence, and we 
did not get the good recovery that we should have. First of 
all, the recession came on very slowly--I'm sorry.
    Mr. Heck. I have the same trouble with my mentor too, Mr. 
Chairman. I understand.
    I would just conclude by saying if we want to go where 
there is no government regulation, that country exists. It is 
Somalia, and I am not trading places with them for anything.
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Gramm. I shouldn't have cut him off all those years in 
the classroom.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New Mexico, Mr. 
Pearce.
    Mr. Pearce. Thank you, Mr. Chairman.
    Just a little bit of housekeeping here. We heard the 
statement earlier in an answer to a question that derivatives 
are entirely useless and Mr. Miller could see no reason to have 
them.
    Senator Gramm, do you see positive reasons for any 
derivatives?
    Mr. Gramm. Yes, I see lots of positive reasons for 
derivatives. I think it is a way that people can hedge, for 
example, if you are an airline and have to buy jet fuel, it is 
a way of protecting yourself. If you are in the insurance 
business, you can partially protect yourself by buying 
derivatives which have value based on what happens with the 
weather.
    It is a vehicle whereby you can get risk in the hands of 
people who are capable of bearing it and they get a profit for 
bearing it. So I think there is a reason for it.
    And if I could, let me just straighten something out. A lot 
of people point to the Commodity Futures Modernization Act as 
being some terrible law that deregulated derivatives. Nothing 
could be further from the truth.
    You had a Commodity Futures Trading Commission (CFTC) Chair 
who got it in her head that derivatives were futures, and by 
raising the question, since it is illegal to trade futures off 
an exchange, she created legal uncertainty in all of these 
markets. President Clinton and every financial regulator in the 
government begged the Congress to pass a law making it clear 
that derivatives were not futures.
    Derivatives were never regulated, so this idea that somehow 
we deregulated derivatives in the Commodity Futures 
Modernization Act is just totally wrong.
    Mr. Pearce. Thank you.
    Mr. Gramm. And it got 300 votes in the House and only 60 
people voted against it.
    So the point is that we never regulated derivatives before. 
We now regulate them. It will be interesting to see what the 
net result will be. My guess is it will not be good.
    Mr. Pearce. Okay.
    Mr. Wallison, you had mentioned that one of the great 
problems was the--and the move toward 2008 was the relaxing of 
the underwriting standards, and you said that we are doing it 
again. Can you flesh that out just a bit? I have another 
question, so if you could--so we are doing exactly the same 
thing that put us in position--
    Mr. Wallison. Two things, Congressman, that I would 
mention, and that is a few months ago the regulator of Fannie 
Mae and Freddie Mac, which is the Federal Housing Finance 
Agency, told them that they weren't taking enough risk on 
mortgages, so he wanted them to reduce their downpayment 
standards from 5 percent, which is already too low, to 3 
percent. That substantially increases the risk.
    The second thing is that the President himself said he was 
going to reduce FHA's mortgage insurance premium by half a 
point, about 50 basis points. What that does is put more of the 
taxpayers at risk and allows much riskier mortgages to enter 
our financial system.
    So in both cases, the government has been going back to 
exactly the same policies that preceded the financial crisis.
    Mr. Pearce. Okay. Now, the basic narrative that we get from 
our friends on the other side of the aisle is that the system 
was teetering on collapse and that we have strengthened the 
oversight. And yet, the people who reduced the underwriting 
standards, Fannie and Freddie, it is my understanding that they 
are not touched at all by Dodd-Frank. Is that more or less 
correct, Mr. Wallison?
    Mr. Wallison. That is exactly right.
    Mr. Pearce. So this narrative that comes from our friends 
on the other side is probably completely bypassing the lynchpin 
of the entire problem, and yet we never hear that.
    Lastly, the effect on the community banks. Community banks, 
in my opinion, were not greatly responsible for any of the 
problems--the subprime, the predatory practices--and yet they 
get the bulk of the regulation under Dodd-Frank. Again, Mr. 
Wallison, I would like your comment on that.
    Mr. Wallison. Exactly. They are suffering much greater 
regulation than they need, and as a result of that additional 
regulation, they are not making the loans that local 
communities need and small businesses need.
    Mr. Pearce. Okay. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Thank you. Mr. Chairman, the topic of this 
hearing is, are we more prosperous. I would point out that 
Dodd-Frank is just one of many things that have happened in the 
last few years.
    The harm to our prosperity done by our current trade policy 
swamps any benefit that Dodd-Frank was intended to provide. And 
I don't think we will be as prosperous as we should be until we 
eliminate a trade policy which has given us the largest trade 
deficit in history.
    Dodd-Frank gave an awful lot of power to the regulators, 
which they are not using. First, we had the Franken-Sherman 
amendment which dealt with credit rating agencies.
    It continues to be the fact that if you are issuing a major 
debt instrument, you can decide which credit rating agency 
rates you, you can pay them a million bucks, and they have 
every reason to give you a good rating because you will be back 
to them with another issue or someone else will be back to them 
with a similar issue the next week.
    So as long as credit rating agencies are rating dead 
issuances, we will have the same result that we would have in 
the American League if the home team got to select and pay the 
umpire.
    We also were trying to pass a law that said we shouldn't 
have too-big-to-fail. We still have too-big-to-fail. The reason 
for that is the regulators under Dodd-Frank were given the 
authority but were not required to break up those that are too-
big-to-fail. So the only way you don't have too-big-to-fail is 
if you are too-big-to-fail, you are too-big-to-exist.
    But I only have one House cosponsor on that bill. Maybe we 
will pick up some more if any of my colleagues are listening to 
this. And of course, Bernie Sanders is, I believe, the only 
person on that bill in the Senate.
    So to ask us whether we are more prosperous when we still 
have the debt instruments rated by a credit rating agency 
selected and paid by the issuer, while we still have too-big-
to-fail and, in fact, they are bigger, the one thing that saves 
us from a meltdown this year is that we remember 2008, and 
nobody plays with matches for the first few years after they 
burn down their house.
    So I think investors are going to be careful for a while. 
Maybe for another year or 2 years. And after that, if we give 
AAA to Alt-A, we will have this kind of meltdown.
    Finally, on the CFPB, we on the Democratic side passed a 
bill which creates a single regulator. We may rue the day. I do 
not know who is going to win the next Presidential election, 
and we have a panel here who could advise us but they don't 
know either.
    If a Democrat wins, Mr. Cordray may continue to be there. I 
know some Republican candidates who would appoint somebody to 
that position whose first act would be to repeal everything Mr. 
Cordray has done.
    And if we have a panel of three or five, we--some of us are 
very sure that we will not lose the Presidential election, and 
Donald Trump is doing everything possible to help us.
    But we could still lose the next Presidential election, so 
I think the CFPB got a good start because we guaranteed a 
Democrat would be in complete control. And now, having enjoyed 
that for a while and until we know who is winning the next 
election, it might be good to get a board in there that will 
reduce the swings to the left and the swings to the right that 
you would expect if there was just one person from one party 
appointed by one President.
    Mr. Miller, do you have any comments for us?
    Mr. Miller. I commented on that at the last hearing. That 
is one of the potential downsides of having a single 
commissioner is that presumably that will change--a more 
dramatic change. But if you have a five-member commission, that 
can change pretty quickly too. The SEC and the CFTC are pretty 
much three-to-two all the time. You swap out one commissioner 
and you have it three-to-two the other way.
    Mr. Sherman. Yes. But I have never seen the SEC change 
where they repeal all their existing regulations, or a big 
chunk of them, when a new Administration takes office. I hope I 
don't see that because we will win the Presidency.
    And I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Virginia, Mr. 
Hurt.
    Mr. Hurt. Thank you, Mr. Chairman.
    Mr. Chairman, I want to thank you for continuing to focus 
on this important issue 5 years post-Dodd-Frank.
    I want to thank each of the witnesses for appearing and 
participating in today's hearing.
    I represent Virginia's 5th District. It is a very rural 
district, mostly agricultural in nature. There is a lot of 
history--Jefferson's home and Madison's home are in the 5th 
District.
    Main Street Virginia 5th District is a long way from Wall 
Street, and I think about this in the context of the big 
picture, which is that since the founding of our country, I 
think that all Americans, whether you live in the big city or 
you live in the rural areas, have benefitted from this marriage 
between free market principles, a robust free market, and a 
democratic republic as a political system.
    And I think we have all benefitted from that across the 
country, and it has built the greatest economy--I think that we 
would all agree--the world has ever seen.
    My question is really for all three of you. I would like to 
start with Mr. Miller, and then go to Mr. Wallison, and then 
finish up with Mr. Gramm.
    But 5 years after Dodd-Frank we see the Federal Reserve 
Bank of Richmond reports now that 60 percent of all liabilities 
in our financial markets are either explicitly or implicitly 
backed by the U.S. Government, backed by the U.S. taxpayer. And 
I guess my question for you all is, is that a good thing?
    What is the current effect of that? What is the current 
effect of that in today's economy? And more important, what 
does it portend for the future of the American economy? And if 
you have time, how do we fix it?
    That is a whole lot for just a couple of minutes, but maybe 
we could start with you, Mr. Miller.
    Mr. Miller. I have not seen that statistic or that study. I 
would certainly be interested in analyzing it. It is kind of 
hard for me to imagine that is the case, but I have heard a lot 
of statistics thrown around in the time that I was in Congress 
and since that, upon closer examination, there were asterisks 
that explained them.
    Obviously, I don't think that 60 percent of assets should 
be guaranteed by the government. I said just a moment ago that 
I think the great mistake in responding to the financial crisis 
was not to take the financial institutions that were insolvent 
through an orderly receivership, come out of that--continue to 
maintain this--the economy's payment system, prevent 
disruption, which is possible to do, offload their suspicious--
their suspect assets into something like the Resolution Trust 
Corporation, deal with those in a sensible way, which often 
would mean reducing the principal to try to make them payable 
rather than forcing people into foreclosure.
    No. I think that the sensible thing during the financial 
crisis would have been, again, what has been the standard 
playbook of dealing with financial crises around the world--and 
they happen with surprising frequency--is to take banks through 
receivership.
    Mr. Hurt. Thank you, Mr. Miller.
    Mr. Wallison?
    Mr. Wallison. Yes. Government does guarantee much of our 
financial market today, and I suppose the worst example of all 
is the Government-Sponsored Enterprises, which are not only 
regulated now by the government but also backed by the 
government. The result of that is that they can take much more 
risk.
    And this is true of any institution that is backed by the 
government. It can take much more risk because people assume 
that they will not suffer any losses if they make loans to such 
an institution. And as long as that is happening, as long as we 
have institutions like that, we are going to have much more 
risk and much more failure in the economy.
    Mr. Hurt. Excellent. Thank you.
    Mr. Gramm?
    Mr. Gramm. First of all, I don't doubt your number is 
right. The Federal Government backs loans to preempt the 
capital market. And I object to it not just because it puts the 
taxpayer at risk, but because it changes the order of the 
credit line and puts people at the front of the line who have 
low-priority uses for capital and pushes further down in the 
line people who have high-valued uses that would create jobs 
and growth and opportunity.
    And if you look at the preemptions that are occurring with 
these Federal guarantees, they are in areas where the rate of 
return is low. Not to pick on wind power, but it is such a 
beautiful example. With the Federal guarantees and the 
subsidies, you can make money generating electricity with wind 
by giving the power away practically for free.
    Now, clearly that kind of incentive creates waste, 
inefficiency, and misallocation of capital, and you see it all 
through the capital market. So we go around the world advising 
all these underdeveloped countries, ``Let the market system 
allocate capital,'' and yet we are not doing it.
    Mr. Hurt. Right.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And I thank each of you for being with us today.
    In 1983, I started a business. I had an idea, and went to a 
banker in Dallas, Texas, at Mercantile Bank, and asked if he 
would loan me $150,000. And for some reason, he loaned me the 
money. He thought I had a good idea, and I think he thought I 
would pay it back.
    It turned out to be a good idea. We had about 300 
employees. It was a very successful company.
    He got paid back ahead of schedule. The people we hired 
were a broad spectrum of America who came and enjoyed that 
business. I later sold it to my partner.
    In later years, I started another company, a real estate 
investment business that I no longer own, and those raw land 
properties, undeveloped properties, are now being purchased by 
developers, and those developers have to go to private equity 
to find money because they can't go to the market. They can't 
go to the commercial lenders. They don't have access to that 
capital again.
    What do you see, Senator Gramm, as the long-term 
implications? America became the great economic power we are 
today not because of the great government but because of real 
opportunity that people had to take an idea and build on that 
idea.
    And that access to capital, as I had in 1983, isn't there 
today. I was on a bank board. We knew who to loan money to. We 
knew who was creditworthy, as you said, by character alone. And 
yet, you can't borrow money on that basis anymore.
    If we are a country which was built because of those 
entrepreneurs, what is going to happen to the future of this 
country?
    Mr. Gramm. Basically, growth is not some kind of formula 
where you get a multiplier based on the government spending 
money. Growth comes from somebody who has a new idea, a new 
vision, a better product, a better way of doing things, and 
then they go to the capital market and the capital market is 
where these ideas, these dreams, get translated into reality.
    I always said when I went to the old New York Stock 
Exchange that I thought I was standing on holy ground. When you 
look at what that institution and the capital market have done 
for mankind, you look at what it has done in the last 20 years 
in terms of people who were living on less than $1 a day, and 
when capitalism and markets started to grow, people started to 
prosper.
    If we think we can remain the greatest country in the 
history of the world by giving up the system that made us the 
greatest country in the history of the world, I think we are 
fundamentally wrong. And I think one of the reasons this 
recovery has failed so miserably is because of the expansion 
and the preemption of capital in these areas where we are 
subsidizing people to do things that would never be done on an 
economic basis. This increasing capital cost falls squarely on 
small business and the entrepreneur, and finally, we have a 
regulatory system that is now stifling the very functioning of 
the capital market--where you had a banker who had a good sense 
of what a good idea was, a good sense of people's character, 
and his job was to make good loans.
    I never have understood how you make money by making loans 
that people don't pay back. I have never been able to do it. I 
have never worked at any place that could do it.
    So I think we are in danger of getting away from the thing 
that made us great.
    Finally, let me say that Britain is no longer a great 
country in terms of its ability to produce goods and services. 
I think it is below Belgium in the export of goods and 
services. But Britain is still a great country because it has a 
great banking system.
    We let New York and Chicago, the hubs of our financial 
system, deteriorate at our own peril. We need to dominate the 
world in banking and finance. It is something we do well. It is 
a source of power. It ultimately is a source of military power. 
And I think we ought to be very concerned about it.
    And this idea that all these people on Wall Street are a 
bunch of crooks--I worked for a big investment bank for 9 
years, and I think I have about as good a sense for when people 
are proposing something as anybody else. I never heard anybody 
propose to do anything illegal. I never saw anybody set out to 
violate the law.
    Now--
    Chairman Hensarling. The time of the gentleman--
    Mr. Gramm. Maybe they did and I didn't see it, but--
    Mr. Pittenger. Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr, for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    And thank you, to our witnesses here today.
    I wanted to talk to you all a little bit about what I think 
everybody acknowledges was the core cause of the financial 
crisis: mortgages. You talked about that today.
    Dodd-Frank has a number of titles that deal with issues 
extraneous to the core cause of the financial crisis, so let's 
get at what I think there is general consensus about the 
subprime mortgage crisis, which precipitated the economic 
collapse in 2008. Obviously, two of our panelists here make the 
case that government policy produced the subprime meltdown. One 
of the panelists here disagrees and says it was greed that 
caused subprime.
    Can you elaborate a little bit on your differing positions 
on that?
    And let's start with Mr. Gramm.
    Mr. Gramm. Look, we set out in a law that in order to open 
a teller machine, much less acquire another bank or merge with 
another bank, you had to meet a test called CRA. And that 
basically boiled down to, as Alan Greenspan said in testimony 
before this committee, ``If you want to know the source of 
subprime lending, you need to go back and look at CRA.'' That 
is a direct quote.
    And as bank mergers occurred, as bank growth occurred, the 
pressure to make CRA loans got bigger and bigger and bigger. We 
set out in law that Freddie and Fannie had to hold 25 percent 
of their whole portfolio in subprime loans, and then we 
increased it until when the wheels came off it was 57 cents out 
of every dollar.
    We know now from the records of Freddie and Fannie that 
they knew they were taking huge risk in making these loans and 
guaranteeing these loans and holding this paper. We know that 
they told their superiors that they were taking big risks. And 
we know they struggled to meet their goals.
    And what was the net result? As Peter has told the world in 
the most convincing terms, the net result was a huge volume of 
loans that had been made to people who either couldn't or 
wouldn't pay them back.
    Mr. Barr. And just to follow up on your observation that 
the skin-in-the-game concept is actually a potential remedy to 
this--in other words, portfolio loans, risk retention--at least 
partial risk retention from mortgage originators. Contrast a 
policy like that to what the Administration is doing now to 
continue to incent taxpayers to bear that risk, and what is the 
difference between the originate-to-distribute model, where 
there is not an alignment of incentives between the mortgage 
originator and the borrower, where they sell to the government, 
versus a system in which mortgage originators retain the risk 
and the risk is on shareholders as opposed to taxpayers. Which 
is the better system?
    Mr. Gramm. Look, if mortgage lenders have to retain risk, 
they are not going to make a lot of the loans that were made. 
It wouldn't have happened.
    Secondly, we are going back to exactly the same system that 
existed before. We are lowering downpayments; we are pushing 
CRA again; I don't doubt that we are going to move back to some 
kind of quota at Freddie and Fannie.
    And look, I understand wanting loans to be made, wanting 
houses to be built, but if there is anything we know, it is 
that if you foresaw housing you are going to end up lowering 
home ownership, not raising it. That is what the financial 
crisis proves.
    Mr. Barr. So to conclude, Senator--my time is expiring--
what is the cause of subprime lending? Is it portfolio loans, 
where there is risk retention, or is it government policy that 
encourages originate-to-distribute, where the taxpayer is on 
the hook?
    Mr. Gramm. Look, some subprime lending would occur because 
people figure out that somebody would be a good risk. I am not 
against subprime lending, but I don't think the Federal 
Government ought to guarantee it. I think we ought to take a 
hard look at securitizing subprime loans with very low 
downpayments because of the inherent risk that it injects into 
the system.
    Chairman Hensarling. The time of the--
    Mr. Gramm. Why did we get where we were? There is no 
plausible explanation for it other than government mandates 
that mandated a bunch of loans that couldn't or wouldn't be 
paid--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from--
    Mr. Gramm. I'm sorry. I took the whole time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Connecticut, Mr. Himes.
    Mr. Himes. Thank you, Mr. Chairman.
    And thank you all for being here. It is terrific to have 
the opportunity to chat with some people who have been so 
important to the last 15 years on this issue.
    Reflecting on the title of the hearing, ``Are We More 
Prosperous?'' at some level that is a no-brainer. There is 
simply no question or no point of fact to suggest that we are 
not dramatically more prosperous as a country, in the 
aggregate, than we were 5 years ago--certainly than we were 7 
years ago.
    And by the way, this is not what we were promised. I was 
there when we started writing Dodd-Frank, and just as we 
started writing Dodd-Frank we were promised that, like the 
Affordable Care Act, this would be job-killing legislation. 
Frankly, everything we did was going to be job-killing.
    Twelve million new jobs later and a fairly reasonable 
recovery, of course, we don't hear job-killing much. Now we 
hear the criticism that the recovery is not what it might have 
been, and Mr. Wallison and Senator Gramm are making that case 
fairly strongly here. It is not what it might have been.
    They are arguing a hypothetical. They are arguing a 
counterfactual, which is always challenging to do, and not the 
strongest platform on which to criticize some work that was 
done.
    We were also promised, of course, that credit markets would 
seize up and stop the critical function of providing credit to 
American households and businesses.
    I did a little work. I am not going to go through it, but 
what you see up on the screen there is commercial and 
industrial loans up fairly dramatically in the last 5 year; 
venture capital investment up really quite dramatically in the 
last 5 years; total consumer credit up--actually concerningly 
up in the last 5 years; and, of course, the stock market there 
in the lower left is not exactly availability of credit but it 
is certainly a proxy for the confidence that our--that people 
have in our capital markets.
    So we are left with the idea--and this is where I have some 
questions--that the recovery is not what it might have been.
    Mr. Wallison, you say, ``I believe all the new regulation 
added by Dodd-Frank is the primary reason for the slow growth 
that this country has experienced.'' And you open your 
testimony with a chart which shows that this recovery has been 
less strong than the average of the other 10 recoveries.
    With all due respect, the economic analysis there--there 
was absolutely nothing even near average with the meltdown that 
we suffered in 2008, 2009. Fourth quarter 2008 GDP growth was 
at negative 8 percent annualized. We had not seen the kind of 
asset destruction that we saw.
    Is there any reason, Mr. Wallison or Senator Gramm, why we 
should expect that the recovery from what we have come to call 
the Great Recession, acknowledging that it is probably the 
second-biggest economic dislocation we have seen in 100 years--
is there any reason to believe that just basic analysis would 
suggest that maybe it would be very much at the low end of the 
kinds of the recovery? Is there anything average about what 
happened in 2008 and 2009?
    Mr. Wallison. Yes. Actually, in my prepared statement you 
will see a study that was done of the 27 recoveries that we 
have had since the late 1800s done by 2 scholars, and what they 
showed was that in almost every case, the recovery is as fast 
as the decline that preceded it.
    In three cases, that was not true. One was in the Great 
Depression. The second was in 1989 to 1991. And the third is 
this current recovery we have today.
    The reason that I think you might assign to this is that 
when the government gets involved in trying to improve the 
economy in some way, creates more regulation, as they did 
during the Great Depression, as we did in 1989 to 1991, and as 
we have just done, we interfere with the natural return of the 
economy which usually occurs after a severe recession. So yes, 
there is a lot of history that is behind exactly what Senator 
Gramm and I have said.
    Mr. Himes. I have to respectfully disagree, and I think you 
yourself point out that actually in the Great Depression, which 
of course led to regulation which tamped down the cycle of boom 
and bust that we had seen prior to the 1930s--it was the 1933 
and 1934 Acts and associated regulation that fairly 
dramatically changed the volatility in the business cycles in 
our economy--that I think also stands as counterpoint to this 
idea that it is government interference that causes this stuff.
    But I am really taken by your statement: All the new 
regulation in Dodd-Frank is the primary reason for the slow 
growth this country has experienced.
    I have asked the Fed that every time they have been there. 
They have pretty good economists. I have certainly read the 
economic literature.
    Do you really believe--because no one else does, that I am 
aware of anyway--that Dodd-Frank is the primary reason, and it 
is not reduced aggregate demand, it is not uncertainty in 
Europe, it is not continued dislocation in the housing market? 
Dodd-Frank is the primary reason?
    Mr. Wallison. Here we have a Q.E. by the Fed, we have the 
ACA, the Affordable Care Act--
    Mr. Himes. Which is different than Dodd-Frank, right?
    Mr. Wallison. I am just talking about the three things in 
the last 5 years that are really significant activities by the 
government. Q.E. by the Fed hasn't substantially improved 
growth; Obamacare, the ACA, hasn't substantially improved 
growth. But if anything, both of those should have been 
stimulative.
    The third is Dodd-Frank. And in that case, of course, we 
see what we have seen, which is very slow growth--historically 
slow growth.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Hultgren.
    Mr. Hultgren. Thank you all so much for being here, 
especially Senator Gramm.
    It is good to see you. As a 1996 Gramm-for-President 
delegate from Illinois, I appreciate your work and--
    Mr. Gramm. You were in a distinct group.
    Mr. Hultgren. And I'm very proud of that.
    Five years after the passage of the Dodd-Frank Act, a 
cornerstone of President Obama's liberal economic agenda, this 
overreaching law has unquestionably made Americans worse off. 
We are now less financially independent and we are now 
increasingly subject to the demands of bureaucrats in 
Washington.
    Dodd-Frank has nearly 400 rulemaking requirements. Only 235 
of these rulemakings have been finalized.
    At the same time, we are seeing community banks, the 
drivers of economic growth, continue to struggle under this 
crushing regulatory onslaught. We have 500 fewer community 
banks since the passage of Dodd-Frank. And with no end to 
regulations in sight I am fearful we will continue to see the 
big banks get bigger and the community banks be fewer.
    At the same time, American workers are facing stagnant 
wages and reduced economic opportunities because of the failed 
economic policies and regulatory overreach of this 
Administration. No one should be celebrating an economy where 
growth is so weak, feeble, and slow that more than 17 million 
Americans are still unemployed or underemployed 6 years after 
the recession ended.
    The Dodd-Frank Act has done nothing to create jobs in my 
home State of Illinois, where the unemployment rate stands at 
5.9 percent.
    Senator Gramm, I think everybody agrees that our Nation's 
community banks were not the cause of the financial crisis. 
However, I noticed in your testimony that community banks have 
hired 50 percent more compliance officers, while overall 
industry employment has expanded by only 5 percent, and I quote 
you there.
    Are compliance costs such as these one of the reasons why 
we are continuing to see fewer and fewer community banks? And 
for the industry as a whole, what does this mean for financial 
services, innovation, and the ability of companies to focus on 
the evolving needs of their customers?
    Mr. Gramm. I don't think you can dispute the fact that a 
growing regulatory burden has induced banks to terminate their 
activity in various kinds of businesses. Consumer credit, 
commercial credit, and housing credit have fled the banking 
system.
    New innovations still occur in finance but they occur 
outside the banking system. And so we have a huge banking 
system with all of its capital and with all of its talent that 
is basically being thwarted and is not being put to work, 
putting America's money to work, and putting America to work.
    I think that is part of it, but I think it goes beyond 
that. I think that Dodd-Frank, by creating all of this 
regulatory power, has created uncertainty and fear in the 
business community which has induced people not to take risks 
that would have been productively undertaken in the absence of 
the situation.
    It is not just that Dodd-Frank did bad things. Not 
everything in Dodd-Frank was bad.
    But the problem is it gave so much discretionary power to 
regulators that now we are ruled by regulation. It is not you 
writing the law and them implementing it. For all practical 
purposes, they are the law.
    And this is not the system that created the American 
miracle. And it is a dangerous system. I know it is your next 
hearing, but it is dangerous for freedom and democracy.
    And I would just like to say to our Democrat colleagues, 
someday Republicans are going to win an election for President, 
I hope soon. And all of these things that were done by 
regulation can be undone. There is nothing permanent about 
this.
    This Consumer Product Safety Commission has so much power 
that the new Director could in essence eliminate it by his own 
power and order. So it is just a bad way to make law.
    We need to define what laws mean. We need to control 
regulators within the constraint of what you say.
    And I think that is where Dodd-Frank got way off track. 
Part of it was community banks, for example, they weren't part 
of the problem, but the desire had always been there to have 
the government play a greater role, and so community banks that 
had nothing to do with the problem, hedge funds that had 
nothing to do with the problem, insurance companies that were 
in traditional lines of insurance that had nothing to do with 
the problem, money managers that were simply caught in a 
bankruptcy were not the cause of the problem, and yet they have 
all been brought under the grasp of the government. And in 
doing so, you have created tremendous inefficiency in the 
marketplace, in my opinion.
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Hultgren. I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Florida, Mr. Ross.
    Mr. Ross. Thank you, Mr. Chairman.
    Yesterday, I endured something that I think many consumers 
in this country have endured as a result of Dodd-Frank, and 
that was going through a closing after I refinanced my house. I 
had done this years ago, had gone from a 15-year to a 30-year 
mortgage in an effort to fund my children's education--a cash 
loan, if you will. And I did. The oldest has graduated; the 
youngest is just about done.
    So I decided to take advantage of the rates, as low as they 
have been. And before the Truth in Lending changes come about 
now in October, I wanted to get this done.
    It was a grueling 2-month process. I met with my community 
banker, and the community bank has been in existence in my 
community since 1920. It has endured a lot.
    But I was told that this has been probably one of the least 
expansive--in fact, they have shrunk their mortgage business 
significantly. One community bank will only write their own 
paper, and they will do so only on their terms, which is 
usually a balloon note that may be adjustable but it is outside 
Freddie and Fannie.
    And for 2 months, we went through a process of disclosure, 
and disclosure, and ultimately did close. But it was an 
experience that I can't imagine that the general public can not 
only not endure but may not qualify.
    And my banker told me, ``The qualified mortgage rule is 
killing us. What did we do wrong to cause the proscriptive 
regulatory burden that we have on community banks?''
    And so, Senator Gramm, I would just ask you, what did the 
community banks do wrong that led to this restrictive policy on 
them that I think has been an unintended consequence, to the 
detriment of the consumers out there who desperately need their 
capital not only for their businesses but for their children's 
educations and for their own livelihoods?
    Mr. Gramm. I think we all know that in any society, people 
have a political agenda.
    Mr. Ross. Right.
    Mr. Gramm. And since the turn of the century, the 
progressive political agenda has been to have government 
basically control the commanding heights of the economy. And 
when the financial crisis occurred and the people who had had 
this agenda for 100 years were in control of the government--
    Mr. Ross. They imposed it.
    Mr. Gramm. --they decided this was a crisis that shouldn't 
be wasted, and even if community banks had nothing to do with 
it, they could be improved by having government as a partner.
    And so now, if you are unlucky enough to be designated one 
of the systemically important banks you have government 
bureaucrats embedded in your executive offices to report and 
advise. And it reminds me of the old Soviet system where you 
had political officers in every military unit and in every 
factory.
    Mr. Ross. Which we do. We now have more compliance officers 
than we have ever had.
    Mr. Gramm. So I don't know. Some people this doesn't 
bother, but it bothers me.
    Mr. Ross. And it bothers me, too. Let's take, for example, 
the payday lending industry. The CFPB has just come back down 
with some extensive regulations that are going to essentially 
put the payday lending business out of business. Now, banks 
don't want this. But we are not going to eliminate the demand 
for payday lending.
    And in fact, what would be the consequences? Would they not 
have to go to Lenny the loan shark? There is still going to be 
a demand. Just because government thinks they can control the 
supply of capital doesn't mean they are going to be able to 
control the demand. Is that correct?
    Mr. Gramm. What has happened, of course, is that the 
regulatory burden and the uncertainty have basically caused 
bankers and other people in the financial sector and other 
parts of the economy that are affected to basically become very 
cautious.
    Mr. Ross. Yes.
    Mr. Gramm. And as a result of being very cautious, they 
don't want to make a mistake.
    Mr. Ross. And they are being very--
    Mr. Gramm. And to do something, you have to take action. 
And I think that is a big factor in this failed recovery.
    Mr. Ross. I agree.
    Mr. Gramm. And it is going to be difficult to fix. But I 
think a good starting point is to go back and look and see, 
what did we learn from the financial crisis, and try to fix the 
things that we learned were a problem and know after the fact, 
and the things that weren't part of it, let them operate.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus.
    Mr. Rothfus. Thank you, Mr. Chairman.
    I would like to talk a little bit about the concentration 
we see going on in the financial services industry.
    Mr. Wallison, Senator Gramm testified that according to the 
FDIC, 1,341 banks have disappeared since 2010, and only 2 new 
banks have been chartered in the last 5 years. There seems to 
be no doubt that assets in the financial sector are becoming 
more concentrated in the Dodd-Frank era.
    I am seeing it in Western Pennsylvania as institutions 
merge, and I also recall a conversation I had with a community 
bank where they had to have an individual, or a group of 
individuals, spend a cumulative 2,000 hours going through some 
CFPB regulations. Mind you, it wasn't this community bank that 
was responsible for the financial crisis.
    The big banks are getting bigger and the small banks are 
becoming fewer. What does this mean for families and small 
businesses on Main Streets across America?
    Mr. Wallison. This is a very serious problem because these 
small businesses depend entirely on banks in order to find 
financing. And as we know, it is small businesses that provide 
most of the growth and most of the employment in our economy.
    These small businesses cannot go to the capital markets, as 
larger businesses can, so they--their dependence on banks means 
that if we put more burdens on the banks and as a result of 
those burdens--these are small banks I am talking about--as a 
result of those burdens they cannot make as many loans as they 
could before, that means there will be less growth in our 
economy. It is as simple as that.
    Mr. Rothfus. So you think there is a direct correlation 
between the regulatory burdens on our community banks and the 
ability of small businesses to receive capital and credit from 
community financial institutions?
    Mr. Wallison. Yes. That is the entire burden of my prepared 
testimony today. There is a relationship there.
    Mr. Rothfus. I also wonder about the concentration of 
liabilities and what that means for systemic risk. Does 
industry consolidation as a result of what I call trickle-down 
government's higher relative regulatory burden on smaller 
institutions make the system more or less risky?
    Mr. Wallison. Yes. First, let me step back and say I have 
grave doubts about systemic risk coming from any single 
institution. The very, very largest banks--the $1 trillion 
banks--perhaps. But any bank smaller than that, the failure of 
such a bank would not, I think, cause systemic risk.
    But is perfectly true that as these institutions get larger 
and larger, the losses that they would cause--not necessarily 
systemic, but the losses they would cause would be much more 
substantial if they were to fail. And so we are always better 
off--as any system is, including our own gene pool--if we have 
much more diversity in the gene pool.
    Mr. Rothfus. And if we keep going down this road over the 
next 10, 20, 30 years, could we get to a point where we have 
far fewer banks in the country, far fewer community banks, and 
what does that mean for Main Street?
    Mr. Wallison. It is going to be disastrous if we have far 
fewer because it will be very hard for local businesses to get 
credit. And--
    Mr. Rothfus. I just want to--
    Mr. Wallison. --under those circumstances, we would have 
much slower growth, as we have.
    Mr. Rothfus. Senator Gramm, during consideration of the 
Dodd-Frank Act, there was a lot of talk about moving toward 
government-mandated plain vanilla credit products. Congress 
expressly rejected this approach in the final version of the 
bill, yet I am concerned that actions by regulators, 
particularly the CFPB, are instituting a plain vanilla approach 
in contravention of congressional intent.
    What regulations do you think are moving us toward 
homogenized, plain vanilla credit allocation?
    Mr. Gramm. I am against credit allocation of any kind. I 
think it is very harmful to the economic system.
    And at its root, many of the reforms of Dodd-Frank are 
about credit allocation, about getting government involved in 
determining who gets loans and who doesn't, who gets access to 
capital and who doesn't. And I think that is a very dangerous 
thing for government to be doing because it promotes 
inefficiency and it lowers the growth capacity in the economy.
    Mr. Rothfus. If I could just quickly go to Mr. Miller, were 
you on this committee in 2003?
    Mr. Miller. I was.
    Mr. Rothfus. Do you have any recollection of Barney Frank 
suggesting that the Federal Government was doing too little 
rather than too much in pushing Fannie and Freddie to meet 
affordable housing goals?
    Mr. Miller. He may have said the same thing that Mr. 
Wallison said. There was a great deal of criticism of Fannie 
and Freddie during that period that they were--
    Mr. Rothfus. Do you remember Barney Frank, during the fall 
of 2003, saying he wanted to roll the dice?
    Mr. Miller. I do not recall that he said that. I do 
remember Mr. Wallison's column in American Banker that said the 
same thing.
    Mr. Rothfus. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Arizona, Mr. 
Schweikert.
    Mr. Schweikert. Thank you, Mr. Chairman.
    And, gentleman, I want to see if I can distill down part of 
this conversation. If we look back to late 2007-2008, 
ultimately do we all agree that as home prices moved against 
the markets, the securitized products had impairments, MBS 
began to turn negative in its value, and that created the 
cascade?
    When we look at something like Dodd-Frank, was it floor 
plan, was it credit card securitization, automobile 
securitization? We have a bill that regulated huge portions of 
our financial sector, but we constantly circle back here 
saying, ``Okay, it was this portion of our mortgage market.''
    Have we done something, allowed something that is 
absolutely irrational on saying, ``Here is the problem. Here is 
what we wanted to deal with. Here is what we wanted to improve. 
Oh, by the way, there is a grab-bag of desires that have been 
around this place for decades. There is a crisis. Let's load 
them in. Let's burden the financial markets up and down.''
    Was there a dramatically more elegant, simple solution to 
actually what went wrong? This is half statement and half 
question.
    And the second side is you just said diversity in markets. 
Are we actually seeing a creativity, a diversity because of 
Dodd-Frank being forced to, we will say, alternative sectors. 
When I am reading article after article that Silicon Valley is 
now much of the future of financial markets, whether it be 
peer-to-peer type lending platforms, is that where the velocity 
of markets are going to come from?
    Mr. Wallison, is diversity away from the traditional 
banking sector now?
    Mr. Wallison. That could actually be happening because I 
happen to think that banks intermediation is much more 
expensive than agency intermediation that is in the securities 
markets, and maybe more expensive than the intermediation that 
is occurring in the V-to-B kind of market. So, it is entirely 
possible that is true.
    The cure for that is to, of course, allow banking 
organizations--not the banks themselves, which are insured; 
much of that is bank holding companies--to get into much more 
financial activities rather than freezing them, as current law 
does.
    Mr. Schweikert. That would be a situation of my community 
bank could act as an aggregator, collect investors and put them 
out on a loan product, therefore there is no cascade threat to 
the rest of the banking system. If something goes wrong, it is 
those investors, not even that institution.
    Mr. Wallison. Yes.
    Mr. Schweikert. Is that an easy way to phrase it?
    Mr. Wallison. That would be a good way to phrase it, yes.
    Mr. Schweikert. Senator, if I were to look at a solution--
let's live in a pretend world where Dodd-Frank did not exist. I 
am fixated on the concept that information would have been a 
much grander regulator of good practices.
    In a previous life, I bought billions and billions and 
billions of dollars of agencies, some MBS, and my risk officer 
was someone who picked up the phone, called over to Moody's and 
said, ``What was the rating on this?'' instead of having flow 
of information from that securitization saying, ``Hey, here is 
our impairment; here is our geographic distribution; here 
is''--is information ultimately a much more efficient solution 
to ever avoid such a event again?
    Mr. Gramm. I think the answer is ``yes.'' I think the 
government helped promote the idea that a rating agency rating 
was all you needed; it protected you.
    I don't think it should. I think a lender ought to be 
liable for their decisions no matter what a rating agency does.
    Much of subprime credit and almost all subprime securitized 
paper was AAA rated. I don't think bankers should have been let 
off the hook for that.
    I don't like the idea of banks settling and taking 
stockholder money. If somebody violated the law, convict them. 
Take them to court. Send them to jail.
    I don't like the idea of taking out of somebody's pension 
fund because somebody did something wrong. I have never 
understood that.
    Mr. Schweikert. In the last few seconds, because I know you 
are sort of a price theory allocation economist--Dodd-Frank, is 
it creating a massive distortion of where capital gets 
allocated and intense inefficiencies?
    Mr. Gramm. The net result was it did, and it was agenda-
laden because it was not bipartisan. The advantage of 
bipartisan legislating is that both sides are forced to throw 
out their agenda.
    Chairman Hensarling. Tht time of the gentleman has expired.
    The Chair now recognizes the gentleman from Colorado, Mr. 
Tipton.
    Mr. Tipton. Thank you, Mr. Chairman.
    And I thank the panel for taking the time to be here.
    This is an interesting conversation. I am just a small 
business guy, and I like to be able to look at actual outcomes.
    Right now, we have a real unemployment rate--our colleagues 
have been putting up charts about the recovery of the American 
economy--real unemployment rate now of 10.6 percent. We are 
seeing $2 trillion in regulatory costs. We are seeing the 
lowest labor participation rate in 4 decades. And coming out of 
the rural part of America, we are seeing real challenges 
economically because it is access to capital issues.
    And, Mr. Wallison, you were speaking to some of the 
challenges we are seeing with our community banks, and as we 
are seeing that pool of banks, that access to capital, shrink 
up, labeled that as ``disastrous.''
    Would it be a good idea--and because I haven't heard anyone 
say no regulations, and I don't think that is coming from our 
side of the aisle; just sensible regulations--would it be a 
good idea really to be looking at cost-benefit analysis when we 
are looking at rules and regulations moving forward?
    Mr. Wallison. Sure. And there is a difference between the 
largest banks and the smallest banks in that, because the 
largest banks can handle a large amount of regulation because 
they have the staffs to do it; the smallest banks cannot. So if 
you are going to make regulations, you ought to taper them to 
the ability of the institution to handle the regulations.
    Mr. Tipton. When we are talking about having that tailored 
to actually the institutions, we just introduced out of our 
office the TAILOR Act for small community banks, and for credit 
unions, as well, to be able to have regulations that actually 
meet the risk portfolio, the size of the bank, to be able to 
have a sensible policy, to be able to create opportunity for 
the banks to be able to prosper, and still to make sure that 
they are secure. Does that sound like a good step in the right 
direction?
    Mr. Wallison. I think that is an excellent idea. I have 
some questions about whether the FDIC or the Comptroller of the 
Currency is going to be able to implement it, but we ought to 
get them to try to implement it.
    These are agencies, especially the FDIC, which have never 
been able to come up with a truly risk-based insurance system, 
even though Congress has asked for it. You are asking them to 
make even more kinds of distinctions. Maybe if you push them, 
they will do it, but it is a great idea.
    Mr. Tipton. I appreciate that.
    I would just like you to comment, maybe, as well--we 
continue to see and we have heard the comments that only 60 
percent of Dodd-Frank has currently been implemented, and 40 
percent is yet to come.
    I think the chairman has probably adequately labeled this 
as a kind of mission creep, or stealth regulatory actions that 
are moving forward. Not knowing, as Senator Gramm had spoken to 
as well--creating that uncertainty in the marketplace, are we 
really actually helping to cripple the American economy in this 
recovery that is impacting our ability to be able to prosper?
    Mr. Wallison. Sure. There are two things that are operating 
here.
    One is uncertainty. And at the very beginning when Dodd-
Frank came down, uncertainty was the principal problem. But as 
the regulations started to come out, there were actual real 
costs that were imposed on institutions, keeping them from 
making financing available to the real economy, to the business 
economy, and reducing growth. It's as simple as that.
    Mr. Tipton. And is there a problem--and, Senator Gramm, you 
may want to speak to this as well--having unaccountability? The 
Federal Government wants to be able to have all financial 
institutions have accountability. I think that we have the 
empathy, certainly, with that.
    But now we have a lot of institutions that are being 
established which are accountable to whom?
    Mr. Gramm. They are not accountable to anybody. In fact, 
the intention of the Consumer Financial Protection Bureau was 
to put it in the Fed so it had enshrined funding, and to deny 
the Fed any oversight ability over it whatsoever. They are the 
most isolated and protected government agency that I am aware 
of that has ever been created. If there has ever been a law 
that violated the separation of powers, that is it.
    But that is not all of it. That is true in all of these 
other areas where regulators have in essence become little 
kings. They decide what the law says, and when it says it, and 
it creates tremendous uncertainty.
    And when people are uncertain, they don't act. That is 
basically what is happening here.
    And your point about the recovery or argument about the 
recovery--when is the last time you heard a candidate 
campaigning on ``Happy days are here again?'' Ronald Reagan did 
in 1984, ``Morning in America.'' I don't hear anybody doing it 
today.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Williams.
    Mr. Williams. Thank you, Chairman Hensarling.
    And thanks to all the witnesses today, and to my good 
friend and our good friend from Texas, Senator Gramm. Thank you 
for being here.
    I am a small business owner. I have been a small business 
owner for 44 years--a car dealer. And I can tell you, Main 
Street America is hurting.
    I go back to $1 gasoline, I go back to 20 percent interest, 
I go back to 1988, go back to 9/11, and I have never seen the 
inability to get a quick recovery like I have with the 
inability to come back from this Obama economy. Small business 
is hurting.
    And when you look at that, 400 new regulations, billions of 
dollars in crushing compliance costs, massive consolidation for 
smaller community financial institutions, and I could go on and 
on about the real effects of the disastrous laws we have talked 
about today.
    In addition, we have an economy that, as we have talked 
about also, has created 12 million fewer jobs in the last 6\1/
2\ years, the lowest labor participation rate in nearly 4 
decades, and a national debt that stands over $18 trillion. 
Main Street America, again, I repeat, is not back.
    Senator Gramm also mentioned the lack of new banks being 
created in the wake of the financial crisis. It has been long 
documented that in my home State of Texas, banks large and 
small are struggling just as much as anywhere in the country 
and we have the best economy in the country.
    So my first question would be to you, Senator. You note in 
your testimony that Dodd-Frank was enacted 5 years ago. Only 
two new banks have been chartered in the United States. Later 
in your testimony you state that Dodd-Frank has undermined a 
vital condition required to put money in America back to work: 
legal and regulatory certainty.
    Would I be correct in assuming that you would view these 
two phenomena--the almost total absence of new bank charters 
since Dodd-Frank became law, and the climate of legal and 
regulatory uncertainty created by Dodd-Frank--as closely 
related?
    Mr. Gramm. I don't think there is any doubt about the fact 
that we have a financial system now that is very much bogged 
down with uncertainty and overregulation. It is not uncommon 
for a small bank in a small town that is not part of any chain, 
that makes virtually no bad loans, that had nothing to do with 
the subprime crisis--it is not unusual for them to be audited 
five different times in a year.
    So you figure they spend 2 weeks getting ready for the 
audit, and then they spend 2 weeks responding to the audit. And 
so all of a sudden you have 10 weeks--did I multiply that 
correctly? No. You have 20 weeks that are taken away from the 
job that they are supposed to do.
    And they have a CRA audit, they have all of these audits, 
and it seems to me that first of all, they ought to be audited 
by one audit and it ought to go for everything. We are making 
life hard for these people and they are making life hard for 
America by not making the loans we need to grow the economy. 
And it is just that simple. This is not a complicated problem.
    Mr. Williams. And in the end, small business hurts. And I 
don't know how you would start a business today, with Dodd-
Frank, with CFPB, with taxes. I don't know how you would get a 
loan. I don't know how a young person would get a loan to start 
a business.
    So what about those considering chartering a new bank and 
the considerable efforts necessary to raise capital? To do so, 
isn't the regulatory apparatus constructed by Dodd-Frank a huge 
impediment?
    Mr. Gramm. I probably should not say this because I can't 
verify that it is true, but somebody sent me a memo this 
morning that the second bank which has been chartered under 
Dodd-Frank has opened this week. I think the name of it is the 
Bird in the Hand Bank. It is worth two in the bush.
    And supposedly they have 10 employees, and they show up to 
open their business and they have 10 government bureaucrats who 
show up to tell them how to do their business.
    Now look--it makes for a nice joke, but the plain truth is 
when a bank charter has no value, it tells you something is 
going on. We have vast parts of the American community, many 
minority communities, that are grossly underserved financially, 
that are underbanked, that don't have bank accounts. And we 
need more banks to open, but banks are not going--people are 
not going to invest capital if they can't earn profits and if 
they don't have certainty.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Maine, Mr. 
Poliquin.
    Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it very 
much.
    And thank you, gentlemen, for being here. I appreciate it.
    Now, all of us who have run or owned small businesses or 
family budgets know that we can't spend more money than we take 
in for long periods of time and borrow to make up the 
difference and survive. As a business owner myself, and as a 
former State treasurer up in Maine, I have also learned that 
high levels of public debt can be very damaging to an economy 
and job creation for a couple of reasons that we all know: It 
discourages business investment when the government can't get 
its fiscal house in order; and also the debt service payments--
the interest payments on that rising debt chokes off the 
government's ability to fund roads and bridge repair, educate 
our kids, protect our environment, or defend our country.
    Now, here in Washington--I am a freshman; I have been here 
for 7 months--I have learned that the folks here have been 
doing this for a very, very long period of time, and it has 
accelerated over the past 6\1/2\ years. So now, we have this 
$18 trillion national debt.
    The interest payments--1 year on that debt is about $230 
billion. That is almost twice what we spend in a year on 
veterans' benefits. And the CBO projects that in 10 years the 
interest on that debt will be $26 billion or thereabouts. We 
will exceed what we spend to defend our country.
    We have folks who come before us, like Treasury Secretary 
Lew, say, ``Well, that is no big deal because it only 
represents 3 percent of GDP.'' Now, on the second day I was 
here, the House of Representatives passed H.R. 1, which 
requires the Federal Government to balance its books by way of 
a constitutional amendment requiring such.
    So I would like to ask you, Dr. Gramm, what do you think of 
H.R. 1, about requiring a discipline here in Washington to 
balance our books and to start paying off our debt, and what 
advice would you give to the Senate?
    Mr. Gramm. First of all, let me say that what I worry about 
in the debt--of course, the debt held by the public has doubled 
in the last 7 years--is that we are paying $230 billion a year 
to service that debt when interest rates are practically zero. 
Some day in God's good time, we are going to have ordinary 
interest rates.
    And when you go back and look at what ordinary interest 
rates have been in the post-war period, they have been about 5 
percent on a 5-year Treasury note. If we were paying that 
interest cost today, the cost of servicing the debt would 
skyrocket and we would be spending as much money servicing the 
debt as we spend on Social Security.
    So the problem with debt is that it is forever if you don't 
pay it off.
    Mr. Poliquin. I assume, therefore--
    Mr. Gramm. So I think it is a very real problem and I think 
that we are going to end up in the not-too-distant future 
paying the price of this debt, and it is going to crowd out 
spending, and it is going to deny people services, and people 
are going to be unhappy about it.
    Mr. Poliquin. Do you believe, therefore, Dr. Gramm, that it 
is a good idea for Washington to have an institutional 
discipline coded in our Constitution to balance the books every 
year?
    Mr. Gramm. If I could make one change in American 
government, I would want to require a balanced budget--
    Mr. Poliquin. Thank you--
    Mr. Gramm. --the reason being then you have to choose. We 
could have--look, the two parties--people have different values 
and they put a different weight on different things, but if we 
really had to choose and we didn't have a choice except to pay 
our way, we would have a lot of bipartisanship because we would 
end up compromising and we would have democracy at its best. 
Now we don't have to choose.
    Mr. Poliquin. Thank you, sir.
    Mr. Miller, do you think that a balanced budget amendment 
to our Constitution is a good idea?
    Mr. Miller. I think Congress should do its job. The 
chairman, in his introduction of me, mentioned that I was the 
chairman of the Oversight Subcommittee for the Science 
Committee. We had a great many hearings designed to get at--
    Mr. Poliquin. Do you think--
    Mr. Miller. Excuse me--designed to get at programs that 
were badly run and were spending too much money, and reducing 2 
percent across-the-board is lazy, slovenly work on the part of 
Congress.
    Mr. Poliquin. Do you think Washington, sir--
    Mr. Miller. Figure out--
    Mr. Poliquin. Sir, do you--
    Mr. Miller. --what the government is spending money on. I 
know that is hard work, but it is really your job.
    Mr. Poliquin. I am assuming, sir, that you do not think an 
institutional discipline to balance the budget in our 
Constitution is a good idea. Is that correct, sir?
    Mr. Miller. Why don't you do your job? Why don't you figure 
out what the government does--spends--
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Poliquin. Thank you.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from Utah, Mrs. Love.
    Mrs. Love. Thank you very much.
    I just want you to know first of all, Senator Gramm, I have 
listened to your testimony and I have had to smile because I 
think that you have articulated so well the problems that we 
have had with Dodd-Frank.
    I don't think anyone in this body is saying that we didn't 
have to address a financial crisis, but sometimes too much 
medicine is really bad also, and can actually hurt.
    The one portion that I want to point out to you that I 
really appreciate was when you talked about people of value and 
rewarding people of value. And I want you to know, these are 
the people who took all the risks; these are the people who 
have been able to come in and been able to fix companies and do 
several things.
    And although we know that there are always some bad 
players, I believe we need to do everything we can to make sure 
we give people as many opportunities as possible.
    My parents--my father came here with very little money, 
just $10 in his pocket. And I want you to know that those are 
the people who actually gave him a chance.
    Those people gave him three jobs, sometimes all at once, to 
make sure that they made ends meet, to the point where my dad 
was actually able to be a manager without having the education 
that he needed. He gathered the experience that he needed to 
become a manager and put three kids through school. And that is 
the American Dream.
    So I thank you very much for bringing that up.
    I would like to actually focus on the Volcker Rule and its 
impact. In your testimony you said that despite years of delay 
and hundreds of pages of new rules, no one knows what the 
Volcker Rule actually requires.
    Mr. Gramm. Not even Mr. Volcker.
    Mrs. Love. As a matter of fact, as articulated by Paul 
Volcker himself, it was to stop large banks with large trading 
and derivative operations from gambling with taxpayer-backed 
deposits.
    Given the enormous regulatory burdens being carried by 
small community banks, and the much-discussed impacts on credit 
availability, shouldn't banks with less than $10 billion in 
total assets, in your opinion, be explicitly exempt from the 
Volcker Rule?
    Mr. Gramm. Let me tell you what happened as observed it: 
Paul Volcker was the Chairman of the President's Economic 
Recovery Advisory Committee. They had never had a meeting.
    Months, years were going by. Mr. Volcker was becoming 
unhappy. He started telling people he was unhappy.
    And then he had this idea about proprietary trading and 
banks. Nobody was for it. The Democrats in Congress weren't for 
it.
    But suddenly it became the be-all proposal even though 
nobody knew what it meant. And so now we have a proposal such 
that, despite years of study, and thousands of pages of 
regulations, nobody knows what it means.
    And so what is happening is as we are really starting to 
implement it, at some point somebody is going to figure out 
what they think it means and then banks are going to have to 
comply with it. And I think it is going to have a very negative 
effect in terms of the ability of people to manage their 
capital.
    And every time you limit a bank's ability to be efficient 
in using its capital, you are hurting the bank and you are 
hurting the bank's customers. And that is what I think is going 
to happen.
    Mrs. Love. Okay. Do you have--I'm sorry--
    Mr. Gramm. I am not sure I have answered your question.
    Mrs. Love. It is just that I am thinking about the Volcker 
Rule and the $10 billion in total assets, and also the 
implement that they have on the ILCs, the issues that the--that 
they have to deal with with the affiliates of the ILC.
    I am looking at this Volcker Rule and I am looking at the 
unintended consequences and wondering what needs to be done so 
that we can provide some regulatory relief to the small banking 
agencies and also to the small bankers--sorry--and also to our 
ILCs, who are--pretty much can't do business with other 
companies because of the affiliates language in there.
    Mr. Gramm. Let me just quickly respond. I think a nice 
proposal would be to have the regulators write what they think 
is required by it, have it submitted to Congress, and if 
Congress didn't approve it, then that part of the law would be 
repealed.
    Mrs. Love. Great idea.
    I want to finish with this note: We are not talking about 
banks here, really. We are not even really talking about big 
banks--large banks, ILC.
    We are talking about the American people and their ability 
to be able to get some credit so that they can achieve their 
dreams, and what we are doing to actually help that or stop 
that. And let's make sure that we are on the side of the 
American people.
    Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair wishes to advise Members that the Chair intends 
to recognize two more Members and then we will adjourn. 
Currently, that will be Mr. Hill and Mr. Emmer.
    The gentleman from Arkansas, Mr. Hill, is now recognized.
    Mr. Hill. Thank you, Mr. Chairman.
    It is certainly good to see you, Senator Gramm.
    And my old friend, Peter Wallison, glad to have you back.
    And, Congressman Miller, thank you for coming back to the 
committee.
    I want to tell you that for certainly the past 17 years as 
an entrepreneur, prior to coming to Congress in January, I was 
one of those banks that Senator Gramm was referring to when he 
described the multi-examination cycle. And in the State 
securities department, the State insurance department, the 
Federal Reserve Bank of St. Louis, the State banking department 
of Arkansas, the FDIC, the FINRA, the SEC Fort Worth, and I am 
not sure if I have left anybody out, I never had one of those 
agencies ever shirk their consumer protection obligation under 
Federal or State law, ever.
    And from that point of view, I think one of the main titles 
of Dodd-Frank is the single most redundant--you say independent 
and unaccountable--agency ever created, and that is the CFPB. 
And I stand in awe that Congress would do that to itself. And I 
didn't--I left out the State's attorney general and the FTC in 
that process.
    Peter Wallison, on the subject you laid out for the 
committee that in 2008, 50 percent of the mortgage market at 
that time at the peak was subprime, and that 78 percent of 
those were guaranteed by FHA or Fannie and Freddie, and yet 
Dodd-Frank completely ignores reforms in the mortgage market.
    My experience as a banker during that crisis was that 
people were trying to sell us secondary-market instruments, 
privately issued, purely for CRA credit, and the spread on 
those securities were no greater than mortgages that we 
originated in our own portfolio.
    So we had no risk spread premium for them allegedly being a 
subprime credit or CRA-type credit. I found that sort of 
amazing, as a banker at the time, and one reason why we just--
there was no spread, there was no benefit to it. We didn't need 
the CRA credit, so we passed on it.
    But it struck me that they wouldn't have existed if Fannie 
and Freddie had not reduced their own underwriting standards. 
And 20 years ago they were the gold standard of underwriting 
standards. They were the clearinghouse. Could you reflect more 
on that deterioration in the Federal Government's leadership in 
declining underwriting standards?
    Mr. Wallison. Yes. Up until 1992, Fannie and Freddie would 
only accept prime mortgages. In fact, they were known for that.
    And a prime mortgage had a good credit rating for the 
borrower; it had a downpayment of 10 to 20 percent; it had a 
debt-to-income ratio of no more than 38 percent. That was the 
prime mortgage and that kept mortgage defaults in the United 
States somewhere below 1 percent on a regular basis.
    But in 1992, the affordable housing goals were imposed on 
Fannie Mae and Freddie Mac and then raised over time from 30 
percent to 56 percent. And during that period they had to 
reduce their underwriting standards in order to meet those 
goals.
    So by 1995, Congressman, they were accepting mortgages with 
3 percent downpayment. And by 2000, they were accepting 
mortgages with no downpayment at all.
    That was all to meet the government quota.
    Mr. Hill. You know what--
    Mr. Wallison. That is why we had so many mortgages in our 
financial system that were poor quality in 2008.
    Mr. Hill. What frustrates me from a public policy point of 
view is that Congress was so eager in the Clinton and early 
Bush Administrations to boost home ownership rates at this huge 
cost to society and to the economy, and skewing capital 
markets. And yet, that increase was so modest it was almost 
microscopic. I think today the news came out that it has fallen 
back to 63.3 percent or something like that, I think it was 
announced this morning.
    But it never really--all that effort didn't produce the 
lasting economic benefits of sort of the pot of gold at the end 
of the rainbow. What do you think, looking on--studying--and 
Senator Gramm as well--what do you think sustainable home 
ownership rates are in our economy?
    Mr. Wallison. Let me just add something before Senator 
Gramm just briefly, and that is home ownership rates were 64 
percent for 30 years between 1965 and 1995, so it looks like 
that is the natural rate of home ownership in this country.
    Mr. Hill. Yes. Okay.
    Senator Gramm?
    Mr. Gramm. Yes. Look, I think the way to promote home 
ownership is to promote jobs. If people have jobs, if they have 
a solid future, if they are confident in their future, they 
will be able to buy a home and they will be able to pay for it.
    We are trying to create home ownership without people 
having to do the things you do that make it possible for you to 
own a home. So I think a jobs program is the best housing 
program, the best education program, the best nutrition 
program.
    Mr. Hill. Thank you, Senator.
    I yield back.
    Mr. Gramm. We need to get back to that.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Emmer.
    Mr. Emmer. Thank you, Mr. Chairman.
    And thanks to the panel, for a couple of extra minutes.
    Mr. Wallison, I wanted to ask you a question, because many 
of our colleagues believe that deregulation played a large role 
in the economic collapse in 2008. I find the argument somewhat 
disingenuous since apparently the number of banking regulations 
in Title 12 of the Code of Federal Regulations actually 
increased by approximately 20 percent between 1997 and 2008.
    In fact, in the 2 decades preceding the financial crisis of 
2008, Congress gave Federal regulators broad new powers over 
banks, mortgage lenders, and other financial services firms 
through the Federal Deposit Insurance Corporation Improvement 
Act of 1991, the Home Ownership and Equity Protection Act of 
1994, the 2001 Bank Secrecy Act amendments made by the USA 
PATRIOT Act, the Sarbanes-Oxley Act of 2002, and the Fair and 
Accurate Credit Transactions Act of 2003.
    The question with that is, did deregulation of the 
financial industry play a large role in the economic collapse 
of 2008?
    Mr. Wallison. First of all, it didn't occur, so it couldn't 
have had any role in 2008. There was no deregulation before 
2008. In fact, there was none throughout our economy except in 
finance.
    In the financial area, there was no deregulation from the 
New Deal up until 2008. Every other area of the economy did 
very well with deregulation. We had a lot of growth, a lot of 
improvement in products and innovation, reduction in cost, and 
so forth, all because of deregulation.
    But not in finance, which has been controlled by the 
government very carefully, and I am here--speaking here almost 
entirely of the banking system, which has been increasingly 
regulated all this time. And the Acts you refer to, FDICIA and 
FIRREA, were perfect examples of that.
    Now, when people try to blame the financial crisis on 
deregulation, they point to Senator Gramm's Act, Gramm-Leach-
Bliley, in the elimination of one part of the Glass-Steagall 
Act. That had no effect whatsoever on the financial crisis, 
which, as we know, was the result of mortgage meltdown, the 
housing system in this country coming apart because of a 
reduction in underwriting standards, which was induced, as I 
have said, by government activity.
    So there was no deregulation and there is no reason to 
blame deregulation for the financial crisis.
    Mr. Emmer. Senator Gramm, you were waving at me?
    Mr. Gramm. Let me just say, people assume that because I am 
the ``Gramm'' of Gramm-Leach-Bliley that somehow this is me. 
This is what I thought in 1999. Ninety members of the Senate 
voted for it. It was supported by President Clinton and every 
financial regulator in America, and it was the best judgment I 
had at that point. But if I thought that it was a mistake, I 
would say so.
    I don't see any evidence that it was a mistake. If allowing 
banks and security companies to--insurance companies to 
affiliate through a financial services holding company where 
bank capital couldn't be put into those other areas--if that 
were a problem in causing the financial crisis the financial 
crisis would have start in--started in Europe where they never 
separated the things to begin with.
    Mr. Emmer. Senator?
    Mr. Gramm. And I would add to your list one other thing.
    Mr. Emmer. What is that?
    Mr. Gramm. When the Congressional Research Service did its 
outline of Gramm-Leach-Bliley it never used the word 
``deregulation'' or ``deregulates.'' The truth was it allowed 
the affiliation but it kept the same regulators regulating the 
same thing.
    There isn't any evidence to substantiate the claim that 
there was this massive deregulation between 1980 and the 
financial crisis. It just won't hold water.
    Mr. Emmer. Thank you.
    I see that my time is quickly expiring so, Mr. Chairman, I 
will yield back.
    Chairman Hensarling. The time of the gentleman has expired. 
There are no other Members in the queue.
    I would like to thank our witnesses for their testimony 
today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing stands adjourned.
    [Whereupon, at 1:09 p.m., the hearing was adjourned.]

                            A P P E N D I X



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