Two hundred and twenty-three years ago, twenty-four businessmen gathered under a buttonwood tree four miles south of here and signed an agreement to the following effect: “We the Subscribers, Brokers for the Purchase and Sale of the Public Stock do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day for any person whatsoever any kind of Public Stock at a less rate than one quarter percent Commission…”
It was signed on May 17th, 1792, one of the most consequential days in U.S. history: the founding of the New York Stock Exchange.
So much of what has made America the most prosperous country in the world is a result of what those 24 men signed under that tree outside of 68 Wall Street. It was also on Wall Street that George Washington took the oath of office as our first President. And it was on Wall Street that the Bill of Rights was proposed by the first United States Congress.
But for a century or more, Wall Street has been famous for one thing: its role as the financial engine of the world’s economy. It has funded entrepreneurs, homeowners, and the world’s great innovators.
However, Wall Street’s reputation isn’t what it once was.
After the bailouts of 2008, Americans came to believe that Wall Street is out for itself. That the game is rigged. That the wealthy and the well-connected have insurmountable advantages over average Americans who simply work hard and play by the rules.
At a time when average Americans have experienced stagnant wages for a quarter century – while dealing with the rising costs of health care, child care, college tuition and consumer goods – distrust with Wall Street, as well as Washington, is probably greater than any time in the modern era.
And for good reason: most Americans see a special political class that spends large sums of money to wield influence, to protect entrenched interests, to advocate for special favors at the expense of taxpayers and the general public.
This kind of cronyism has transformed capitalism into corporatism, where profit is secured without risk. Where government officials reward cronies in pet industries, forcing taxpayers to pick up the tab for companies like Solyndra, or quasi-public entities like Fannie Mae and Freddie Mac.
Wall Street should not be let off the hook for its bad behavior. Banks made a lot of mistakes regarding risk management leading up to the crisis. Some financiers intentionally misled investors and customers. They pushed people into deceptive financial products.
This is wrong. But instead of them being punished, it was average Americans who paid a tremendous price.
To be quite frank, they were screwed.
They were not bailed out. They lost jobs, homes and savings. And they have every right to still be angry about it.
But I am tired of politicians bashing Wall Street while ignoring the sins of Washington, D.C.
It was Washington regulators who fell asleep at the switch. It was Washington politicians who changed laws that created the housing crisis.
The roots of the financial crisis can be traced to the 1990s. President Clinton’s goal was to add another 8 million people to the ranks of homeowners. He sought to achieve this goal by forcing the two federally-backed mortgage giants – Fannie Mae and Freddie Mac – to increase from 30 percent to 42 percent the share of mortgages they sponsored from low- and moderate-income borrowers.
In 2000, Clinton increased the share requirement yet again, to 50 percent.
In a speech on his housing policies, President Clinton said: “Our home ownership strategy will not cost the taxpayers one extra cent. It will not require legislation. It will not add more federal programs or grow federal bureaucracy.”
It reminds me of the promise, “if you like your doctor you can keep your doctor.”
The truth of the matter is many Republicans were for these changes too. In fact, Under the Bush Administration in 2008, Washington told Fannie and Freddie they wanted 56 percent of loans to go to low- and moderate-income borrowers. So it is fair to say there was bipartisan support for Fannie, Freddie and private mortgage lenders eroding their lending standards in order to meet the Clinton-era requirements.
This set in motion catastrophic events. Lower-income Americans started taking out mortgages that, in many cases, they couldn’t really afford. And upper-income Americans started taking advantage of the relaxed standards to buy even larger homes than the ones they already had.
Prior to 1992, nearly all mortgages held by Fannie and Freddie had been purchased by Americans with good credit, who had paid at least 10-20 percent down – what bankers call prime mortgages.
But by 2008, half of the mortgages in the country – 31 million of them – failed to meet the prime standard, thanks to the new Clinton regulations. And three-quarters of those non-prime mortgages were held by government agencies or government-backed entities like Fannie Mae.
Not only were Americans buying homes with little or no money down, but they had no documentation of their income or assets. The banks looked away. The regulators looked away. Everyone pretended the good times would never end.
When some people warned that danger was afoot, Democrats Chris Dodd and Barney Frank blocked reforms to the federal mortgage system.
Said Congressman Frank, “I want to roll the dice a little bit more in this situation toward subsidized housing.”
Looks like Congressman Frank rolled snake-eyes.
As Americans began to borrow more money to buy bigger houses, demand went up and prices went up. A whole ecosystem of lobbyists emerged to block reform, and ensure that the party could go on. People started saying that housing prices would never go down again. And then the music stopped.
During the good times of the ‘90’s, seeds were sown that would do great harm to the middle class in America.
If Secretary Clinton wants to take credit for the “Clinton economy,” then she must defend the destructive homeownership policies advocated by her husband that pushed shoddy loans to people who couldn’t afford them, and the economic chaos that followed.
Once the smoke cleared, Congress misdiagnosed the problem, passed the wrong remedy, and actually made things worse. In 2010, Chris Dodd and Barney Frank wrote a new bill that bears their name.
In the five years since President Obama signed Dodd-Frank into law, Fannie and Freddie have been backing even more mortgages than they did before.
During the housing bubble, taxpayers backed around 50 percent of all American mortgages. Today, they back around 60 percent of them. Thanks to Dodd-Frank’s blizzard of new regulations, it has become extremely difficult for investors to set up new funds. And the law’s so-called “Volcker Rule” which is supposed to prevent banks from making risky bets, has become so cumbersome that banks can’t adequately manage their balance sheets.
It’s everyday Americans who are paying the highest price for it. Credit card and checking account fees have gone up. Nearly one million people were shut out of mainstream banking from 2009 to 2011. So instead, many turned to riskier forms of credit, such as payday loans, as lenders of last resort.
Over 1,300 community banks have closed, making life for small businesses much more difficult. Yet the big banks are bigger than ever. Three decades ago, the six largest U.S. banks held assets amounting to 14 percent of our GDP. Today, it’s 61 percent.
If you thought the financial crisis of 2008 was bad, wait until the next serious economic downturn.
The fact is the Obama Administration is pursuing some of the same reckless policies that caused the housing crash of 2007 and 2008. Fannie and Freddie are still pushing relaxed credit standards, and down payments on homes that are too low.
The next crash is on the horizon, and the question is: have we learned anything from the last one?
That’s why, today, I am proposing a new agenda for Wall Street reform, one that will do far more than Dodd-Frank to end the era of bailouts and cronyism.
If we want to truly end “too big to fail,” we need to restore market forces to banking, where failure is not rewarded or bailed out.
I want to be very clear: if I am elected president of the United States, we will not bail out a single bank on Wall Street.
Concentrating assets in the hands of a few giant banking institutions is a recipe for massive bailouts. Systemically important banks can borrow money at lower rates, giving them a substantial competitive advantage, because investors know those banks will be bailed out in the future. It has to stop.
We have to level the playing field between small banks and big ones. Second, we have to put forward smart regulations that make it less likely that the banks of the future will fail.
I don’t always agree with the Federal Reserve, but last week they announced the final version of a new rule that points us in a promising new direction.
The Fed examined America’s eight largest banks – the Global Systemically Important Banks, or G-SIBs – and the Fed required them to harbor additional capital requirements: financial cushions in case of another downturn.
What’s smart about this new rule is that it uses a formula to ensure that bigger and more complex banks must maintain larger capital cushions. In that way, the Fed has reduced, but not eliminated, the risk that these banks will someday fail again.
The Federal Reserve and Congress should consider strengthening this rule, to help assure American taxpayers that they won’t be on the hook for trillion-dollar bailouts in the future.
Let me say a few more words about the Federal Reserve.
I mentioned the role of Washington politicians and Wall Street financiers in the financial crisis of 2008. But it bears noting the Fed shares part of the burden too. They kept interest rates too low for too long. They created the conditions for the housing bubble that crashed in 2007 and 2008. And they are creating those conditions again.
We must have steady, reliable currency. We must have a predictable money supply. And we must have market-based rules that make the Fed transparent and understandable to everyone.
We also need smarter regulations than the Volcker Rule. We could once again require banks to separate their traditional commercial lending and investment banking and related practices. Alternatively, these large, one-stop-shop banks could be required to hold a significant, additional capital cushion for their trading activities.
Who knows? Those banks’ shareholders just might convince them to break up into smaller units on their own, in order to unlock the value of their distinct parts.
We should replace Dodd-Frank’s so-called “orderly liquidation authority” with a true, orderly bankruptcy process, so that banks of any size can fail. Small banks can be closed by the FDIC in a weekend. A reformed bankruptcy code for big banks can help make bailouts obsolete. In 2012, scholars at the Hoover Institution proposed adding a new Chapter 14 to the U.S. Bankruptcy Code, with this express purpose in mind.
We should create regulatory breathing room for banking with digital currencies, like Bitcoin. Digital currencies harbor the possibility of reducing the cost and improving the quality of financial transactions in much the same way that the conventional internet has done for consumer goods and services.
We have to free up credit for small businesses on Main Street in order to truly revive our economy. I once served on a community bank board in the small town of Haskell, Texas. I can assure you that its capital was vital to the prospects of Main Street businesses.
Dodd-Frank took aim at Wall Street and ended up harming Main Street. And today, community banks are spending more time and money on legal compliance than ever before. We should exempt community banks, banks run as partnerships, and asset management firms from Dodd-Frank’s onerous and excessive regulations.
And let me say a word about one of Dodd-Frank’s least accountable new agencies: the Consumer Financial Protection Bureau. It’s run by a sole director and can spend whatever the Federal Reserve wants it to spend, without Congressional review.
The regulations imposed by the CFPB haven’t protected consumers, they’ve made credit cards and checking accounts more expensive. They’ve also made it harder for community banks to compete and stay in business.
At a minimum, we need to reform the CFPB so that its leadership and funding are accountable to Congress. We also need to put the CFPB under a strict regulatory budget, so that it doesn’t do more damage to consumers than it already has.
Lastly, Congress should wind down Fannie and Freddie. In the meantime, the two mortgage giants should maintain strict capital cushions, just like the big banks, and we should phase in a requirement that all loans that they sponsor are accompanied by higher, more responsible down payments.
And let me be clear: if we want a vibrant home lending market in America, we need to stop the trend of pushing more and more home loans to Fannie and Freddie and start rejuvenating the private insurance market again.
Before I move off of financial reform and talk about the economy more broadly, I want to discuss why Texas largely escaped the housing crash of 2007 and 2008.
To put it simply, no one running for President has a stronger economic record than I do. The proof is in Texas’ performance after the Great Recession.
From December 2007 to December 2014, Texas added 1.5 million jobs. The rest of the country lost 400,000 jobs over that same time period. We did this by keeping our taxes low, and our regulations and frivolous lawsuits to a minimum, and by educating our kids.
And significantly, Texas didn’t have a housing crash like the ones they faced in Florida and Nevada. One analyst recently estimated that more than a third of Florida’s job growth, under Jeb Bush’s administration, was due to the housing bubble.
During the Great Recession, the national house price index fell by 20 percent. In Texas, it fell by less than one percent. In 2011, 27 percent of all first mortgages in America were underwater. In Texas, only 7 percent were. Among non-prime borrowers, 54 percent of mortgages were underwater across the country, compared to only 10 percent in Texas.
Part of the reason for our success is that Texas has flexible zoning laws and land use regulations. Our cities have been able to expand the supply of housing along with their expanding population.
But there’s another thing we have in Texas that the rest of the country could learn from: we regulate, in an intelligent way, the use of a type of mortgage called “cash-out refinancing.”
During the housing bubble, in most parts of the country, American homeowners could take advantage of an increase in the value of their home to refinance their mortgage and take cash out, as if their house was their own ATM.
For many Americans, this was a great financial resource. But for some, it was a way to borrow and spend even more than they otherwise would have. Where cash-out refis were common, the housing bubble got worse.
The problem was that when the bubble burst, homeowners who had done cash-out refis at the peak were suddenly underwater with their loans, and many went into default.
In Texas, we’ve been regulating cash-out refis since our great state joined the Union. Today, we limit the amount of cash you can take out of your home to 80 percent of its value.
This simple rule protected Texas from the worst of the housing crisis. We can stabilize the housing market across America, if Fannie and Freddie are required to hold their loans to the same standard.
If we do these things – if we end too big to fail, and stabilize our housing markets – we will have come a long way in restoring Americans’ faith in the ability of the free market economy to work for them.
But what’s most important, for both Main Street and Wall Street, is that we get our economy back on track.
There is nothing wrong in America today that can’t be fixed with new leadership. We’re just a few good decisions away from unleashing tremendous growth.
But there is a major battle concerning the right economic policy for America.
Democrats have a 1915 view of the 2015 economy.
The problem is they are building a toll bridge to the 21st Century, with higher health care costs for employers, a higher cost of living for single moms in blue states because of their land use policies.
Now Hillary Clinton wants to raise capital gains taxes.
She thought it was a bad idea in 2008. Her husband cut capital gains in the 90’s. But now that she is a proponent of Warrenism, she is for taxing capital gains, which is already double-taxation on Americans.
And here is where Democrats are blind to the effects of their policies: Secretary Clinton’s plan won’t do much harm to rich people who can offshore jobs, capital and investment, but it will harm average Americans, who can’t hire an army of accountants to lower their tax burden.
When you kill “risk capital” you kill economic growth. And economic growth is the only solution to stagnant wages.
The answer to the failed Obama-Clinton policies is not to raise taxes more. It is not to amp up the regulatory state. It is not to protest the innovation economy and companies like Uber because of antiquated views on labor.
The answer is growth.
Growth is the key to funding education. Growth is the key to funding health care. Growth is the key to reducing poverty. And growth is the key to investing in our military, and stopping the march of tyrants and terrorists around the globe.
If we set our sights on four percent growth or higher, instead of the two percent growth of the Obama years, we can solve a whole host of challenges in America.
To get there, we need to stop taxing businesses at a higher rate than any country in the Western world. We need to significantly lower corporate rates to bring jobs and investment back on shore, and to lift wages for workers.
We need to dramatically cut taxes for businesses of all sizes. And we need to cut taxes on individuals and families.
It’s wrong that Americans have to work two jobs just to afford the increased premiums posed by ObamaCare, the increased housing prices spiked by big city, liberal mayors, or the increased tuition charged by Ivory Tower elites.
And as America emerges as the leading energy power of the 21st century, we must legalize the export of our oil and natural gas.
Thanks to President Obama, Iran will soon be able to export its energy. Maybe it is time he allowed America to do the same.
If you elect me president, I will reform Wall Street and I will reform Washington.
We have a lot of Washington insiders running for President. But I will suggest true change can only come in the form of an outsider, with the leadership of a governor who was not one vote out of 100, but one out of one when a bill came to his desk.
We need someone not beholden to Washington interests and megabanks to lead the country and change the culture.
As someone who grew up on the prairies of West Texas, I know that the common sense of Main Street can help make Wall Street work again for all Americans, not just the well-connected few.
It can be done. It will be done.
If there is one thing we can learn from the 24 visionaries who met at the Buttonwood Tree, and from those who lived through the American Revolution and the Civil War and the Great Depression, it’s that America has overcome far greater obstacles than the ones we face today.
America can still be that exceptional country, where nothing in life is guaranteed, but where we all have an equal opportunity to build a better life for ourselves, our children and our children’s children.
Thank you — and may God bless you.