Jason Hartman welcomes Bob Pozen, a Senior Lecturer at MIT’s Sloan School of Management, a Senior Research Fellow at the Brookings Institute and former Associate General Counsel for the SEC. Bob and Jason talk about changes in legislation and regulations through the banking system, which may help small to medium-sized banks and increase lending by the big banks. They also discuss Bob Pozen’s book Too Big to Fix, peer-to-peer lending, and the Security and Exchange Commission’s constraints on employees working for corporations after their service.
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Welcome to the creating wealth Show episode number 768 768. This is your host, Jason Hartman. I want to wish all of our listeners in 164 countries around the world, a very Merry Christmas, and a very happy holiday to you. It has just been such a great journey being with you for so many years and so many episodes. And I so much appreciate your listening to the show. You’re you’re reviewing the show, rating the show, telling your friends about the show and spreading the word on how to protect yourself from the powers that be that will devastate our portfolios, and our retirements. And it’s just been a great honor to be with you all this time. So today we have a fantastic episode. And we’ve got a couple really fantastic episodes. For example next week, now look at I understand, it’s The holidays and you got things going on. But you got to listen to the shows because we just had a really historic sea change in our government. And even if you’re not a US citizen and you don’t live in the US, you might be thinking, well, Jason, that doesn’t apply to me. I live in Europe. I live in Asia. No, it definitely applies to you, you know, if you’re thinking of investing in the very special us real estate market, if Yeah, I mean, you know, it impacts so much of the world. Everything is going to change in terms of trade in terms of the economies of China and Japan, and Indonesia. I mean, this is this is just a huge change. And I have been diving in deeply with many, many guest experts on trying to figure out the significance of the political sea change. Of course, I’m talking about the Trump administration, what it will mean for all of us, it is hugely significant. It represents 180 degrees. About face in in policy and I mean it’s just a giant thing i don’t i don’t know if we really if any of us realize the size of this shift and then of course the business cycle and and and what that means to us and there were just so many issues so today I think you’ll enjoy this episode Monday we’ve got another fantastic episode next Wednesday as you’re as you’re cleaning up from from Christmas as you’re getting ready for the new year. A lot of good stuff so do not miss these episodes super important to be listening to all these episodes right through the holidays because there’s there’s some really important stuff coming up you do not want to miss this stuff. Anyway, let’s get to our guest today. Of course a lot of you have been registering for upcoming meet the masters of income property investing in January. You’ve been visiting the New Jersey hartman.com website every day literally every day we’re making improvements and refinements to our new website. And we thank you for your feedback. We appreciate that. We try to consider all feedback on the on the new website. So check that out at Jason Hartman calm but be sure to register and join us for meet the masters of income property. It will be our best one yet. The 2017 we only do this once a year. Go to Jason Hartman comm slash events and get your tickets for meet the Masters before the next price increase happens and we will look forward to seeing you there. Let’s get to our guest today and very happy holiday to everybody. We will keep producing some great episodes through the holidays through the New Year. Don’t miss a single one of them. Here we go with today’s guests.
It’s my pleasure to welcome Bob Posen. He is chairman emeritus. mF s investment management, a senior lecturer at MIT Sloan School of Management, senior research fellow at the Brookings Institution, and former associate General Counsel for the SEC, the securities exchange commission, and author of too big to save how to fix the US financial system. Bob, welcome. How are you? Okay, thanks for having me on your show. Good to have you on give our listeners a sense of geography and tell us where you’re located.
Bob Pozen 5:27
Well, I’m located in Cambridge, Massachusetts, because some sitting in my office here at MIT Sloan School of Management, fantastic.
Jason Hartman 5:36
Well, you know, I just want to make sure we cover this because so much of our audience is interested in real estate investing. You know, one of the things you talk about is Dodd Frank, and this is this onerous piece of legislation about 2200 pages long that has wide ranging impact on the real estate in business, whether it be investing or for homeowners or or trading notes. In mortgage interest instruments on the secondary market, what do you think? I mean, Trump has specifically addressed Dodd Frank. I know what what do you think will happen to Dodd Frank
Bob Pozen 6:10
under a Trump administration? I do not think that Dodd Frank will be repealed because it would take 60 votes in the Senate to repeal it. And I don’t think that the Republicans can get another eight democratic votes over there is a consensus on a number of issues that really need change. And many of these issues are, were dealt with in the Obama administration through regulation and those can be changed. So the first thing probably the most important to homeowners is how small and middle sized banks are being treated. There were a lot there was a lot of concern about too big to fail. And there was a huge there were a huge number of regulations passed to deal with the very largest banks. Unfortunately, many of those regulations King, also to cover small and medium sized bags. And so I think that probably, we can expect that the regulation of small and medium sized bags will decrease. And specifically, if they can come up with a meet the new capital requirements, then they’re going to be able to be free to do a lot more things. And I think that will be very important in terms of the loan volume of all sorts. Second of all, I think we have a special council it’s called stability Council, which is empowered to name not only large banks that are too big to fail, but insurance companies and any other financial institution. Now I think that’s very controversial. They’ve so far named Prudential and met MetLife is in the process of suing them and I believe that that whole process is going to be slowed down, that we’re not going to see a lot of non banks being deemed to be too big to fail and then subject to a whole new set of regulations. And then third of all, we have this consumer financial agency, which at the moment is headed by one person. And I think it’s pretty clear that that’s going to be restructured. So that it will, it will be more like more like most agencies, and it will have three republicans and two Democrats. Yes. And
Jason Hartman 8:34
so you’re talking about the Consumer Financial Protection Bureau that is sort of being run by it like a little, you know, a little kingdom, right. I mean, one personalities, one person who’s head of it and he’s not very accountable to anybody. He does. He does are basically
Bob Pozen 8:52
Well, he has those characteristics because he, he doesn’t have other commissioners and he’s got a budget which he gets into directly from the Fed, but the Fed doesn’t have the right to sort of really hold him accountable. So I think, except for the courts, I think he does have much more power than almost any other agency. And I think that’s going to definitely change.
Jason Hartman 9:16
Yeah, I hope so. So, I mean, is that when we talk about Dodd Frank, this has wide ranging impact on on real estate? Yeah, every year, you know, for investors, and for homeowners, of course, and and for hard money lenders and these small to medium sized banks that you mentioned, when we began is is the consensus that, you know, Dodd Frank is just too onerous for the small players. And, you know, maybe the big players should be saddled with it because they can they can deal with the regulatory issues, but the small players should be exempted or it should be softened.
Bob Pozen 9:50
I think. I think there is a consensus that there has been too much regulation of small and medium sized banks, which really or not the cause of the financial crisis that are unlikely to be, you know, systematically important and cause failure around. And so we’ve had very, very few new small banks start. And a lot of them would tell you that they’re overwhelmed by regulations on money laundering, and just all sorts of details stuff that really causes great compliance costs. So I think that will change. The one thing that Frank didn’t do is they did not address Fannie and Freddie. These are the two previously shareholder own institutions, and they and they continue to buy mortgages, but they’re owned by the federal government now effectively, because they’re in conservatorship. Everybody would like to change them but the difference in opinion is use some people would like to get rid of them totally and let mortgages go back. To the normal market, others will say, Well, what we need is to turn them into government agencies and stop making believe that they’re owned by shareholders. So there’s still a tremendous disagreement on that point. And I’m not sure that that’s going to be resolved sooner than later.
Jason Hartman 11:17
Just out of curiosity. Can I ask where you fall on that? I mean, do you favor Fannie and Freddie becoming truly, you know, governmental agencies, or do you favor privatization or, or somewhere in between? I guess,
Bob Pozen 11:29
I actually think that I that that. We already have a government agency that insures mortgages called the FHA and then we have the VHA. So I think we ought to decide what we want to do in terms of government’s insurance of mortgages and run it through them. I think the problems with Fannie and Freddie is they were neither private nor public. I think I would favor something which was Were they they became private institutions, but real true private institutions, meaning that the government didn’t provide support, and that when people sold mortgages to them, they weren’t. The people who are sellers would retain some of the risk. I think the biggest problem that caused the biggest factor behind the mortgage crisis was that you had lots of mortgage brokers that could sell mortgages to Fannie or Freddie, and then they didn’t seem to care what happened because they’re out of the loop. And I think we need to have some capital at the lender level, some risk retention at the low lender level so that they have some skin that theoretically they
Jason Hartman 12:43
can force them to buy back the bad mortgages, when they if they go bad in 18 months, the lender can be forced to buy them back. You know, I don’t know how much Yeah.
Bob Pozen 12:53
Yes, it’s not happened very often. And usually when these
Jason Hartman 12:57
companies are so paper thin, they’ll just declare bankruptcy. You know, and then just start Well, that’s what I
Bob Pozen 13:02
that’s what I mean is if you’re going to have a true private market, then people make these mortgages have to have a little capital. I mean, that’s part of the deal. I mean, you can’t have people in the business of making mortgages who have no capital to back their processes, then you’re just asking for trouble.
Jason Hartman 13:20
Yeah, well, and you’re right. I agree with you completely. I just want to say that the counter argument to that is that, you know, that’ll reduce competition in the marketplace that will increase costs for consumers, etc. I mean, you know, what I’m gonna say there, right. So it’s a it’s a tough, I mean, it’s a tough line to walk, isn’t
Bob Pozen 13:36
it? Yeah. No, I think there’s there’s all a question of what’s a reasonable balance? And the The answer is that we, we have lots of banks that originate mortgages that have capital and I and I’m perfectly okay with lots of other types of institutions that originate mortgages. But But if if a mortgage broker originates a lot of mortgages and sells 100% of them. So the federal government or to Fannie Mae, then they no longer have a stake in that mortgage really being done properly. So I think it’s if you don’t want to have capital, then you can have some risk or retention or some representations or something. But you’ve got to you’ve got is moral hazard to tell somebody you can make money by issuing a mortgage, but then you can sell the mortgage The day after 100% of it, and you no longer care enough about what happens to the mortgage. Absolutely. No question.
Jason Hartman 14:44
Yeah. Yeah. Yeah, the whole the whole system was incentivized improperly. And I remember reading an article in one of the major magazines about that in, you know, circa 2002, or 2003. And I’ve owned a couple of mortgage companies over the years and you It’s just unbelievable. I mean, they the these mortgage brokers, so many of them, I would just say it. I mean, they’re such crooks, you know, they’ll just they’ll just put together any loan. I couldn’t believe the type of people I started meeting when I, when I had a mortgage company, you know,
Bob Pozen 15:15
well, you have the government. Now, this is the parallel that we have the government FHA, VA, insuring 100% of mortgages that are made by banks, if if the government insured 95% of the mortgages, these banks would make them but they would be more diligent about making them. We don’t really want the government to take 100% of the risk. Because if they do, then we don’t have enough incentives on the private side to do a good job. Yeah,
Jason Hartman 15:45
I couldn’t agree more. So just one more thing on Dodd Frank, so you don’t believe it’ll be repealed under Trump? It sounds like you do believe there will be some changes. Maybe it’ll be soft and
Bob Pozen 15:55
I think there’ll be there’ll be, see, I think there there are two different things. One is Lots of things that were done under Dodd Frank, were done through regulation, there were literally thousands of pages of regulation. Those can all be changed without legislation. So the fact that you don’t have 60 votes in the Senate to repeal Dodd Frank doesn’t mean you can’t change those regulations. And there are lots of them. There are lots of regulations on derivatives on loan to value ratios on, you know, money laundering. They’re just, you know, so many different regulations. And those are the ones that are going to change. And I think they’ll change in a way that helps small and medium sized banks. And I think that’s very important. So I just, I just want to follow the flow here, though, if that happens, or probably more like when it happens, that will cause more money to flow into the real estate market, right, because lending requirements will be loosened a bit softened, and the pendulum will swing. You know, I think it’s swung too far. they’ve overcome In my opinion, yeah. Now I agree, I think that’s exactly what will happen. Banks now are afraid to make anything. A smaller medium sized bankers are afraid to make anything but a gilt edge loan because they think the examiner will come and beat them up about it. So we’ve got to have some more flexibility on this. And I think that’s what we’re going to have.
Jason Hartman 17:19
So, just to follow that flow more money comes into the real estate market that means upward pressure on prices, because your typical supply and demand equation right,
Bob Pozen 17:28
well, I think that will be one factor that will influence supply and demand. Other factors will be you know, the degree to which wages go up. So people have more money, the the relative rise in the housing prices, and we have we have a counter force here, which is rising interest rates, which tends to as you know, go against homebuilding and we already have seen a very steep rise in rates and If President Elect Trump does pass a number of these tax cuts and infrastructure spending, I think it’s predictable that interest rates will rise further. So you’ve already seen that reflected in the mortgage rates. So you have, we have, in a sense, two different forces, the forces that are helping mortgages, helping home mortgages less, which include less bank regulation, more jobs for people, higher wages, more economic growth. On the other hand, we’ve already seen a rise in housing prices, so that discourages some people and rates are very important. And I think that probably mortgage rates will be the key for a lot of housing markets as to how far they’re going to go up. And then just to throw in some of my experience into that mix. It’s interesting when you see rates go up, it causes a dramatic amount of urgency and people get off the fence and they start buying Of course, that only works to a point because then rates move out of the affordability category. And, you know, affordability has been quite good in the linear markets that aren’t the high flying markets that we, you know, see, well, you make a good point is when rates start to go up, people, it actually helps on buying because then people fear that if they don’t get it now, it’s going to get worse. But once they settle in at a higher plateau level, then it does discourage home buying. Yeah, yeah, interesting
Jason Hartman 19:30
stuff. So you’re a Democrat, yet you were appointed by bush and Romney to head up the economic planning. How did this happen?
Bob Pozen 19:38
Well, I was appointed by President Bush when he put together a special commission to strengthen Social Security and the commission. And of course, when I say Romney, I’m talking about as Governor Bush when he was president. And I knew already right but I’ll talk about them separately. Okay. And so it wouldn’t bush became when he started this commission he was constructed to have both half democrats and half Republicans. So therefore, it’s very understandable that there was that I as a democratic was part of the commission because that was necessary in order to have a bipartisan commission. In romney’s case, it was much more surprising. I didn’t know Mitt Romney. But in Massachusetts, it’s mainly a democratic state. At the time, he was elected, we had a severe budget crisis. I had just retired as being president of fidelity. And he was looking for someone with financial savvy, who could help navigate the state out of this crisis. And he was really keen on getting the best talent and he didn’t really care that much about whether anybody who was a Republican or a Democrat because basically the legislature was all democrats anyway, so I think he was just trying to get the best people and he did a very good job and getting us out of that budget crisis for the first year and a half. Then he started running for president and sort of took his eye off messages.
Jason Hartman 21:03
Talk to us a little bit about the Securities and Exchange Commission the SEC. what some have jokingly called the scoundrels encouragement commission. I love that one.
Bob Pozen 21:13
Well, I don’t I don’t think I think the the departing Chairman Mary Jo White has had a very strong enforcement rationale and enforcement and she’s done a pretty good job at bringing that to bear but, but but there are lots of other things. Let me let me give you
Jason Hartman 21:30
a little ammunition a little fodder here. I had to make it interesting. Okay. And, you know, talk about whatever you like, but, you know, the one thing that just bugs the heck out of me, is when companies can hire these, these government employees that work for the FDA, the SEC, you know, they can sort of they’re, they’re investigated by the companies and then the companies, you know, get friendly with him, and, and offering them a job or dangling that carrot out there. You know, that’s just And I mean, right?
Bob Pozen 22:02
Well, there are rules now that constrain that they don’t prevent it, but they constrain it in the sense that, depending on what level you are, if you leave the SEC, you’re not allowed to work for a year or two, on any matter that you were had participated in when you’re at the SEC, and that goes for a lot of other agencies. And then there are certain bans on other people about lobbying and agency where you were a very senior official, but having said all that, those are short term constraints. And after a year or two, you’re, you can you can do what you want. But you know, that’s a double edged sword because if we were if we were a country, like say, France, they’re all the bureaucrats, stay in the government for years. They’re all go to a certain number of universities and get trained and there Very little intersection here. I think it’s actually a good thing, that we have people in the government who have private experience and then people who come from the government who then go into the private sector. So, to some degree, that’s a positive, but I agree with you. We have to, we have to be worried about conflicts of interest. Yeah,
Jason Hartman 23:20
yeah. Okay, talk to us. Let’s, you know, direct the rest of our talk quickly here to, you know, your book specifically too big to save how to fix the US financial system. Just give us some of the broad strokes on that, if you would?
Bob Pozen 23:34
Well, the biggest things are, first of all, that we should increase the capital requirements of financial institutions, which will be pretty much done. And then probably the biggest thing that we didn’t think about was liquidity. liquidity turns out to be much more important than people previously thought. If you may have an asset, that’s good, but the question is, if you get a financial crisis, can you really So, now we have more rules that require financial institutions to hold liquid assets. And I think that’s a second thing. That’s very important. And, you know, the the. The third thing is we have a very broad range of institutions that are under the radar, and a good one now is online lenders. So a lot of these online lenders, and they become very big, and they’re lending. And the question is, you know, is there a regulator for them? Who are they lending to? What are the rates? What are the disclosures involved? And, you know, so it’s, again, a two edged sword, we want to encourage lending, we want to encourage innovation. But sometimes I wonder whether these people who are giving their money to various portals and for For new businesses and online lending, some times I wonder whether these people really know what they’re getting into? Yeah. are you addressing peer to peer lending when you say that?
Jason Hartman 25:08
Yeah. Peer to Peer. And that’s not really you don’t hear much for real estate. I mean, it isn’t the crowdfunding world. And I don’t know if you’re talking about crowdfunding,
Bob Pozen 25:16
those of us in the crowdfunding area. The question is, do people you know, it’s okay with me if people want to take a fling and try it a new business? I don’t think a lot of these people realize that most of these new businesses go belly up. And the question is, are people really knowledgeable, but the risk that they’re taking, so that’s the issue with crowdfunding. Most of these crowdfunding companies don’t have detailed business plans, they don’t have any financials and so it’s perfectly okay with me. If sophisticated investors put their money in then they either lose it or not. And I hate to see people who are in a position where they really can’t afford to lose the money. lose it when They really don’t know what the risks they’re getting in the peer to peer lending. This is separate questions just they’re lending out a lot of small businesses, medium sized businesses, probably partly because of the thing we just talked about where small medium sized banks aren’t willing to serve these people. So they’re getting their loans from, from peer to peer lending. They’re playing very high rates. And, you know, again, we have to question, you know, are these things being done in a proper manner? They’re pretty much unregulated at the moment, but there are talk about having some oversight. That’ll be interesting to see what happens, I can imagine that the world of crowdfunding and peer to peer lending has
Jason Hartman 26:41
dramatically increased litigation.
Bob Pozen 26:44
Well, it’s predictable that crowdfunding will, in the next five or 10 years generate a lot of litigation, a lot of very, very unhappy people, because they won’t realize what they put their money into. And I think that’s a that’s a tough one. Because you know what? You know, people, everyone has the right to, you know, try and buy a lottery ticket question has, you know, any? Do they know what they’re getting into and be we don’t want them in the situation where their family has no food if the lottery ticket doesn’t work, you know?
Jason Hartman 27:16
Absolutely. That’s why we have the accreditation rules and all that kind of stuff. So one other thing I just want to ask you before you go, what is going on with the banks, you know, they they’re stabilized, they’ve got money, yet, it seems like they’re hoarding it. Is that true? Or is that just a perception people have, you know, where banks are buying treasuries rather than making loans? You know,
Bob Pozen 27:40
take a stab at that if you would want to, you know, it’s interesting you say that, because every time I go to a meeting of businessmen of banks, the banks say, oh, they’d love to learn more, but there aren’t enough good credits around. And the business people say, Oh, no, we want to you know, borrow and weren’t, you know, we’re good credits for they don’t look at us. So It’s it’s a conundrum as to why this is happening. But partly it is that banks can now put money at the Federal Reserve and get 25 basis points or half a percent interest essentially risk free. And so that’s a bit of an incentive for them to put money with the Fed rather than lend it out. And so I would like to see that changed, because I think that’s, that’s something was done for a totally different reason, but now sort of access and incentive for banks not to lend. And the other thing banks will say is that, you know, they they have to the capital requirements are too high, the liquidity requirements are too high, so then it’s not profitable for them to lend. And, you know, I think there are a lot of good credits for them to lend but the banks are starting to lend a little more now. And, you know, as the economy strengthens, hope They’ll be lending more. But as as long as they can get a risk free rate. That’s pretty good as that the Federal Reserve, that’s a bit of a disincentive to lend, don’t you think? Oh, absolutely.
Jason Hartman 29:13
Of course. Yeah. No, no question about it, Bob. give out your website.
Bob Pozen 29:18
My website is Bob Posen calm VOB t like in Peter O’s, he likens zebra e n.com. And I, the book, too big to save is there and I also wrote a book two or three years ago, called extreme productivity about how you can personally increase your own productivity. So that’s been a bit of good stuff. Good stuff. Bob
Jason Hartman 29:41
Posen, thank you so much for the enlightening conversation. We appreciate you joining us. Okay, take care of Bye bye.
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