Interview with AEI’s Peter Wallison

On October 30, 2018, the Buckley Program hosted a dinner seminar with AEI scholar Peter Wallison. Mr. Wallison served as general counsel of the U.S. Treasury Department, and had a significant role in the development of the Reagan administration’s proposals for the deregulation of the financial services industry. He also served as White House counsel to President Ronald Reagan. Mr. Wallison discussed his latest book, Judicial Fortitude: The Last Chance to Rein In the Administrative State, in which he argues that the administrative agencies of the executive branch have gradually taken over the legislative role of Congress, resulting in what many call the administrative state. 

By: Carson Macik

CM: Thank you Mr. Wallison for sitting down with me today. I’m sure you have many insights to share, and I can’t wait to delve into the issues with you.

PW: It’s my pleasure.

CM: So, after the 2008 financial collapse, many were left wondering what happened. Some even theorize the lack of an explanation gave rise to the economic system of socialism. Of course, you’ve written a book about the issue [Hidden in Plain Sight: What Really Caused the World’s Financial Crisis and Why it Could Happen Again, 2015], and your work has pushed you into the eye of critical economists like [Paul] Krugman. What did they get wrong about the cause of the 2008 collapse?

PW: They did not understand. They refuse to accept the idea that the government’s housing policy actually caused the 2008 collapse. I can understand why they would believe that after all. They’ve always thought the government did everything right. This book, my book, makes clear that it was the government’s housing policy that caused the huge bubble and then the collapse which ultimately caused the financial crisis.

CM: In my economics class that I took in high school, we learned about the FDIC. It was portrayed very positively, that it was this safety net which saves banks from overstepping their bounds. What are your thoughts on the FDIC?

PW: Well, I do think people want a very safe investment for their savings. I don’t really think we can do without a government-backed deposit system. Once you get a government-backed deposit system, the FDIC or some other agency must regulate the banks, because people deposit their money in the banks believing that they will be able to get out of the banks if a problem arises. They won’t care whether the bank is “safe” or not. The government has to protect itself by regulating [the banks]. I do think the government over-regulates the banks. They [the banks] should be given more authority than they have to venture into new areas, but I can understand why people would be reluctant to do that. Once we establish that you should have safe deposit accounts, we have no choice but to implement a regulatory system for the banks.

CM: In that case, it would seem like some sort of regulation is needed. The administrative and regulatory state, as you’ve written about, has become a pressing issue among conservatives especially since the implementation of the Affordable Care Act, the escalating rise in government spending, and the ever-constant intervention of bureaucratic agencies into the lives of Americans. What role do you think the Fed, the IRS, and other financial agencies play in maintaining the American way of life? And have any meaningful changes come from this administration addressing that?

PW: Here’s my problem with the administrative state. It has nothing to do with the American way of life. It has a lot more to do with whether we are going to live in a democracy or not. If we actually have a democracy, that means ultimately the American people, through their representatives, have to make the major decisions for what the government does. The administrative state, unfortunately, and all these agencies of the executive branch, are functioning without any approval from Congress. And that is dangerous. If the American people come to believe the government is acting without any support from them or any control by them, they will no longer support the government. We see this happening in Brexit where citizens there, at least the majority, thought the rules coming out of the European Union were falling on them without any control or representation. So, they wanted to eventually withdraw from the European Union. That can happen in the United States: not a withdraw, but a sense that the government is no longer legitimate.

CM: I think that’s becoming more prevalent now, especially with Trump being president. I think many people feared the state more than they feared Trump.

PW: Well, the election of Trump has the implication that a very large portion of our population was tired of all the regulation from Washington. This isn’t just the business community. These are ordinary people who felt disillusioned by the regulations. They said, ‘this has got to stop.’ They felt that Congress wasn’t responsive.

CM: Organizations like the Mises Institute advocate for abolishing the Fed[eral Reserve] and returning to the gold standard. Frederick Hayek, who they quote very often, even went so far as to advocate for the private competition of currencies. Where do you draw the line with government regulation and to what extent do you think these limitations can be implemented in the bureaucratic state?

PW: I’m unsure about the whole issue of currencies and what the Fed does, whether it could be done without government action. I just haven’t studied this, so I’m unwilling to say anything definitive about it. I have many friends who are conservative economists, and yet they won’t go so far as to say the Fed should be replaced or eliminated. So, until I know more about monetary economics, I guess I’ll have to pass.

CM: That’s fair. As I’m sure you’re aware, insurance premiums are skyrocketing and are predicted to hit new records in 2019. Is over-regulation the cause of this price-hike and are there free market solutions this late in the game of government-regulated healthcare?

PW: So, I’ve always had the view that we don’t have enough consumer sovereignty in the healthcare industry. People should be able to make choices based on the cost for various kinds of healthcare services; and to the extent that they do that, to the extent that they have a number of providers, a number of services, and a number of medications, that system will drive down costs. By creating the Medicare system and Obamacare, and regulating insurance providers and imposing costs on service organizations, the government has made it very difficult for that to occur. We have a competitive system for everything, including food. If you take the case of food products, where one supermarket is trying to compete with another supermarket and there are different products within the supermarket competing among each other, you can see how the very efficient, free market system could work in the delivery of healthcare.

The data shows, for example, that automobile prices are stable over time since maybe the mid-1960’s through today. Automobile prices have remained the same in relation to the median income of the American people. It’s almost a flat line. Why is that? It’s because the automobile companies are competing with one another. They keep improving the quality of their services and the goods that they provide, but they also keep the prices down to compete.

The same thing is true in the home-construction business. If you look at the prices of homes, you see the same thing. The prices of homes increase incrementally and then crash suddenly. But, if you look at the cost of building homes, the line is flat. Why is that? Again, the answer is that the cost of building is negotiable on the free-market basis among the contractors on the one hand and the builders on the other, and that keeps the prices stable. When the government steps in, you get these giant bubbles which naturally collapse. If we had a free market in housing, we would have a stable market. And if we had a freer market in healthcare services, we would also have stable and much less expansive governmental role.

CM: That’s interesting how, in principle and in practice, the free market can be applied across many different fields.

PW: Well, if you look at most of the things in the United States, they’re completely open to the free market without government regulation. The government regulates a little bit, but it doesn’t control. It doesn’t have a major role. And when the government is not involved, you get a stable market over time. You don’t have the government causing all those collapses.

CM: The power of the free market is truly incredible. It’s quite astounding. So, you grew up in New York City, hardly a town known for its conservative populace, and then graduated from Harvard College and Harvard Law, went on to work in the Reagan administration, and now hold the position of co-director at AEI’s [American Enterprise Institute] program on Financial Policy Studies. That’s quite a distinguished career. What motivated you to reach the place where you are now, and what advice would you give to aspiring conservatives?

PW: Well, of course, I always wanted to be a lawyer. Now you don’t have to be a lawyer to be conservative: you can be an economist, or a business mogul, or anything really. But, my observation is what I said before. That is, if you look at the economy as a whole, if the private sector is left on its own largely, it produces a stable market, low prices, and a lot of innovation. If the government gets involved, it’s a terrible situation. One of the things I did when I was practicing law was representing banks and financial institutions that were heavily regulated. I could see the problems that came out of that. There are reasons why financial and investment firms need regulation, but the real problem is that the government, once it gets involved and begins manipulating things, causes problems. Then the government comes into solve those problems, only making things worse. What’s going to happen in the housing field right now? We are going to have another serious crisis because the problems that caused the crisis of 2008 have not been solved. In fact, they haven’t even been touched. When it occurs, I can guarantee you people won’t say ‘the government should get out.’ People are going to say ‘we need more government control over the housing business,’ and that’s what will have caused the problem.

CM: Thank you so much for your thoughts. I think you really gave some valuable insight into the role of government regulation.

PW: Sure. That’s just my perspective, and I think it has plenty of support among economists, but unfortunately too many people can’t imagine a world without government control. That’s a continuous fight, and I hope that the William F. Buckley, Jr. Program will pick up the baton and run with it. There’s a lot to be said for the free markets.

CM: We will certainly lead the charge. Thank you.

Carson Macik is a first-year in Saybrook College.

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