John Allison: Government policies led to financial crisis

John Allison does not mince words when explaining how the United States and subsequently the world stumbled into the financial crisis that developed one year ago.

“Government policies are the primary cause of the crisis,” he told an audience of nearly 400 students, faculty and members of the community during a speech at the Worrell Professional Center Thursday afternoon. “The Financial Crisis: Causes and Possible Cures,” was the kickoff event of this year’s Leadership Speaker Series sponsored by the Wake Forest Schools of Business. The event was also the culmination of BB&T Day at Wake Forest. As part of the event, BB&T executives spoke to students in classrooms and roundtable discussions.

Allison, distinguished professor of practice at the Schools of Business and chairman of BB&T Corporation, joined the Wake Forest faculty this year after stepping down at the end of 2008 as chief executive officer of the bank. During his 20-year tenure, BB&T’s assets grew from $4.5 billion to $152 billion, and he led the bank through the financial collapse last fall.

He filled his remarks with numerous anecdotes from his experiences in banking and noted that the opinions were all his own, not those of Wake Forest.

“We were buried with cash,” he said of BB&T during the period when some of the largest banks in the world appeared near collapse. “There was a huge flight to quality going on.”
But despite many opportunities for healthy institutions to acquire assets at bargain prices, he said misguided policies, such as mark-to-market accounting rules, dissuaded businesses from making decisions that were economically sound.

At the heart of Allison’s critique of government policies is the fact that since the Federal Reserve was created in 1913, the government has owned the monetary system of the United States. He said the system was created to reduce volatility in the short term but has created more volatility in the long term.

“We do not live in a free market in the United States. We live in a mixed economy,” he said.

Allison pointed also to actions by the Federal Deposit Insurance Corp. and the Securities and Exchange Commission, as well as longstanding government efforts to promote affordable housing through the government sponsored mortgage lenders Fannie Mae and Freddie Mac, which he said could not exist in a free market and “effectively drove everybody out of the prime mortgage business.”

After government agencies pursued policies that pushed financial institutions to increase leverage and to lower lending standards, once the crisis began, Allison said, the government made it worse through an ambiguous program of bailouts for some companies and not others. “They took a normal correction process and turned it into a panic,” he said.

Allison’s prescription for putting the economy on a sounder footing includes ending bailouts for companies that would otherwise fail in a free market, cutting government spending, cutting business and personal taxes, boosting real estate sales through tax credits, and restoring cash-basis accounting. He also recommended privatizing Fannie Mae and Freddie Mac, Medicare and Social Security.

While Allison believes the economy has pulled back from the brink and remains resilient, he said there is a great risk of 1970s-style “stagflation” because of the misallocation of resources, and he is concerned that over the long term the United States is going broke. “If you run the numbers, frankly it’s scary,” he said.

Ultimately, the issue is philosophical, not economic, Allison said, asserting that a “free lunch” mentality and weakened ethic of personal responsibility are at the root of the flawed policies that created the financial crisis.