Rick Perry has as much of a chance to win the Republican presidential nomination as Bobby Jindal, George Pataki, and Jim Gilmore—which is to say not much of one. Nevertheless, his speech on Wall Street reform this week at the Yale Club in New York City was unique and important, not just because it represented areas of bipartisan agreement on limiting the size and power of the biggest banks, but also because it was a conservative acknowledgement—at long last—of the importance of prohibitive regulation. That crack in the edifice signals a possible end to the Greenspan-era belief that the free market alone can sort out predatory behavior. This laissez-faire approach wrecked the economy in 2008, and if both parties begin to recognize that, it would make us all a bit safer.
Perry’s speech covered a lot of territory. After a Washington-heavy view of the housing bubble and crash, which rightly blamed politicians and regulators for missing warning signs but mostly ignored private banks and their securitization schemes, the former governor offered a surprisingly bold take on the road ahead. Perry endorsed higher capital requirements for the largest banks so they can absorb trading losses rather than pass them on to the government. He also advocated for a firewall between investment and commercial banks, which is not unlike the Depression-era Glass-Steagall reforms now championed by the likes of Bernie Sanders and Elizabeth Warren.
There were conservative ideas in there as well: Perry proposed restricting the Consumer Financial Protection Bureau’s budget and privatizing mortgage backers Fannie Mae and Freddie Mac. But the areas of agreement reflect a growing alignment between the parties about how banks that are too big threaten the economy through their power and influence. Though conservatives come at the issue from the perspective of government cronyism, they get to the same place as their counterparts on the left, rejecting bailouts and demanding that banks reduce risk and cover their own mistakes.
But that wasn’t even the most interesting part of Perry’s address. Picking a fight with leading Republican presidential contender and former Florida Governor Jeb Bush, Perry explained why Texas didn’t have a housing bubble. Home prices only fell 1 percent in Texas during the Great Recession, and just seven percent of homes were underwater, compared to 27 percent nationwide. Perry partially touted flexible land use regulations, that allow for more building to keep the housing supply high and prices low. “But there’s another thing we have in Texas that the rest of the country could learn from,” Perry said, referring to a prohibition on the type of mortgage that drove much of the increase in lending during those years.
Bush has played up his economic record, which only looks good because he escaped Tallahassee before the financial dynamite detonated and destroyed Florida’s economy. In Florida and across the country, many homeowners were persuaded into grabbing the equity that accompanied rapidly rising home prices to refinance their mortgages. They would get cash out to pay bills or expenses, and carry a bigger loan. Some cashed out and refinanced three or four times, using their home as an ATM and falling deeper into debt. When the bubble collapsed, homeowners could no longer refinance their way out of trouble, and foreclosure rates soared.
Texas, on the other hand, limits cash-out refinances to 80 percent of the home’s appraised value, significantly reducing the amount you can pull from equity. There’s also a twelve-day cooling-off period where borrowers can change their minds; and more important, homeowners cannot use proceeds from cash-out refinances to pay off other debts. Restrictions on cash-out refinances reduced price increases, subsequently limiting the exotic loans with low initial payments that got many homeowners into trouble.
“This simple rule protected Texas from the worst of the housing crisis,” Perry said in his address. “We can stabilize the housing market across America, if Fannie and Freddie are required to hold their loans to the same standard.”
The restrictions are part of the Texas constitution and date back to its founding as a state. Perry didn’t create them, and given his preference to keep “regulations and frivolous lawsuits to a minimum,” it’s unclear whether he himself would have called for such a change. But Perry, buoyed by his experience in Texas, called for a national prohibition on home equity loans above a certain level.
This is a much stronger regulation than what is currently in place— it goes further, even, than the Consumer Financial Protection Bureau (which Perry wants to gut) has been willing to go. Most CFPB regulations have been around disclosing certain types of loans, or standards of conduct for lenders to follow. Even CFPB’s payday loan proposal doesn’t ban high-cost consumer credit, opting more towards trying to fix it through allowing limited numbers of loans in a calendar year.
It’s hard to reconcile Perry’s urge to prohibit risky refinances with his resistance to regulation in general. But he inherited these restrictions, and discovered their utility in protecting the public. This is similar to the situation where a conservative with an illness in their family supports spending on medical research to fight that particular illness. Perry saw how a flat prohibition saved his state from ruin. The concept was proven and now he wants to bring it to the rest of the country. While we should expect politicians to have a broader policy perspective than what’s solely within their personal point of view, if this is what it takes for Perry to endorse strict regulations, so be it.
And you can hardly think of a more paternalistic policy than banning a type of loan. Conservatives could easily say that such a policy would restrict access to credit, or that the free market would punish the risk-takers and work this out on its own. But because it worked in Texas, these appeals to rugged individualism and lighter-touch rules like disclosure or financial literacy fall flat. There’s a better example from a red state that doesn’t match the usual deregulatory impulse.
Nobody in either party has gone this far; candidates should take notice, and it should upend the usual conservative story about burdensome regulations shackling well-meaning entrepreneurs. Even if Perry doesn’t make it to the general election, he’s done the country a service by telling the truth about the value of consumer protection. I hope his rivals will listen.