Charles Calomiris

Charles Calomiris

Charles Calomiris is the Henry Kaufman Professor of Financial Institutions at the Columbia University Graduate School of Business and a professor at Columbia’s School of International and Public Affairs. Calomiris codirects the Project on Financial Deregulation at the American Enterprise Institute, where he is a visiting scholar. He is a member of the Shadow Financial Regulatory Committee, was a senior fellow at the Council on Foreign Relations, and is a research associate of the National Bureau of Economic Research.

Occupy Wall Street is denouncing banks and Wall Street for "selling toxic mortgages" while "screwing investors and homeowners." And the federal government recently announced it will be suing mortgage originators whose low-quality underwriting standards produced ballooning losses for Fannie Mae and Freddie Mac.

Have they fingered the right culprits?

There is no doubt that reductions in mortgage-underwriting standards were at the heart of the subprime crisis, and Fannie and Freddie’s losses reflect those declining standards. Yet the decline in underwriting standards was largely a response to mandates, beginning in the Clinton administration, that required Fannie Mae and Freddie Mac to steadily increase their mortgages or mortgage-backed securities that targeted low-income or minority borrowers and "underserved" locations.

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Mortgage Mess

On March 4, 2011, the New York Times described a settlement ("settlement") proposed by a consortium of state attorneys general (AGs) to large mortgage servicers. The claims to be settled reportedly relate to failures to follow existing procedural rules relating to the foreclosure process. The settlement would make dramatic changes in those rules, and reportedly require a mortgage loan principal reduction program of $20 to $25 billion. Negotiations over the settlement are continuing despite servicers reaching an agreement with bank regulators on penalties and procedural changes related to foreclosure processing deficiencies. These negotiations continue to create uncertainty in the housing market and have the potential to stall foreclosure proceedings nationwide. The purpose of this essay is to review how such a settlement would affect the housing market and the larger economy.

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Exiting the Euro Crisis

What do economics and history have to tell us about the ways euro zone countries are likely to resolve their problems of fiscal unsustainability and banking system insolvency? In answering that question, I am among the most pessimistic observers of the likely future of the euro and its membership. In my view, the euro zone’s likely failure to avoid at least some departures, if not total collapse, reflects its poor initial institutional design. Countries were joined together that were unlikely to be able to survive as a common currency zone, and there were no credible institutions in place to enforce long-term fiscal discipline or to coordinate the resolution of exigencies.

Why doesn’t everyone share my view? I think their relative optimism can be traced to differences in worldview. My worldview is that of a non-European economist and historian. Here is why that worldview leads to pessimism.

Arithmetic Trumps Legalism

As an economist, I place more stock in arithmetic than in the legalities of what countries supposedly are or are not permitted to do; legislation or politicians’ pronouncements about the impossibility of a departure from the euro zone counts for little if the math ultimately requires it. I will argue that in the case of at least one country—Greece—the fiscal arithmetic strongly favors not only a sovereign debt restructuring but also a departure from the euro zone, and there may be others for whom this same outcome will soon become a necessity as well.

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On Bloomberg TV, Charles Calomiris discusses why he signed the QE2 letter to Federal Reserve Chairman Ben Bernanke.

Charles Calomiris participates in this Bloomberg Businessweek expert panel about the economy and how to “get out of this mess.”