A Libertarian in Government

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0:00:08.3 Trevor Burrus: Welcome to Free Thoughts, I’m Trevor Burrus.

0:00:10.3 Aaron Powell: And I’m Aaron Powell.

0:00:11.7 Trevor Burrus: Joining us today is Mark Calabria, Senior Advisor to the Cato Institute, and formerly Director of the Federal Housing Finance Agency, and Chief Economist to Vice President Pence. Welcome back to the show, Mark.

0:00:22.1 Mark Calabria: Yeah, it’s terrific to be back, gentlemen.

0:00:25.8 Trevor Burrus: So you accomplished something pretty unique for true Blue Libertarians, in that you actually found a position in government where a lot of us are sort of… I think I might burst into flames if I worked in the government and you evidently did not. So how did you do that? It wasn’t the first time, of course, before Cato, but how did you find yourself in these positions?

0:00:47.5 Mark Calabria: A great question, and while I’ve… Of course, it’s very encouraging of having more libertarians serving government because if you don’t, I’m sure somebody else will and they won’t be as good. But I would be the first to say that I think the number of positions that a libertarian would probably feel comfortable and can make a difference in are gonna be limited. So certainly, unlikely to think you’re gonna find a libertarian who’s gonna run DEA well or be successful at it, for instance. Now as you somewhat alluded to, I had served government before I had spent seven years on Capitol Hill on the Senate Banking Committee, and I found myself in an unusual position of having written a lot of the statutes that created the agency that I went and further ran, which was FHFA, the Federal Housing Finance Agency. And the reason that I was comfortable with it, and then we’ll get into this, and at the risk of a little immodesty, say that I think I did actually a pretty good job, is because I had a clear sense of why the agency should exist, and that is, in the financial services realm, if you’re gonna have the government coming and create moral hazard, either through explicit or implicit guarantees, then you have to have a regulatory structure to offset that moral hazard because you’ve clearly crowded out private sector offsets to that moral hazard.

0:02:15.6 Mark Calabria: And so what I think made me an effective head of the FHFA, was I very clearly understood that’s what we were trying to achieve, it was the second best objective, obviously, the first best objective is don’t create government guarantees and moral hazards to begin with, but if you accept, when you start from where you start and this is where we are, then I think you can kinda take those jobs, and again, there are a number of other jobs in government I think that do kind of fit that mold, but again, I’d be the first to say that there are lots of agencies in which I probably would have not been the best choice.

0:02:50.4 Aaron Powell: What does this process look like? Did you just got a phone call from someone in the administration saying, “Hey, you’re up.” Or do you throw your hat in the ring?

0:03:00.5 Mark Calabria: So it was a bit unusual for me as Trevor alluded to in my bio, I was already at the White House working for Vice President Pence, and maybe I’ll give a little background on, “How did that happen?” If you wonder. And so, the way it really came about, and it was basically a phone call, that someone I happened to work with on Capitol Hill, 20 years ago, when I worked for Phil Gramm, a gentleman who had worked with me in the Phil Gramm office, who later worked for then Congressman Pence who was chair of the Republican Study Committee in the House, he was tasked as part of the campaign on putting together a domestic team. So quite frankly, I’m sitting here at my desk at Cato, a friend who I usually grabbed lunch with every six months or so, phone rings, and of course, I think he’s just calling to catch up, I answer the phone, “Hey, how’s it going?” And he’s like, “Are you interested in being the chief economist for Vice President Pence?” And quite frankly, that’s how it happened, and that’s how the process started.

0:04:01.5 Mark Calabria: I did try to be extremely transparent about who I was in terms of a libertarian and made them very cleared, in fact, I would probably say I’ve never been in a job interview where I try to give somebody more reasons not to hire me. ‘Cause again, I just wanted to be transparent about who I was and what my background was. But again, it was my friend, Daris Meeks, who I used to work with in the program days, who worked for Pence, who pulled me into that world, and that’s how I got in the White House. Interestingly enough, while at the White House, I felt early on, that a big way I could have an impact would be in the recruitment of personnel. So I very much in 2017 early, threw myself into the personnel process, got to know the presidential personnel well, and helped them get a number of nominees and some of it was quite fun. I got to offer Jelena McWilliams, who is the current chair of the FDIC, I got to call her while she was, I believe, in the supermarket, over the produce aisle, and offered her over the phone whether she’d be interested to be an FDIC chair, and of course, there’s some other people I recruited as well, and really did try to make sure that we had generally market-​friendly people.

0:05:14.7 Mark Calabria: So for instance, and I was involved in some of the recruitment for the Federal Reserve, and I would ask the nominees, “Well, what do you think about bailouts? What do you think about monetary policy?” And so we really did try to craft getting people in place who were very skeptical of government interventions. We could probably have a different conversation on how that turned out with some of the FED nominees as to where they’re at today. With that said, I got to know the personnel people pretty well. And so as a way of background, at least until I was there, in the Collins Supreme Court decision, that FHFA is an independent regulator, with a fixed term, so when we came in, when I came into the White House, former Congressman Mel Watt was still the director of FHFA and had two years to go. When we got to the point in, let’s see, I think probably summer of 2018, when we knew that Mel Watt’s term was gonna be up in January of ’19, that there really began an internal process at the White House, and I was immediately reached out to as, “Mark, you worked on the statute, you know these issues, would you enter the running?” And I was one of five. I also had the very unusual situation of knowing that there was competition, and at least two of the five, I knew, and in fact, the gentleman I ended up hiring as my number two was one of the other competitors for the job, sort of a team of rivals back there, if you will.

0:06:48.6 Mark Calabria: But once that had been the case, I certainly pulled myself out of the process in terms of doing policy in that area, and there was a vetting by personnel, there was a vetting by NEC, Natural Economic Council, they ran the process, interviewing candidates. So obviously, I was not involved with the interviews of the other candidates, but I did know who they were. And at the end of the day, and then of course, the Vice President really leaned in on my behalf and really made a very big effort to get involved. There were other candidates and Secretary Mnuchin had a candidate of his own that he advocated for. I think at the end of the day, I won out of that competition, partly because I think there was a feeling of that I knew the issue, they knew I would try to take a hard stance on trying to fix Fannie and Freddie. I knew I was a principled person, certainly as you mentioned, I did work on the banking committee, which was the committee of jurisdiction that the nomination would go through. So there was a sense of, well, I was probably the most free market person that could get confirmed, simply because I knew the process.

0:07:57.9 Mark Calabria: And by contrast, for instance, I wouldn’t consider myself to be any more or less radical than our friend Judy Shelton, and we know that her process for the federal reserve stalled. And again, some of that just happens to be that I worked in a large number of nominations. I knew how to get to the committee, I had gotten people through, obviously nothing is ever guaranteed until you’re there. And so that process again, began somewhere, I think June, July of 2018. I very much remember September 14th, 2018, President Trump signed the decision memo that carried forth on my nomination, and that’s when the FBI search and everything else starts. So they don’t really do the FBI, they do a political, if you will, vetting, the President decides, they do an FBI search. My nomination actually got delayed a couple of weeks because they had to pull off my FBI team to work on the Cavanaugh background. A little bit of history. There was, well, you may remember there was a big demand to re-​litigate that issue, so that delayed me probably two weeks while they pulled off some of my FBI background team, and then…

0:09:11.6 Aaron Powell: They weren’t concerned about you being at a Jam bands?

0:09:14.3 Mark Calabria: Oddly enough, it never came up. And there was never questions about whether what my favorite Dark Star version was, or whether I was more Widespread Panic or Fish guy, but all of that said…

0:09:30.9 Trevor Burrus: These are the policy questions that matter, Mark, come on.

0:09:33.3 Mark Calabria: It kind of truly is…

0:09:34.5 Trevor Burrus: I mean, who was the best bassist for Metallica would be pretty much the only question I would ask?

0:09:39.9 Mark Calabria: Cliff Burton, but we can argue back, back in the day. What are we on four different bass players, but that’s a whole different…

0:09:48.2 Trevor Burrus: Something like that.

0:09:48.4 Mark Calabria: Yes, they’ve gone through a number. But all that said, it really was a process where the President made the decision in September, there was a back and forth, though, and there were some conversation of whether I should be nominated officially within 2018, and the feedback we got from the Hill was that the clock was running out. And therefore, the intent to nominate was done in December of ’18. The official nomination was made in January of ’19. I was actually, thanks to my friends in PPO listed as nominee number one, if you go back on the list, and my nomination was the first one that went up to Congress when the new Congress started in 2019.

0:10:31.7 Trevor Burrus: Well, talk a little bit about that back and forth, because the conversations that happen between the Hill… So first of all, you mentioned the people on the Hill are telling you, “We’re not gonna get to nominations,” so who’s talking to the White House on that? And then secondly, after the nomination goes through, do you just go and meet with everyone and try and win their good graces on the committee to try and make sure that they don’t think you’re at least a radical?

0:11:00.3 Mark Calabria: You have to do some amount of lobbying, there’s some of it to get to that point, second and just talk about. And so it’s a combination of the committee offices, and then the leadership offices, and that’s, in this case, it was McCulloch’s office, and then the committee office at the time, Mike, Senator Mike Crapo of Idaho, was the chair of the Banking Committee. And if you remember, if a congress ends, and a nomination is still outstanding, it all comes back to the White House. And because the composition of the Congress is different, so for instance, you had members like Bob Corker of the committee, who were retiring, and so there was a sense of, “Well, who are we gonna do a hearing in November, and we weren’t able to get, for time before the end of the year, we’d have to start the whole process over again.”

0:11:48.7 Mark Calabria: For me, I was actually willing to do that, and then I was willing to do another hearing and do the process over again, despite all of that being relatively painful in some ways, which we’ll get to, but the sense we got from both the Banking Committee and from leadership was that it was extremely unlikely, that setting my nomination up in the beginning of November, which was in ’18, which was the earliest we could have done it, we would have been able to get it through in time. But because of the end of the Congress, which again, this is very different than, say, the end of a session. ‘Cause the end of a session, you… And as you know the Senate is a continuous body, at the end of a session, you still have the same members, so even if you have a December hearing and the nomination comes back up, and you’ve got the same members, there’s no need for a hearing again. But for me, they would’ve had to do it all over again, and the sense was, they just weren’t gonna be able to make it happen in that timeline. So that’s why the nomination was sent up in the beginning of ’19. Certainly my hope had been that we could’ve gotten it sooner. But things then work out how they work out, and certainly the FBI does a fairly thorough extensive background check. They do…

0:12:55.7 Trevor Burrus: I didn’t get a call. I was… Do you know if they watched the Parking Lot Movie, though, this is important, yeah, yeah…

0:13:00.8 Mark Calabria: I think they actually… Well, I do know that there was a young man in presidential personnel who had to watch all 300 some of my Cato TV appearances and had to read all of my Op-​eds, and his name is Justin, so we should all say a prayer for Justin, that he had to read and watch everything I’d ever been on.

0:13:20.9 Trevor Burrus: For listeners, there’s a movie from the 80s that Mark appears briefly in, the called it, Heavy Metal Parking Lot. Was it outside of a Metallica Show?

0:13:30.3 Mark Calabria: Judas Priest.

0:13:31.0 Trevor Burrus: It was Judas Priest. Okay. So see, I feel like that…

0:13:33.7 Mark Calabria: All blend together for you, you kids.

0:13:36.0 Trevor Burrus: Of course, but I feel like… Hopefully, I won’t ever be nominated for anything, but there might be some movies that would never wanna come up of me at concert, so. Anyway, so they went through your entire record, yes, and called your mom and your sister…

0:13:49.2 Mark Calabria: Very extensive. They dig into your travel history. A lot of it, they dig into your written history, so literally, Justin, the presidential personnel, had to read everything I ever wrote, had to watch everything I ever appeared on. And that’s… That’s a process that takes time, ’cause he’s doing it for other nominees at the same time. So they’re really trying to vet through things, and of course, they ask you, and you’re always best to be very candid about, “Are there things that could come up that could be embarrassing?” And I would, of course, I’d say, “Well, I do know Trevor Bast, I don’t know if that’s gonna be an obstacle in nomination,” but they would go through and say, “How you’d handle this,” and then let’s fast forward a little bit and say the nomination was submitted and then the committee has some questions, so there’s a committee questionnaire, and then a hearing gets scheduled, and luckily for me, my hearing was Valentine’s Day in 2019. [chuckle]

0:14:47.3 Mark Calabria: And so usually, you try to do as many meetings with members as you can. And even though the partisan environment we were in, I felt very strongly that I wanted to offer every member in the committee, which I think at that time there were 21 members. I wanted to offer every member of the committee an opportunity to meet with me, and I think before the committee hearing, I probably met with 17 or 18 of the members across the aisle, and many of them, even ones who had no intention of ever voting for me were very pleasant and cordial and glad that I met with them. And again, had a number of everything, very good meetings, and you try to understand what objections are gonna be out there. And again, I have written… People went through a lot of my background, and there were questions about like, “Well, Mark, are you gonna get rid of the 30-​year mortgage or?” Or this or that.

0:15:42.3 Mark Calabria: I think this is somewhat going back to kind of my libertarian perspective, I’m at heart when I think of, as yo lawyers would probably say, an article one guy, and this gets into the kinda how I ran the agency, but also I think how I got confirmed, which is, my view was always, “Okay, it’s one thing to take an academic thing, take perspective in blue sky, like a piece of paper,” my perspective as a regulator was, my agenda is to simply follow the law, “This is the law,” where it’s not clear, “Okay, there’s gonna be some discretion,” but where it is clear, the decision’s been made and it’s not my decision to preempt that or rewrite that, or even to try to take a creative interpretations of it, was certainly my perspective, my perspective was flying under the law, and so I think that a lot of members did derive some comfort from hearing that, while I may not be fans of Fannie and don’t, and I’m afraid, I don’t think you should have created them in the first place, that was a decision that ultimately the rest of Congress, that was a decision that Congress made, obviously, I feel like Congress should have made a different decision, but it wasn’t my job as a regulator to make that decision.

0:16:57.0 Aaron Powell: This raises something our listeners might be wondering about, which is when we see these hearings, we see the public side of them, but when we see them, they seem very political, and it’s people just like, this is more of a comment than a question, and everyone seems to have their minds made up, and we have a whole media ecosystem that has taken sides on the nominee, but is there, actually, can you move the needle with people? Are they actually open to being persuaded, or are… So is there… Does anyone change their mind during these hearings or during these meetings?

0:17:36.9 Mark Calabria: So yes, they can. And so I guess I feel safe saying this now, since I’ve got the job and I’m out of the job and it’s all behind me, we were able, I think, very early on to create a perception of inevitability that partly because I was working for the vice president, I had worked for Senator Shelby who at that time was chairman of the Appropriations Committee. And as every senator knows, it’s good to be on good terms with the chairman of the Appropriations Committee. And so we had really early on just kinda helped create this public perception of inevitability, but there were a Republican or two that I think actually grew on the fence that we had to work on. Of course, if that was known at the time, people would have concentrated on them.

0:18:21.4 Mark Calabria: And so, for instance, when you’re watching one of these hearings and you’re seeing some of the members go after me, like it’s important to keep in mind, like Democrat, Senator Menendez was probably one of the tougher people on me in the hearings, and I would probably say quite frankly, the only meeting I had that was even borderline unpleasant. Everybody else was quite cordial, even, I had a great meeting with Sinema and Brown and many of these people on the committees, and were very cordial. And it’s just important to remember, I had the benefit… I worked on the committee for seven years, I ran a number of nominations processes, so I had done so many nominations hearings as a staffer that I kind of knew what this was about, and so I knew that when, say, a Senator Menendez was going after me, he really wasn’t looking for me to try to change his mind, he was looking to trick me up so he could put some moderate Republican in a tight spot, and that’s what he was trying to do, and you can do that.

0:19:23.0 Mark Calabria: And it’s one of the reasons that probably Judy didn’t get confirmed. There were other nominees who were tripped up. And, again, it’s this kind of game. Like one of the things interestingly enough that people thought were a line of attack against me was, I had in a couple of… And we can debate the wisdom of this, but during the mortgage crisis, I did a couple of blogs, op-​eds on the issue of strategic default. And I may have once or twice used the colloquial term deadbeat. And so a number of senators, Senator Branagan took some offence at my that use of the term. And so they went after me on it, and I think I handled it quite well by not backing off of it, but explaining and defending it in a way that I think that made it, that was factual, like why I felt that way. I know it’s a shocking thing to some of their listeners, but there actually are deadbeats out there, I’m related to a few of them, I can testify to that. How do you handle these, where they want to get you flip-​flopping back and forth, and things like that, so they wanna try to say that you’re inconsistent, or they wanna try to say that you’re dishonest and are you…

0:20:35.4 Mark Calabria: I also had the benefit of, I had worked on the statute, I had a PhD in economics, obviously still have it. I had written a lot on mortgage finance at Cato, so then I had worked within the industry trade associations, so one of the things I had going for me, there was never ever a question during the process, about my qualifications. There was a sense of, “Okay, this guy is qualified to do the job, is he crazy or not?” That was the margin of where the debate was. And again, because I had been through this and we did a number of so-​called murder boards at the White House, which is really an important process for anybody testifying because it gets you used to the environment. You got a bright light shine on you, you got people that are gonna intentionally interrupt you.

0:21:21.0 Trevor Burrus: Sounds like a moot court for the Supreme Court when I do those.

0:21:24.6 Mark Calabria: It really is. And I remember having to tell my mother and I felt very… One of the highlights of my life is being able to have my mother sit there behind me during the testimonies, so I had to say to her ahead of time, “Mom, some people are going to imply some nasty things about me, don’t believe it, don’t get worried about it.” And I’ll also say, it was just such a thrill that Senator Kennedy of Louisiana clapped for my mom, and said nice things about her during the hearing. So as, at the end of the day, it’s all about mom. And so you really had set up an environment. And again, because I had worked on the committee and knew a number of the members, there really wasn’t a lot of hostility. And I would say anybody else who had walked in with my track record and my paper trail, I think would have gotten a much more hostile reception.

0:22:14.5 Trevor Burrus: Yeah, it makes sense. So getting into what it’s like to run an agency, since you did get confirmed, but before we do that, just so listeners know, what does the Federal Housing Finance Agency do? And since you helped create it, it’s related to the financial crisis. So how were things before and what does it do, at least in the statutory sense?

0:22:38.7 Mark Calabria: So in the simplest way it’s a safety and soundness regulator for Fannie, Freddie, and the Federal Home Loan banks in the same way that say, the officer of the comptroller of currency at the Federal Reserve are regulators of banks.

0:22:52.1 Trevor Burrus: And so you don’t touch private mortgage lenders at all?

0:22:55.8 Mark Calabria: Not at all. We can probably debate, there’s probably debate about whether Fannie and Freddie are private. I believe they are in the same sense that Citibank is or is not private, because again, Citibank itself enjoys a Federal charter. So all that said, your job is to regulate the safety and soundness and make sure that they are fulfilling the laws. We also had the additional responsibility, that since Fannie and Freddie had failed in 2008 and entered conservatorship. And this is a power similar to what the Federal Deposit Insurance Corporation does, that you’re supposed to essentially resolve a failed situation, fix it, and get them back on their feet. Again, the FDIC does this all the time, and the powers that FHFA were given were quite literally remodeled, you guys being merged could appreciate. And we quite literally took sections 11 and 13 in the Federal Deposit Insurance Act and marked it up, and that’s what we went through and said, “Does this apply to Fannie? Should this not apply to Fannie?” And so you don’t really call it plagiarism when you’re writing statutes, you’re borrowing from somewhere else in the law. But that was really the approach, and there was a sense that the previous regulator for Fannie and Freddie, and of course, the Federal Home Loan banks had different regulators, so we merged two regulators, one being the Federal Housing Finance Board, which oversaw the Federal Home Loan banks, and was created out of the savings and loan crisis.

0:24:18.3 Mark Calabria: And then the other one was the Office of the Federal Housing Enterprise Oversight, which regulated Fannie and Freddie, also created coming out of the savings and loan crisis. And so these two regulators were merged. They were partly merged to essentially dilute the degree of capture. There was a real concern with the previous Fannie and Freddie regulator, that because this regulator only regulated Fannie and Freddie, that there was a high probability of a cultural cognitive capture of the staff. And I can certainly attest to seeing that. And I’ll admit myself that I think it took me probably, I don’t know, five, six months at FHFA where I stopped saying we, in reference to Fannie and Freddie And it’s just so much the environment within FHFA, that particularly other, and I think because of my predecessors, but just the conservatorship really reinforces this. And unfortunately, this is very true across the financial regulators, where there’s a high degree of identification with the enemies who regulated. And it’s in fact one reason why, and this is certainly to sound a little self-​serving to say, it’s one of the reasons why I think Libertarians can potentially make the best regulators because we’re not hostile to private enterprise in the same way that perhaps some of the Left are, but we’re also skeptical.

0:25:43.6 Mark Calabria: It’s that, that sort of like, “Well,” a lot of your mainline traditional Republicans tend to be very much like, “Oh well, the private sector, they know the best route, we’re gonna let them completely do what they want, even with the guarantee.” And so you could say, if you want to very much generalize and simplify it in financial regulation, you could say it’s the Republicans are happy to come in with the guarantees without any regulation, and the Democrats are happy to come in with the regulation and perhaps, with or without the guarantees. And I think that the return perspective, and again, I think many… You guys certainly know I did my PhD. At George Mason, I feel very fortunate to have studied with Jim Buchanan and Bob [0:26:25.2] ____ and Richard Wagner and so very much a public choice student, and so come into this perspective of, you have to be very concerned about how private industry or quasi-​private industry tries to use the regulatory process to benefit itself. It’s really a, it’s not a hostility because, again, not hostile to private enterprise, but it’s a skepticism over what is private enterprise, we wanna try to use government for, and again, I think, unfortunately, you do tend, at the risk of generalization, you do among the Republicans and Democrats get one extreme or the other, whether it’s just a hostility to it, or there’s a complete, “Well, you guys are right, what we know?”

0:27:10.8 Mark Calabria: And so I think I brought the right amount of little balance to it where we weren’t trying to stop out Fannie Freddie or the mortgage sector, but we were certainly skeptical, certainly, I was skeptical of whatever anybody was telling me. Partly because I’d worked on the Hill, and I do think as a regulator you have to have an appropriate skepticism, and maybe I would add, at the risk of, I don’t wanna quite read too many personality traits into Libertarians, but I do think one personality trait of most Libertarians is a skepticism of like, “Well, I might not be sure about what the answer is, but I’m also not really sure that what the answer is,” So I’m gonna listen, but I’m gonna do some research and I think that really kind of helps the way I ran the agency and approached the stakeholders.

0:28:00.5 Aaron Powell: How many people are at the FHFA?

0:28:04.7 Mark Calabria: So when I left about 700, which for an agency, it’s size on its par, that’s not unusual for a financial regulator, we were regulating a $7 trillion footprint.

0:28:16.8 Aaron Powell: So when you come in, there’s 700 people there, I expect most of them are career people, there’s probably not a huge amount of turnover, okay, and so you come in as the new director, what are you then expected to direct, what is your day-​to-​day job, if all of these 700 people have been there their whole careers and they know what they’re doing, what’s your powers and what’s the responsibilities that fall directly on you?

0:28:45.4 Mark Calabria: Great question, and I should caveat too that it was about 700 when I left, and this may surprise many people, as me being a former, now Cato guy, I actually increased the size of the agency by about 150, so grew government, but with the objective of shrinking government, because to me, if you don’t have the adequate regulatory structure you’ll end up having Fannie and Freddie blow themselves up. So we certainly just had functions where we didn’t have the staffing on it and so, therefore, we were missing blind spots. So all of that said, A, coming in and trying to figure out what the agency was missing, so for instance, there was no research division there at all. And this may shock you, if you keep in mind that all the entities that FHFA regulated are involved in the housing market and the mortgage market, FHFA did not have a group of people who produced independent house price forecast. They took what Fannie and Freddie said, so there was a heavy reliance on the regulated entities, for instance, I thought felt like, we need to build out a team there, and I hired Glen Fisher, who was in AEI at the time, and really just tasked her with, setup Research Division, and again, there were some economists there spread throughout the program offices. I’m also a big believer of that, what economists you had doing some evaluation work that FHFA previously but within the program offices.

0:30:11.8 Mark Calabria: And I don’t think it’s a radical thought to say none of us could be objective evaluators of our own work, and, at least trying to have a little bit of insulation where you had an independent evaluation function within the agency evaluating what the other parts of the agency were doing. I mean, did it get fully independent, is it always gonna be fully objective? No. But it’s a lot better than having the people who do the work oversee whether the work functions or not. So trying to figure out what resources we need to build out, certainly decided the direction of the regulatory agenda, prioritizing the regulatory agenda, again, most of this was certainly within the realm of Congress, but, so for instance, we were doing a rule-​making on capital, and this was something that Congress actually told the agency to do in 2008, and so I laugh a little bit when I would occasionally get questions during the rule-​making process like, “But why are you rushing on this capital thing?” And I’d like, ” Congress told us to do this 10 years ago, I thought that 10 years to do a rule is rushed,” and in terms of when Congress expected it to be done. So trying to build out the structure, and of course, I came in and there was this weird situation where all of the profitability of Fannie and Freddie were being swept away so they won’t burn enough capital.

0:31:34.0 Mark Calabria: And so trying to, essentially, fulfill the mandate and the statute where you would fix them and get them out, and of course engaged in Congress, and then, of course, I was only there 11 months when COVID hit and that really took over a lot of the agency agenda, just keeping the mortgage market going and playing our role in that, and that response really took it over, so to some extent, what the job is, like and I would say pretty regularly that I didn’t actually do anything, I just directed other people to do things, which of course requires you to motivate them to do other things, and also to be pretty clear about what they are to do, and I think I got to a pretty good point where most of the staff, 90% of the time did not even have to come to me with questions, and they were able to say, “This is what the director’s gonna answer to this.” Because I do think, and this again this is perhaps a trait of libertarians. There tends to be a clear set of principles. Unfortunately, a lot of people in government don’t really know why they’re there. It’s just a fact, it’s certainly been my empirical regularity of my interactions with people over the years. So I had a very clear sense of this is what we’re trying to achieve. This is what we’re going to do to achieve it.

0:32:56.2 Mark Calabria: I projected that very regularly to the staff that, regular emails, all staff meetings, we get up in front of the staff and take questions and explain what we were trying to do. And I’m very much a believer that, successful management does entail a very large amount of repetition, that you just need to say it over and over again, and also reminding kind of a responsibility. I would remind the staff pretty regularly, that if they don’t do their job, Fannie and Freddie potentially fail, which is really bad for the economy, which is really bad for families and communities. And, many of them, they understood that, they could connect to that. They might not have always been motivated by saving the taxpayer money. But they certainly remember the financial crisis, and remembered that, a foreclosure or a massive downturn in housing prices is quite devastating to families and communities. And that they could relate to. So some of this… And I think this is also, some libertarians, they’re very good at this, this is probably why I often say that my second favourite libertarian organisation, after Cato of course, is The Institute For Justice, because they just do a great job at picking cases that you can relate to.

0:34:10.7 Mark Calabria: And so part of successful management, particularly in the federal government, is communicating in a way that people can understand and relate to. And this is why I do think libertarians are often very good, if I could channel our friend Arnold Kling’s Three Languages of Politics. You have to be able to know how to speak to non-​libertarians. And of course, maybe there were a few libertarians at FHFA, I’m certain that there were a few. And here’s what I think, I think any substantial length of time in the government should be enough to turn you into a libertarian. But that said, having to speak to the language that, that the staff would relate to was an important part of it.

0:34:49.3 Trevor Burrus: That kind of got to what I was thinking ’cause in a more of a policy side, aside from what you wanted to do, which you kind of said what you wanted to do when you got in there, maybe the best way of asking this is like flip it around, what would someone who poorly ran FHFA… Like what could…

0:35:07.4 Mark Calabria: Yeah, I didn’t [0:35:08.9] ____ that.

0:35:11.3 Trevor Burrus: Yeah but like what could FHFA, within even the powers of a Bizarro Mark Calabria, like the ability of it to destroy the housing market? I mean, it’s a $7 trillion footprint, how much is that of the total housing market as a percentage?

0:35:25.3 Mark Calabria: It’s probably about 60% of the overall housing market.

0:35:29.1 Trevor Burrus: Okay, so that’s a lot. So like, if they… I mean, are you… Is there an adjusting of interest rates and stuff, or you could just…

0:35:35.9 Mark Calabria: No, no, not necessarily, I mean to some degree, so there are fees that are charged, guarantee fees, they’re the credit box. So one of the things that I inherited, Mel Watt who had been my real predecessor, had really opened up the credit box, really increased, or my sense would be decreased the quality of marginal credit that was coming into the door. And obviously, you didn’t have any capital…

0:36:02.7 Trevor Burrus: So, you mean he sort of increased the amount of lending to people who maybe should… Who were too risky? Which is a lesson that we should have learned, I feel like in 2008.

0:36:10.0 Mark Calabria: You would have thought so. And of course they, carved Fannie and Freddie out of a lot of the rules. This wasn’t actually in statute, but the CFPB had made a decision. What the CFPB had done was to delegate to FHFA the responsibility for enforcing Dodd Frank mortgage rules on Fannie and Freddie, and essentially the approach of Director Watt at the time was to say, “Well, whatever you’re doing is okay, we trust you.” So there really was no enforcement of that delegation. And we started to do that when I came in and said, like it or not, the law is the law, and we’re gonna carry it out, and we’re going to make sure that Fannie and Freddie aren’t driving a race to the bottom in credit quality standards in the mortgage market. So one of the immediate things that I did was start to improve the credit quality, we cut in half the tail risk. And I’m very proud to say, the two and a half years that I was director, were the highest annualized increase in African American home-​ownership rates that we’ve had since we’ve been keeping annual data in this country. So the lesson being here, the conventional wisdom in Washington, of course, was that you can’t increase home-​ownership unless you weaken underwriting standards.

0:37:17.6 Mark Calabria: And I think we showed you can, you can have healthy outcomes, you can have more sustainable outcomes, and ultimately, it’s better for the families involved. I think it’s easy to forget because of the size of the bailouts that the foremost victims of the 2008 crisis were people who were lured into government loans that went bad. And there’s often this sense of it’s a government loan, it’s got to be good, the government would never get me into a bad loan. And so I think a lot of people were, lured into that, with that false sense of security and obviously, just massively devastating, and for my friends on the Left who care about social equity, at the top of the bubble last time, say around 2006,2007, if you were an African American family, you were three times as likely to be a home buyer as a home seller, and in fact, the top of the bubble was probably one of the greatest wealth transfers from African Americans to White ever to happen in American history. And it was all engineered by US mortgage policy. So again, I wanted to make sure we didn’t repeat that. Not that we are necessarily doing this for to offset racial problems that had done in the past, but really just did not want to set families up for failure regardless of their ethnicity. And we had just seen this devastation before.

0:38:38.6 Aaron Powell: How, I guess, ideological or partisan are the people within these agencies? Obviously, there’s the political appointees, but most of the people working there aren’t. Do they have a side that they’ve picked and then they dig in when it’s the other guys in charge? Are there people who are like, “No”? They push hard against ideological positions.

0:39:04.4 Mark Calabria: So it’s a great question and certainly at FHFA. I think this is true certainly at the financial regulators, but many agencies. And that while, of course, by their voting and contribution patterns that they tend to be partisan Democrats and lean that way, they first and foremost see themselves as professionals. That is their identity, and so certainly in their identity, they would probably tell you or would absolutely tell you that politics is just separate from their jobs or incidental to their job, and that they are professional and that they were doing the job in question. And I said pretty regularly and very sincerely, mean and do mean, that at our town halls and such that I saw my job is empowering them to do their job. And it particularly was the case, as you can imagine, most for the stakeholders industry advocacy around town, really don’t want there to be a good safety and soundness regulator for Fannie and Freddie. There’s really no constituency for that, and so therefore there’s no Congressional sympathy for that.

0:40:08.1 Mark Calabria: So I think one of the things that made me an effective leader there is, that both in word and in deed, my job was protecting the staff from outside abuse essentially, and giving them the room to be able to do their job. One of the more bizarre instances early on, and I forget the subject matter, but the career staff were briefing me on a particular issue. I made a particular decision, and someone in the room said, “You’re gonna get a call.” And of course I puzzled-​ly asked, “A call?” And they said, “Oh yes, the CEOs of the companies will call you.” And so apparently it had become regular practice in FHFA that the CEOs of Fannie and Freddie, any time they didn’t like anything the staff did, they simply called the director and got it overruled most of the time. And so I’m a very big believer in the management style of, you yourself are not effective if your surrogates aren’t viewed as credibly. So I very clearly, I, one of the first town halls sat up in front of the entire agency and said, “I have your back. I will never overrule you in front of the entities we regulate. If I got a problem with you, we’ll go over here in private, and I’ll tell you where I think you’re wrong.” And that was always my way with any of my staff that the political people I brought in as well as the career people.

0:41:28.3 Mark Calabria: And again, there’s something called the Federal Employee Viewpoint Survey, which is the survey done every year of the federal agency, and then just questions about the career staff were asking, and these were over 98% response rates. They would ask, “Does senior leadership… Do you trust them? Do they have integrity?” And we increased all those things by over 20 percentage points, obviously on a 1-100 scale, and it really was because I very clearly and regularly projected to the staff that I was there to help them do their job, to insulate them from political fights, I took the political fights on so they could do their job. And I think if you… And again, this is to go back to the earlier part of the conversation. Certainly this is not gonna work at every agency, and if you go in and you’re incredibly hostile and you think the agency should be set down, well, the agency is not gonna agree with you. And so because what people knew that I was trying to do was to bring the credibility of the agency up.

0:42:25.4 Mark Calabria: Another example, as you may know, FHFA, as Director, I sat on the Financial Stability Oversight Council, which is chaired by the Treasury Secretary, but I remember driving back from Treasury one time, and one of the career people saying to me as we were coming back after the FSOC meeting and her response was, “Wow, it’s just so great to be able to go to these meetings and be respected as an agency.” And clearly that had not been the case before. So the staff understood and you can get it, every one of us, and not everybody gets to work at Cato, so gets to work at the greatest place in the world, but everybody wants to work somewhere that they’re proud of. Everybody wants to work somewhere they feel like they make a difference, and I think if you’re gonna be able to try to get the career staff to move along with you in a direction that is more market enhancing, more libertarian, you have to speak to that, you have to speak to how are they an important part of it, how it is consistent with the mission, and how is it consistent with their identity of themselves.

0:43:29.2 Mark Calabria: So I think, again, I was able to accomplish and move the staff pretty much. Did we have a few people here and there? Probably, but I would say, we had very few leaks. You did not read on a regular basis in the paper what I said at our town halls or to staff. We had, like I said, our employee surveys. We did focus groups, were off the charts, and because we listened. And so, and one of the things, one of the last things I did, I’d come in really wanting to sit across the table from every employee at some point, and COVID hit. So we did virtual coffees of 10, 12 people at a time, and before I left, I’ve had a one-​on-​one conversation with 675 people at the agency. And so they knew that I was there to… And they knew at the end of the day that I was gonna make a decision, and I’ll say, one of the really refreshing things we heard, was just how happy people were that we made decisions, that I made decisions.

0:44:28.3 Mark Calabria: There’s a lot of politicals of either party, but they don’t… They either lack the courage to do the right thing. I looked at it and said, “Congress created this as an independent agency, and that’s what we were up until Collins,” And the reason that Congress created this as an independent agency was so that we could make tough unpopular political choices. And I was gonna do that. I was not gonna worry about whether people are gonna love me or not, or what the press were gonna say about it. We had a job to do and we were gonna do that. And I was gonna empower the staff to do that, and I think that all worked out quite well.

0:45:02.7 Trevor Burrus: So did you get the… You mentioned the call from the CEOs, and this is a broader question.

0:45:06.7 Mark Calabria: And they called me all the time and I would feel it… And I would tell them, sorry… I think they quickly got disappointed that they couldn’t overrule the staff anymore.

0:45:17.4 Trevor Burrus: Well, you said, yeah, you don’t want to and be hostile to them, but you don’t wanna be best friends with them, in general though within the housing finance community, were there attempts to subvert you or undercut you in certain ways if they were upset?

0:45:31.2 Mark Calabria: The biggest part of it was certainly last year where there were demands for a bailout of the mortgage servicers and they viewed me, even though it was fundamentally a Fed Treasury decision, not mine, I was viewed as the obstacle partly because we were the ones with the data and there was never any indication of a need for a bailout. Certainly there were a lot of industry participants who are heavily dependent on easier Fannie and Freddie access for market share reasons alone. This isn’t about the housing market functioning or not, it’s about which lender gets to make the loan. And a lot of regulatory decisions, this is again, that, back to the both Libertarian public choice perspective is understanding that so much of regulation is really about shifting market share among various market participants. And so I certainly viewed it as not my job to care what anybody’s market share was, and I also…

0:46:24.4 Mark Calabria: We ended up making sure it was very data-​driven, very analytical, but we were also extremely accessible. Anybody who wanted to make a case could come in and make a case to me, with the caveat of, they actually had to make a case. If it was just whining, that wasn’t gonna work. But certainly there were a lot of industry attempts to either learn from Fannie and Freddie or from FHFA employees and again, that’s certainly one of the frustrations and I was also very much surprised that… I think about a fourth of FHFA staff either worked at Fannie and Freddie at some point, and, which is, it’s like thinking the OCC is full of Citibank former employees, but you work with what you work with, and some were quite good, some were overly sympathetic, captured to some degree and you tried to push that in the right direction, but I would certainly say, the oddity is that, I would say I probably had… I shouldn’t even say, “probably,” I absolutely had a much better relationship with progressive and left-​leaning consumer like borrower/​renter activist groups than I did with the mortgage industry, without a doubt.

0:47:35.4 Mark Calabria: The National Low Income Housing Coalition, for instance, put out a very nice statement when I left about thanking me for the work and recognising the work, and this was a big difference of what I wanted us to do as opposed to 2008. You may remember the stories in 2008 about Geithner talking about many of the borrower programs were simply foam on the runway for the lenders. And of course, Bernanke and others would always have these stories about, “We’re saving Wall Street because we really need to save Main Street via Wall Street.” And my approach was, “I’m actually gonna put Main Street first, I’m gonna, that’s the agenda. I’m gonna put the borrowers and renters first and if the lenders don’t like it, that’s tough. I’m not here for them.” And it did cause a lot of tension because most agencies really do kinda get captured. If you look at the Credit Union Regulator, most of its history it’s been a cheerleader for the credit unions. If you look at the OCC and clearly the OCC has spent a lot of its history [0:48:38.4] ____ being a cheerleader for big banks. And of course, the Fed itself is probably one of the biggest cheerleaders for Wall Street. And so there really was a hope. And it’s interesting, I actually had one mortgage lender tell me at one point during the crisis, he had said, and I appreciated the honesty, he said, “Mark, it’s frustrating, we thought you’d be a real voice for the industry.”

0:49:00.2 Mark Calabria: And I said, “I’m an independent arms-​length regulator, and that’s what I’m gonna be.” So yes, there was probably some disappointment because a lot of these non-​bank mortgage lenders, they have no regulator in DC and so therefore they don’t feel like they have a voice at the table with regulators. And before I got there, FHFA had acted as a voice for that industry in many ways partly because that industry is very closely tied in the Fannie and Freddie and so part of the Fannie and Freddie capture of the industry, had essentially been a capture by non-​bank mortgage lenders. And so again, when I was not their cheerleader, they were disappointed with that. But again, I did not view my role as being anybody’s cheerleader. I’m a cheerleader for liberty and that’s about it.

0:49:43.5 Trevor Burrus: So the moral of the story is Libertarians can do good in government with the right attitude sometimes?

0:49:52.4 Mark Calabria: Sometimes, and I’ll be the first to say that my set of circumstances is very unique. I knew the area of law, and as lawyers, you guys would appreciate, I would probably drive other lawyers and their general counsel kinda crazy when I would say to them, “Oh, let me tell you what we meant when we wrote it.” So I came in with, an area of expertise, I came in knowing the law, knowing the policy, knowing the economics. And so, for instance, often what I think kinda scares a lot of people who wanna be able to liberalize and push, is that you will hear all these voices telling you that if you do X, the sky is gonna fall and the market will fall apart. And so because of my history in the area, I had a really good gut instinct of how far we could dial things without it being disruptive. And a good example of this is the then Treasurer, Secretary Mnuchin and I, back in January agreed to a set of constraints on how much business Fannie and Freddie did in terms of investor homes and second homes, which of course has nothing to do with home ownership. Obviously you buying that second home in Maine or Miami Beach is not gonna change home ownership rate. And in fact in some neighborhoods competes with home ownership opportunities.

0:51:07.7 Mark Calabria: So you can imagine once we had done that, there was a lot of cry from the industry that, “Oh, my God, he’s gonna really shut this down and no one’s gonna be able to get a second home again and there goes the economy of Myrtle Beach, whatever.” And so I know you guys could already imagine what the actual outcome was. The actual outcome was the rest of the market completely picked up that business as I knew it would. And I do think you have to have that sense of knowledge that, again, none of us are all-​knowing, but have enough of an instinct that you could turn this dial and it’s not gonna be disruptive, because at the end of the day, the politicians and the public I think are convinced by experience. And you can make all the theoretical philosophical arguments you want, why the Soviet Union failed or why people are skeptical of government. Nine times out of 10, it’s because they’ve seen it in practice, not because they’ve read Hayek. And the flip side of that is, if you’re gonna liberalise, you have to do it in a way where it doesn’t blow up and prove to be a disaster or you end up setting back the cause of liberalization. So again, I think I was in a very unique situation where I knew the dials, I had the confidence, I knew the issues, I had the independence to be able to do that in an independent agency. So it was a bit of an alignment of stars. Do I expect this to be much of an opportunity?

0:52:35.4 Mark Calabria: But I do think that one way libertarians can be really impactful in the future is those with a policy bent could find an area of policy law, really learn that area super well and then when there’s opportunities to be able to serve, and you can make a really big difference. As much as I know you and I, Trevor, would just love to clone Aaron and have multiple Aarons, the reality is, I think that the demand for renaissance man Libertarians or women who know a whole scope of things, there’s only a small number of that. Most Libertarians, so sorry to break it to everybody, you’re not gonna be able to replace Aaron any time soon. So become a policy expert, find an area to dig into, get to know it as well as people who work in it and then be willing, and again, the big part of it of course, if you’re gonna serve in government is recognizing, you’re gonna lose more than you win, but the fact that you’re there means you’re gonna win more than you would have otherwise.

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0:53:51.8 Aaron Powell: Thanks for listening. If you enjoy Free Thoughts, make sure to rate and review us in Apple Podcasts or in your favourite podcast app. Free Thoughts is produced by Landry Ayres. If you’d like to learn more about libertarianism, visit us on the web at lib​er​tar​i​an​ism​.org.