Those of us who believe that the government was mostly to blame for the 2008 financial crisis and its continuing effects have been reinforced by revelations from Peter J. Wallison, one of the 10 members of the Financial Crisis Inquiry Commission appointed by Congress to investigate the causes of the crisis and a fellow in financial policy studies at the American Enterprise Institute.
For an article in the May issue of The American Spectator, “The True story of the Financial Crisis,” Wallison wrote:
The Commission’s management—particularly its chairman, Philip Angelides, a former Democratic treasurer of California and unsuccessful gubernatorial candidate—would not allow the staff to pursue any theories about the causes of the financial crisis other than those embodied in the standard left-wing narrative. And in the end a majority of the commissioners—never having been presented with any contrary evidence—signed on to a report that said the financial crisis could have been avoided if there had been better regulation of the private sector….I believe that the sine qua non of the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans—half of all mortgages in the United States—which were ready to default as soon as the massive 1997-2007 housing bubble began to deflate. If the U.S. government had not chosen this policy path—fostering the growth of a bubble of unprecedented size and an equally unprecedented number of weak and high-risk residential mortgages—the great financial crisis of 2008 would never have occurred.
In the commission’s report, issued in January, the majority of members blamed the crisis on weak regulations and too many risks taken by the private sector. According to Wallison:
If the Commission had really been looking for the reasons that the collapsing bubble was so destructive, the poor quality of the mortgages in the bubble was a far more likely hypothesis than that there had been a previously undetected weakening in the way the U.S. financial system operated.
He said the root of the problem was the enactment by Congress in 1992 of “affordable housing goals” for Fannie Mae and Freddie Mac. The goals required that, of all mortgages they bought in any year, at least 30 percent had to be loans made to borrowers who were at or below the median income in the places where they lived. By 2007, this percentage had risen to 55 percent. This led to “a significant deterioration in underwriting standards” so that “by 2008 19.2 million out of the total of 27 million subprime and other weak loans in the U.S. financial system could be traced directly or indirectly to U.S. government housing policies.” The rest of the weak loans were made by the private sector.
Even though these privately securitized mortgages were less than one-third of the total number of subprime and other risky loans outstanding, they are the reason that banks and other loan originators generally have been blamed—in the media, in most books and films about the financial crisis, and of course by the commission—for the financial crisis.
However, these weak Wall Street loans, as the report referred to them, were “not from private speculators looking for profit, but primarily from the government pursuing a social policy by directing the investments of companies or agencies it regulated or otherwise controlled.”
Even before the commission’s report came out, Congress and the Obama administration acted on the premise that the private sector was mainly responsible for the crisis and passed the Dodd-Frank Act to greatly tighten the regulatory screws on “Wall Street.”
“The act is far and away the most restrictive piece of legislation ever imposed on the U.S. economy, and it will have a long-term effect in slowing economic growth, just as the uncertainties it has created have already slowed the recovery from the recession,” Wallison said.