‘The Financial Crisis Was the Result of Government Housing Policy’

The American Enterprise Institute’s Peter Wallison on how government, not greed, was the essential ingredient in the 2008 meltdown.

In January 2011, a bipartisan, 10-member, government-created body called the Financial Crisis Inquiry Commission (FCIC) issued a comprehensive report assigning blame for the 2008 financial meltdown. The main culprits: “widespread failures in financial regulation and supervision,” “dramatic failures of corporate governance and risk management at many systemically important financial institutions,” “a combination of excessive borrowing, risky investments, and lack of transparency,” a government that “was ill prepared for the crisis,” and “a systemic breakdown in accountability and ethics.”

The four Republicans on the FCIC issued two dissents from the commission’s findings, the splashiest of which was a 93-page solo response from American Enterprise Institute (AEI) scholar Peter Wallison. The crisis, Wallison said, was caused mainly by the systemic failures of government housing policy.

Some of the public response to Wallison’s dissent was withering. Stanford University political scientist Francis Fukuyama, in a January interview with the online-only publication The Browser, charged that it “takes what is a very complex crisis that has multiple roots and lays it all at the door of Fannie and Freddie and government intervention. It seems to me transparently designed to exonerate free markets.…But this crisis has proved that financial markets are not self-regulating. To draw from this complex analysis that particular conclusion I just find astonishing.”

Fukuyama was not alone. New York Times columnist Joe Nocera had previously called Wallison’s work “loony” and accused him of helping to concoct “what has since become a Republican meme.” Even the free market George Mason University economist Russ Roberts took Wallison to task for downplaying the role of investment banks.

Wallison, who co-directs AEI’s financial policy studies program, is unrepentant. “Instead of pursuing a thorough study,” he says, “the commission’s majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions.”

Wallison, who served as White House counsel and Treasury Department general counsel during the Reagan administration, sat down with Reason Foundation Director of Economic Research Anthony Randazzo on the one-year anniversary of the FCIC report in January discuss about the causes of the 2008 financial crisis, what to do about Fannie Mae and Freddie Mac, and the implications of the Dodd-Frank Act, among other topics. To watch a video version of this interview, go to reason.tv.

reason: The Financial Crisis Inquiry Commission, which you were on, found that the crisis was caused by a mixture of deregulation, Wall Street greed, predatory lending, and many other things. Why do you disagree?

Peter Wallison: There’s absolutely no evidence for anything that the majority of the commission put in their report. The financial crisis was the result of government housing policy.

reason: So are Freddie and Fannie the chief culprits?

Wallison: Fannie Mae and Freddie Mac were the implementers of a substantial portion of the government’s housing policy. Basically, the government’s housing policy was intended to provide financing to people who were unable for one reason or another—mostly lack of resources—to get mortgage credit. And Fannie and Freddie were agents that the government worked through. However, they also used something called the Community Reinvestment Act. HUD [the Department of Housing and Urban Development], which was basically in charge of all of these programs, also had its own program which involved the mortgage bankers’ association, and there were other HUD programs that encouraged the granting of mortgages to people who didn’t have the financial resources to support them. 

In the end, by 2008 there were 28 million subprime or very weak mortgages. Those are known as Alt-A mortgages. That’s half, incidentally, of all mortgages in the financial system. Of that 28 million, 20.4 million were on the books of government agencies like Fannie Mae and Freddie Mac and the FHA [Federal Housing Administration] and other government agencies and banks that were holding them as a requirement of the Community Reinvestment Act, which applied to banks. So that’s why I say that the government’s housing policy was responsible for creating these mortgages. They never would have been created without the government demanding that they be created and providing the funds to buy them.

reason: Stanford political economist Francis Fukuyama recently said that your dissent to the commission’s report was “transparently designed to exonerate free markets.” Did the crisis have nothing to do with free markets?

Wallison: You know, I’m sorry that Francis Fukuyama has lost his skill at analysis. I actually was pretty impressed with what he’s written in the past, but here he really doesn’t understand at all what I was saying in my dissent and probably hasn’t taken the trouble to read it. 

My point was [that] without the government’s housing policy, there would never have been a financial crisis. That’s not exactly the same thing as saying that government housing policy caused the financial crisis. It’s stating it another way—that is, but for the government’s housing policy, there wouldn’t have been a financial crisis. Without the creation of all of the subprime and other weak mortgages, we wouldn’t have had a mortgage meltdown that ultimately was the cause of the weakness in the financial system. Because many, many banks and other financial institutions were holding these very weak mortgages, and when they began to fail that’s when we had what is called the mortgage meltdown, and that led directly to the financial crisis. So I am not exonerating the private sector. The private sector was a factor.

reason: Many economists have claimed that it was the interconnectedness of Wall Street that forced the government to come in and bail it out. 

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Longtorso||

    Anyone mind if I pimp the usual blog post here?

  • T||

    No, you've been beating the drum on the issue long enough that you can be excused a victory dance when a post like this comes along.

  • DJF||

    I put the blame on the ugly mixing of private and public that seems so popular in today’s economy. Fannie and Freddie were created by government but they were also listed on the New York Stock exchange. What was it, a government entity to create a public good or a private entity to provide a private good?

    What we need is a wall of separation between public and private

  • MoreFreedom||

    Fannie Mae was a government entity created so that politicians could make money. They did so by buying Fannie stock, then giving them preferred financing from the Fed, and watching Fannie take over the mortgage securitization market, and their stock go up.

    They also got lots of money from Goldman Sachs who helped Fannie repackage and sell the mortgage backed securities. Obama being the biggest recipient of cash from them.

  • mybarber||

    You mean giving a loan to people whocan't pay them back causes problems?Everyone knew you could borrow 105% of a house and the equity would grow,like magic,and you could borrow against that alsso.Down payments and paying of you princple is for chumps

  • T o n y||

    Yes, this explanation is 100% political. An attempt to exonerate Republicans of blame and lay it at the feet of the people who, according to them, are responsible for all social ills: poor black people.

  • coma44||

    Tony......you never give up do you?

    get a clue.

  • jacob the barbarian||

    Toni, you give douches a bad name.

  • ||

    Fuck you, you race mongering asshole.


  • T o n y||

    Fuck you. You probably buy into the Republican spin while claiming to be a free thinking nonpartisan.

  • ||

    There are vastly more poor white people in this country than poor blacks, just by shear numbers. So no asshole, if any group of people could be "blamed" for our social ills (which I don't think anyone can really do since people aren't a homogenous glop) it would be poor and lower middle class whites.

    Stick that in your pipe and smoke it.

  • Raistlin||

    Heerpity Derp-derp-derp. And now back to your regularly scheduled program.

  • Harvard||

    About the time I think the liberal vomit has scalded Tony's throat he arrives to dispel that rumor and further expose himself as a slow thinker.

  • Wes||

    I agree that government intervention in the market is the major cause of the crisis. But it is the private sector who is giving money and 'encouragement' to both parties to support this and other government interference with a market. And that money encouragement is driven by greed with lack of concern for the future effects. So the crisis was caused by government intervention which was supported by greedy private market companies, like home builders and realtors. Until we get rid of the crony capitalism it is impossible to say the cause is only one.

  • mr simple||

    By that logic, the voters are the ones that are truly responsible for every ill the government has brought against us, including the recession. Which I guess is true.

    The only way to stop businesses and individuals from seeking gov help against competition is to take away the gov's power to do so.

  • MoreFreedom||

    No individual or corporation (i.e. the "private sector") can force government to interfere in the market to benefit the individual or corporation. Only politicians can do it. Yet you blame the private sector. First you paint a broad brush regarding "encouragement" given to politicians to intervene in the market. How do you distinguish contributions to politicians for:

    1) rent-seeking
    2) avoiding legislation that hurts the bottom line (additional regulations to adhere to regardless if customers want it)
    3) avoiding legislation that benefits one's competitors, but not your business
    4) seeking benefits available to other companies/industries (if we support dairy farmers, why not "fill in the blank")

    Not all contributions are from rent-seekers. I don't fault contributions for reasons 2 and 3.

    It's not money and "private sector" greed that corrupts the free market, it's political greed corrupting the free market (creating a politically controlled market instead), by politicians who've shown they'll give government favors for big bribes (I mean campaign cash).

    The best regulator of business, is the free market. The worst regulator is the government.

  • brichards||

    Shouldn't it be easy then to prove all this with numbers and not just rhetoric about the policies?

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  • Jdre||

    For sure. Buy what was the impetus for the government policy? Government had to implement easy credit policies because of rising inequality. Lower middle class American families would not have been able to afford a house otherwise because of stagnant wages. While the rich and corporations benefited from lower taxes, the middle class were left behind. Their disposable income also declined. The easy credit policy was needed to placate this large constituency. It was good politics, but bad economics. So yes government policy led to the crisis, but it was income inequality and the stagnant purchasing power of many Americans that was the impetus behind it.

  • Wayne Jett||

    I disagree with Mr. Wallison's premise that government was the driving influence in the events of 2008. Government served as a complicit operative of the perpetrators, but not in the way described by Mr. Wallison, the FCIC majority, or Dr. Fukuyama.

    The events of 2008 were orchestrated financial fraud of gargantuan proportions. Federal regulators aided the fraud. The SEC repealed the "up-tick" rule, e.g., while knowing violation of that rule at the heart of the Crash of 2000-2002. The SEC also adopted a "Madoff exception" rule, permitting naked short selling (electronic counterfeiting) of shares to drive down share prices. A secret report (now de-classified) obtained by the Pentagon in 2009 supports my conclusion.

    Recent private research found more than half of all sub-prime mortgage-backed securities in the markets in 2006-2007 were designed-to-explode synthetic derivatives. Creators of these IED securities profited by buying credit default swaps (bets against the MBS), and by naked short selling the shares of financial firms who were so ill-advised as to buy the fraudulent MBS.

    This is not the entire story, but space is limited. My point is orthodox views simply do not get close to the real story of what is being done to this country - an estimated $13 trillion looted from investor capital in 2008 alone, per the Pentagon report.

  • Libertarius||

    The nexus and source of all the financial and economic problems in America is the Federal Reserve System, period. Fiat money and the coercive, arbitrary manipulation of interest rates are at the heart of all of it.

    But yes, the government was all over this thing from top to bottom. In addition to the Fed, we had the government underwriting shit mortgage credit, I don't think the "bailouts" were even bailouts at all, since all that debt was underwritten by the government anyway.

    In 2004 I was an intern with the "housing finance agency" in the downtown of my state capital. My job was to write commitment letters for the public housing project finance applications that were submitted through our agency. 99.9% of the letters I wrote were approvals; I think I wrote three denials in the year I was there. These applications were from a gaggle of penniless "community investment trusts" and private developers, and I saw numbers from $250,000 to $25M. I wrote letters all day long, every day.


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