‘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.

(Page 3 of 3)

Wallison: Of course. The Dodd-Frank Act is an extraordinary piece of legislation. I mean, we’re not talking about an ordinary act that responds to a very narrow set of circumstances. You could think, for example, of the Federal Deposit Insurance Corporation Improvement Act, which was adopted in 1991 after the S&L [savings and loan] collapse. That was directed specifically at the problems that were seen as causing the S&L collapse. So it focused on the banking industry, it focused on S&Ls, it focused on those institutions that insured deposits and then tried to write restrictions based on that. People said, now we won’t have any banking crises anymore because we’ve got this wonderful law in place. 

Of course, we had a banking crisis again in 2008. But in this case we got a law—the Dodd-Frank Act—which doesn’t just cover banks; it doesn’t just cover investment banks. It potentially covers the entire financial system, and it turns over to the Federal Reserve the authority to regulate every large financial institution in our system. That is, insurance companies, finance companies, securities firms, hedge funds, God knows what else, because it’s very, very broad. The government can decide that any one of these institutions could, because of its interconnections, cause a financial crisis if it fails, so it has to be very strictly—stringently is the statutory term—regulated. 

Well, that is the kind of law that causes the hearts of adventurous entrepreneurs to freeze, because you do not know what kind of restrictions are going to be put on you and you don’t know what regulatory positions the government is going to take in the securities area, in the Commodity Futures Trading Commission area, through the banking, through all the other instrumentalities of government. And so you are waiting to see what the regulations require. While you are waiting, during this period of uncertainty, you are not hiring. So from my perspective, the Dodd-Frank Act is the principal cause of the semi-recession that we are still struggling through.

reason: In what ways is the Dodd-Frank Act potentially hurting the housing industry?

Wallison: There are lots of ways, but the most significant way has to do with the government-sponsored enterprises, Fannie Mae and Freddie Mac, the Federal Housing Administration (FHA), the fact that those are not treated at all in the Dodd-Frank Act, but the Dodd-Frank Act has provisions which make those three agencies the dominant players in the housing market. And as long as those are the dominant players in the housing market, no private-sector group is going to come in and compete with them because you cannot compete with a government agency. Government agencies have credit opportunities that you cannot approach, and as a result there’s no competition. As long as the Dodd-Frank Act is in existence with the advantages it provides to these government agencies, there isn’t going to be a recovery in the housing market. 

reason: The Republicans in Congress have over the past year tried and failed a handful of times to convince the larger Congress to address Fannie Mae and Freddie Mac. It’s highly unlikely that they will be addressed in this election year. Do you see any viable path forward to address Fannie Mae and Freddie Mac after the 2012 election?

Wallison: Yes, in fact the 2012 election could make it possible for us to address Fannie Mae [and] Freddie Mac. And the FHA, I might add. 

Every Republican presidential candidate has said the cause of the financial crisis was Fannie Mae and Freddie Mac and government housing policy. Now, this is pretty important to me. I happen to know where they got those ideas. And that means that if a Republican beats Barack Obama in the next election, we will have, at least in the White House, someone who accepts the correct narrative about what happened in this financial crisis. Not that it’s greed on Wall Street, not that it’s lack of regulation, but that it’s the result of the U.S. government’s housing policy. Once you establish the right narrative, the answers fall out by themselves. And that means you have to repeal the Dodd-Frank Act because that is impairing our recovery, that is imposing much too much regulation on the financial system when it wasn’t at all necessary. It’s an illegitimate act and has to be repealed. 

reason: There are people in the Republican Party who were significantly involved in preventing the reforms to Fannie and Freddie proposed in 2004 and 2005. One of the candidates for the Republican nomination, Newt Gingrich, worked for Freddie Mac. There are even people in the House of Representatives who are Republicans who have introduced legislation to keep Fannie Mae and Freddie Mac around. You seem pretty confident that the Republicans would make the right steps, but history offers some cause for concern. 

Wallison: I am concerned about this history, and I’m concerned about these Republicans. I’m not concerned so much about Newt Gingrich because he’s flip-flopped on this issue: He’s now against Fannie Mae and Freddie Mac. But at the time, he was well compensated for what he did to help Freddie. In fact, he was at AEI. I was attacking Fannie Mae and Freddie Mac at AEI in the 2000s, 2004 to 2007, saying that they were a real risk to the country; meanwhile, two doors down from me, Newt Gingrich was helping them persuade people that they weren’t so bad, so we were an ecumenical group, apparently, at AEI.

I am concerned about people who are in Congress today, and that’s for two reasons. One is a very technical reason, and that is: The breakdown between Republicans and Democrats on the key committees, on the House Financial Services Committee and on some of the subcommittees, is very, very close. So one Republican in some cases can tie it up so you can’t actually get legislation out. That’s a problem and I would hope that in the next Congress, the leader, Congressman [John] Boehner (R-Ohio), will change the makeup of the House Financial Services Committee so that there are more Republicans than Democrats and we can overcome the votes of a couple of Republicans who are favorable to Fannie Mae and Freddie Mac. 

You simply cannot overestimate the power of Fannie and Freddie and the ideas that underlie them that come from the groups like the realtors and the home builders and in some cases the securities industry, because they all make a lot of money from Fannie and Freddie. These are interests that are very focused on making sure that Fannie Mae and Freddie Mac and to some extent FHA are very much in business, and they have their own influence on people in Congress. And I must say, giving the people in Congress—even the Republicans in Congress who favor Fannie and Freddie—their due, they can always argue, “Well, in my district we need Fannie and Freddie for this reason or that reason, and I’m afraid that if they were no longer present there wouldn’t be any financing for homes in my district.” So they can cover themselves with talking for their district, but in fact if these people say they are conservatives, and many of them argue that they are conservatives, they are not conservatives if they are willing to back Fannie and Freddie.

reason: Would you say that today’s weak economy is a direct result of the financial crisis, or are there other underlying aspects of why the U.S. economy has not bounced back as strongly from the last recession as it normally does after a recession?

Wallison: I actually believe that it was the reaction to the financial crisis, principally the Dodd-Frank Act, that has caused today’s economy to be as weak as it is. Without that, if we had just let the housing market decline, let everything go down to the level where people are willing to come in and start buying, then we would have been in recovery right now. But the government’s actions in trying to prevent that from happening, the government’s actions in impeding the development of new financing sources for housing, have caused the problem we are in today. 

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  • 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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