Now Playing at Reason.tv: Peter Wallison on the Roots of the Financial Crisis

At Reason's 40th anniversary event, held in Hollywood on November 14 and 15, the American Enterprise Institute's Peter Wallison analyzed the roots of the current market meltdown and explained how government policies directly caused or massively exacerbated the housing bubble and the subsequent bust at the center of things.

The Arthur F. Burns Fellow in financial studies and codirector of AEI's program on financial markets deregulation, Wallison is the author of several books including most recently, Competitive Equity: A better way to manage mutual funds.

Approximately 25 minutes.

Comments

[Gilbert Martin]

"American Enterprise Institute's Peter Wallison analyzed the roots of the current market meltdown and explained how government policies directly caused or massively exacerbated the housing bubble and the subsequent bust at the center of things."

Steve Forbes did a pretty good job of explaining how government was the root cause of it in an article in Forbes a while back as well.

[joshua corning]

At the 19:10 point he is flipping off the audience....why the hell do poeple do that?

Seriously it is freaking me out.

[jsh]

It's pointless to argue; people want to believe The State loves them and will protect them and all bad things are the result of a few evil individuals. Torture, the housing bubble, it doesn't matter.

[chris]

without the credit expansion precipated by the Fed, there would not have been the necessary funds for a housing bubble in the first place. Government regulatory and fiscal policy only explains where the credit leaked to -- housing speculation. Even if all this other policy had not existed, the Fed's credit expansion would have caused a boom bust cycle in a different industry or the entire economy altogether.

[Ken]

One thing people tend to leave out is how leveraged everything was.

When you have these complex investment securities that hardly anybody understands, leverage your money 40 to 1, and keep it a secret....*shrug*....well, here we are.

[lukas]

Ken, you can only leverage 40 to 1 if someone gives you the money to do it.

[Matt R.]

Great presentation! I need to pass this on to those who believe that Congress is part of the solution.

[Lefty]

Hello
The fellow from AEI is only telling half the story. The exotic Wall Street mortgage bundling had more to do with causing the current crisis than Fannie Mae/Freddie Mac (although the latter is substantial, don't get me wrong). But to blame the Community Reinvestment Act is a bit misguided. Most of these subprime mortgage brokers did not fall under the rubric of CRA. If they did can someone explain how?

[RicardoVerde]

Hello Lefty:
Another way to look at it is that the "exotic Wall Street bundling" added overburden to an edifice based upon the faulty foundation of the CRA. The overburden caused the house of cards to fall fast and hard, yet the house would have fallen just as surely at a later date and may have taken more with it if it had.
We can't build using faulty financials (true voodoo economics), and good intentions. If we don't require financial responsibility then we won't obtain a sound economy.

[Lefty]

Ricardo
I agree that we can't build or offer faulty financials but you don't provide evidence that the reason why those exotics were caused by subprime mortgages responding to CRA. What was the nature of the relationship between mortgage brokers and the banks?

[Jon h]

"Another way to look at it is that the "exotic Wall Street bundling" added overburden to an edifice based upon the faulty foundation of the CRA."

The CRA didn't apply to enough lenders for it to constitute a 'foundation' in any way at all.

[Faithkills]

To deny the part CRA played is to deny all of economics. The CRA did put downward pressure on the cost of mortgage risk for the banks affected. This in turn put competitive downward pressure on secondary and other prime lenders servicing the same markets, which in turn put downward pressure on the market in general.

Of course the Fed played their role too, but neglecting the CRA's (and GSE's) downward pressure on the price of risk is silly at best and disingenuous at worst. The fed primarily caused the bubble, but the underpriced risk was one of the primary factors that burst it. Mark to market made sure once the burst started it would cascade rapidly.

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