Housing Policy

How Housing Policy Caused the Financial Crisis: Q&A with AEI's Peter Wallison


The 2008 financial crisis "proved that financial markets are not self-regulating," says political scientist Francis Fukuyama in a recent interview with the website TheBrowser:

"[Peter Wallison] lays it all at the door of Fannie and Freddie and government intervention. It seems to me transparently designed to exonerate free markets…I like free markets…[but] that particular conclusion I just find astonishing."

Fukuyama isn't alone in depicting Wallison as an uncompromising ideologue who thinks government deserves all the blame. New York Times columnist Joe Nocera called Wallison's work "loony" and accused him of helping to concoct "what has since become a Republican meme." Even pro-free market economist Russ Roberts took Wallison to task for downplaying the role of investment banks in causing the crisis.

So who is Peter Wallison? He's a scholar at The American Enterprise Institute and was a leading member of the 10-person Financial Crisis Inquiry Commission, a government-created body charged with looking into the causes of the 2008 meltdown. After a year of hearings and deliberation, the commission produced its official report which laid most of the blame on deregulation and private sector avarice. Wallison publicly broke with the commission over the report.

"Instead of pursuing a thorough study," says Wallison, "the commission's majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions—that the crisis was caused by 'deregulation' or lax regulation, greed and recklessness on Wall Street, predatory lending in the mortgage market, unregulated derivatives, and a financial system addicted to excessive risk taking."

Wallison published his version of what caused the crisis in a 93-page dissent, which argues that the meltdown was largely a consequence of government housing policy that underwrote unsustainable economic activity. He draws heavily on the research of Fannie Mae's former chief credit officer, Edward Pinto, which found that federal housing agencies drastically underreported the number of high-risk mortgages on their books. According to Wallison and Pinto, there were about 28 million high-risk mortgages in the U.S. in 2008; roughly 70 percent of those mortgages were owned by government-sponosored enterprises such as Fannie Mae and Freddie Mac.

Wallison sat down with Reason Foundation's Anthony Randazzo in January to talk about the causes of the 2008 financial crisis, what to do about Fannie Mae and Freddie Mac, and why he's not guilty of trying to "exonerate" Wall Street banks.

This interview was excerpted from a much-longer conversation, a transcript of which can be found here, here, and here.

Produced, shot, and edited by Jim Epstein.

About 6 minutes.

Go to Reason.tv for downloadable versions and subscribe to Reason.tv's YouTube Channel to receive automatic updates when new material goes live.


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  1. deja vu

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    2. deja vu
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  4. “Instead of pursuing a thorough study,” says Wallison, “the commission’s majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions…”

    It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to fit facts.

    1. It is a capital mistake to theorize before one has data.

      And has other odd effects as well. It’s been instructive to watch my child’s (9th grade) science experiment.
      The (required) hypothesis had to do with the relative effectiveness of solar cookers, box vs reflector. What she has learned is the difficulties using them due to typically chilly, cloudy, windy Virginia winter weather. She hesitates describing all that because it doesn’t really answer the hypothesis.

      1. A hypothesis and a theory are two very different things.

        A hypothesis is by definition you making a prediction about the specific results of a defined experiment. It’s you using your existing knowledge and available data to be able to predict precisely what the result of an experiment should be. You aren’t trying to prove the hypoethis, you’re testing your ability to apply knowledge practically.

        A theory is a general overarching concept of something that you conduct research and experiments on in order to either prove or disprove your theory.

  5. This guy represents the brain-dead bubble most Republicans live in.

    1. It was the deeregateshun I tells ya!

    2. This guy represents the brain-dead bubble most Republicans live in.

      OK… Nice polemic blast. Do you have something specific to say?

      1. Nah. Too many other people have taken Wallison’s argument apart.

        1. But not very well. Usually just using your technique.

  6. You can cast blame on banks or whatever you like, but it does all ultimately come back to the government. The banks can only get away with what they do, because the government allows it, and in many cases encourages and promotes it, and in the case of the housing market actually legally required it.

    1. True, and you can blame a supernova in the M87 galaxy on government too, because it did nothing to prevent it. How many libertarians are in favor of stronger government police power over financial banks as a way to prevent future crises?

      1. Tony|3.12.12 @ 4:11PM|#
        “True, and you can blame a supernova in the M87 galaxy on government too, because it did nothing to prevent it.”

        Shithead = dumb or dishonest. You decide.

      2. Government didn’t ‘allow’ it, government created the situation to cause it.

        Your childish theory depends on this: borrowers, lenders, and other parties to the bubble all of the sudden for no reason, got simultaneously greedy and stupid en masse, and for no reason. Spontaneous ‘irrational exuberance’, or even better ‘animal spirits’;)

        It was predictable, and predicted. How could this have been the case, while your disney economists like Krugman said everything was just swell.

        1. In fact, Krugman was cheering on the housing bubble, saying it was the cure for the recession following the Dot Com bubble.

          1. Damn, the lie about krugman cheering on the housing bubble AGAIN. It’s been debunked:

            “Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.”


    2. In this case the government specifically said “make a really bad deal you’d never make with your own money and we’ll buy those bad deals from you.” How exactly do you blame a banker who can get rich making bad deals and selling them to a willing, and even eager, government? Banks that went south only did so because they didn’t sell their bad loans to the government fast enough, and even then most were rewarded with billions in bailouts.

  7. …I like free markets…

    …and Bill Clinton said he was libertarian…

  8. Even pro-free market economist Russ Roberts took Wallison to task for downplaying the role of investment banks in causing the crisis.

    Hardly noteworthy, as we can lay blame just about anywhere in the housing market and on anyone involved, including buyers.

    The equivalent of blaming greed even though human greed is a constant.

    1. Right like the one think bankers are just notorious for is how not greedy they are, as a class;)

      But apparently they all went to greedy town out of the blue. Surely insanely low interest rates, insanely lowered borrowing standards, and GSE’s gobbling up the debt to make endless room for more originations, had nothing to do with it.

      It was animal spirits I tells ya!

  9. It does show that regulation is important when certain industries run rampant. Bubbles are nothing more than mob mentality. That is when the government steps in.

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  12. I see commentary on the crisis like the blind men and the elephant. Government intervention in the housing market was so pervasive, massive, and influential that everyone who examines it comes away with just a partial understanding of it. Some see the GSE’s. Others the CRA. Austrians like Russ Roberts see the Fed and our heavily regulated banking sector. Thomas Sowell sees local land use regulations. They are ALL right. All these government measures contributed to the crisis.

    1. So for those who want to blame the government, the housing crisis is a target rich environment. There are so many things the govwernment did to encourage the bubble that it is easy to think any one particular policy is to blame. There is plenty of room for reasonable disagreement about which government policy was the most important determining factor.

      The only thing there IS no reasonable room for is blaming the free market, because there was no free market to blame.

  13. amen to that..no free market to blame. gov’t had its hand in it from the get go. countrywide was forced to give loans of no proof of income or assetts low interest and 5% down. paulson, bernake and guitner are all complisit in this mess. they are still running things

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