- The financial crisis was caused by the government’s housing policies, not by predatory lending or greed on Wall Street
- This claim has one important asset the left's narrative lacked: it was based on data. – Peter Wallison
- Well before 2005 and 2006 Fannie and Freddie were buying subprime loans.
- This country will never solve its problems until the left learns the lessons of tolerance and adult decorum - Pete Wallison
It's always painful to take on the myths and ideological narratives of the left. The pundits of the liberal (excuse me, "progressive") media make a pretense of listening to reason, but when their views are challenged, they become abusive. You are not honestly trying to find the truth; you are making up data, actually lying. If you are skeptical about anthropogenic global climate change, you're not just a skeptic-you're a denier (as in Holocaust denier). And if you disagree with the standard left-wing narrative about the financial crisis, even if you can support your position with data, you are using the "Big Lie" technique (again, repulsively invoking the likes of Goebbels). This attitude and way of dealing with disagreement should have no place in our political system, but seems to have become the stock in trade of the most respected spokesmen of the left.
One good example of this is my dispute with Joe Nocera, a columnist for the New York Times. It began in January 2011, shortly after I had dissented from the majority report of the Financial Crisis Inquiry Commission (FCIC). In that dissent, I argued that the financial crisis was caused by the government's housing policies, and not-as the government and the mainstream media had been saying since 2008-by predatory lending, greed on Wall Street, and insufficient regulation of the private sector.
As outlined in my dissent, the principal executors of these government policies were two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, which were chartered by Congress to operate a secondary market in residential mortgages. Under a 1992 law, Fannie and Freddie were required to meet certain "affordable housing" goals when they bought loans from banks and other mortgage originators. Initially, the quota was that 30 percent of all loans they acquired had to be made to borrowers at or below the median income in their communities.
This initial goal was probably realistic: it was possible to meet a 30 percent quota without compromising underwriting standards. However, the Department of Housing and Urban Development (HUD) was given administrative control of the housing goals, and over time, on its own initiative and under pressure from Congress, HUD raised and tightened them. By 2000 they reached 50 percent, and 55 percent by 2007, with special subgoals that imposed quotas for borrowers at or below 80 percent and 60 percent of median income. These more aggressive goals required the GSEs to reduce their underwriting standards, so much so that by 2008, just before the financial crisis, the GSEs and other government agencies held or had guaranteed more than 20 million subprime and other low-quality loans-74 percent of the 28 million such loans then outstanding. It was the delinquencies and defaults among these loans, I argued, that caused the mortgage meltdown and the financial crisis.
Referring to my dissent in his Times column, Nocera called it "loony," at the same time reasserting the conventional narrative of the left: that while Fannie Mae and Freddie Mac had made some regrettable errors in buying subprime and other low-quality loans, they had simply followed Wall Street in search of market share and profit. Admittedly, "loony" isn't a terrible epithet, but it does the job; it delegitimizes the argument and places it outside the permissible range of reasoned discussion. But things got a lot worse, and Nocera and his ideological ilk got a lot more abusive, as my dissent began to garner more attention and adherents.
In early 2011, it was easy to dismiss an argument that the financial crisis would not have occurred but for the government's housing policy. The idea that Wall Street and the private sector were responsible for the crisis was deeply imbedded in the public's consciousness after the 2008 presidential campaign. Barack Obama had declared in the debates with John McCain that the crisis was the result of "Repub-lican deregulation," and McCain himself stated that "Wall Street greed" was responsible. This narrative was picked up and treated by the media as received wisdom.
But the claim that the financial crisis would not have occurred without the government's housing policies had one important asset the left's narrative lacked: it was based on data. The fact that, in June 2008, 74 percent of all subprime and other low-quality mortgages were on the books of the GSEs and other government-backed or regulated entities was a pretty good indication that the government had created the demand-that is, a buyer-for these mortgages. The foundation of the left's narrative, on the other hand, was made up of anecdotes-stories about predatory lending, about greed, about inadequate risk management and inattentive regulators. That was the essence of the FCIC's majority report, from which I'd dissented.
All these bad things occurred, of course, but the policy question-the reason the whole issue is important-was whether these problems would have caused a financial crisis on their own, without the government's role in fostering the creation of vast numbers of substandard mortgages. If lack of adequate regulation caused the financial crisis, the Dodd-Frank Act was the right answer. On the other hand, if the crisis would not have occurred but for the government's housing policy, Dodd-Frank was a counterproductive overreaction that would ultimately harm our financial system and suppress economic growth. When three-quarters of all subprime mortgages were on the government's books, the data says that the government's housing policy was the principal reason for the mortgage meltdown and the resulting financial crisis.
As the data on government housing policy became more widely known, opinions about the causes of the financial crisis began to change. Most Republican members of Congress and virtually all the Republican candidates for president adopted the analysis that I had outlined in my dissent, arguing that government housing policy and Fannie and Freddie were at the heart of the 2008 financial crisis. Republicans in Congress and all of those running for president began to call for the repeal of Dodd-Frank.
Even some close analysts of the financial system began to have second thoughts. Michael Cembalest, the chief investment officer for JPMorgan Chase, who had written in 2009 that the private sector was primarily responsible for the financial crisis, retracted that view in a May 2011 report, after seeing the data in my dissent and the work of my AEI colleague, Edward Pinto. Later in 2011, Gretchen Morgenson, a Times business columnist, and Joshua Rosner, a widely respected financial analyst, published Reckless Endangerment, a book that blamed Fannie Mae for the financial crisis. Finally, in December 2011, the Securities and Exchange Commission sued six of the top officials of Fannie and Freddie for failing to disclose the number of subprime and other low-quality loans that both firms had acquired before they became insolvent. In connection with the suit, the SEC obtained admissions from Fannie and Freddie that they had held or guaranteed 13.6 million subprime and other low-quality loans, corroborating Pinto's work and the estimate in my dissent.
At that point, I wrote an op-ed for the Wall Street Journal, pointing out that the SEC had confirmed the fundamental elements of my dissent, and that Fannie and Freddie had misled analysts, risk managers, and regulators, as well as their own investors, about the risks they were creating in the mortgage market. The severity of the mortgage meltdown and the resulting financial crash were a direct result of the shock created by the sudden delinquency and failure of the subprime and other low-quality loans these two firms had made under HUD's affordable housing requirements.
All this was just too much for Nocera. It was clear that he and the left were gradually losing the argument over what caused the financial crisis. On December 20, he wrote in his column:
Over at the conservative American Enterprise Institute, two resident scholars, Peter Wallison and Edward Pinto, have concocted what has since become a Republican meme: namely, that Fannie Mae and Freddie Mac were ground zero for the entire crisis, leading the private sector off the cliff with their affordable housing mandates and massive subprime holdings. The truth is the opposite: Fannie and Freddie got into subprime mortgages, with great trepidation, only in 2005 and 2006, and only because they were losing so much market share to Wall Street....The reality is that Fannie and Freddie followed the private sector off the cliff instead of the other way around.
This sounds vaguely as though Nocera knows something about the subject. "The truth is..." he tells us from the op-ed page of the august New York Times.
But that view, devoid of data, which simply reasserts the agreed narrative of the left, is contradicted by Nocera's own 2010 book, All the Devils Are Here, written with financial writer Bethany McLean. There, he and McLean noted that Fannie and Freddie began acquiring subprime loans as early as 2000 in order to comply with the affordable housing requirements set by HUD. "In the end," they wrote, "...it didn't really matter whether Fannie and Freddie moved into riskier mortgages quickly or slowly, reluctantly or gleefully. What mattered was that they entered this new market at all. In doing so, they gave their imprimatur to what had previously been an entirely separate universe. A line that was absolute was now blurring. The whole definition of subprime was 'the stuff that Fannie and Freddie wouldn't touch' a former executive explains. No longer."
In other words, well before 2005 and 2006, Fannie and Freddie were buying subprime loans. They didn't follow Wall Street into the subprime business, they led it. In fact, as disclosed in my dissent, Fannie and Freddie had been active in the purchase of subprime mortgages well before 2000. The affordable housing requirements were imposed in 1992 and, beginning shortly thereafter, Fannie and Freddie bought increasing numbers of subprime and other low-quality loans that enabled them to meet the affordable housing goals.
Nocera and McLean also describe the role of affordable housing goals in causing Fannie and Freddie to acquire the triple-A tranches of mortgage-backed securities (MBS) issued by Wall Street and based on subprime loans; they date this activity to early in the 2000s:
They'd [i.e., Fannie and Freddie] begun buying these securities in the earlier part of the decade because they offered decent yields. But when the housing goals became harder to fulfill, the triple-A tranches provided an easy way to meet their mission numbers. Eventually, the Street began designing a special GSE tranche that was packed with loans that satisfied the affordable housing requirements. And HUD allowed the GSEs to count these purchases toward their goals. Over time, Fannie and Freddie became two of the world's largest purchasers of triple-A tranches. In the peak year of 2004, the GSEs bought about $175 billion in triple-A's, or 44 percent of the market.
So, far from getting into subprime loans "with trepidation" in 2005 and 2006, or a "reality" in which Fannie and Freddie "followed the private sector off the cliff," Fannie and Freddie were buying Wall Street's subprime MBS in the early 2000s, and by 2004 were the principal buyers of the subprime packages the private sector was putting together. In effect, they helped build the business that Nocera now denounces as the work of the Devils on Wall Street.
If there is any further doubt about what caused the GSEs to buy these loans -- loans that ultimately caused their insolvency and have cost U.S. taxpayers more than $150 billion thus far -- here is a statement from Fannie's 2006 10-K, which somehow never made it into the Nocera book or the majority report of the FCIC:
[W]e have made, and continue to make, significant adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet HUD's increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns than our typical transactions. We have also relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUD's goals and subgoals, which could increase our credit losses. [Emphasis added.]
Thus, according to Nocera himself, Fannie and Freddie got into subprime mortgages well before 2005 and 2006, and were the principal customers for the MBS backed by subprime loans that Wall Street was putting together in 2004. In calling my dissent "loony," Nocera was attacking me for drawing conclusions not substantially different from those he had announced in his own book. But the point here is not that Nocera did not read his own book, although that might be true. It's that his commitment to the left's narrative about the financial crisis was more powerful than the facts. Since the progressives' position was that Fannie and Freddie, seeking profit and market share, had followed Wall Street into subprime lending, it must be true. Indeed, he'd probably read it in the New York Times.
I responded to Nocera's attack by pointing out that the SEC's case rested on a simple and reasonable finding that the mortgages the GSEs had not disclosed were in fact subprime, because they had a substantially higher rate of delinquency and default than prime loans. This seemed to put to rest the left's specious argument that what Pinto and I had called a subprime mortgage was not in fact a low-quality loan. Since Fannie and Freddie had become insolvent because of the poor quality of the mortgages they held or had guaranteed, one would think this would be obvious, but this assertion had been the left's principal argument against my dissent and Pinto's work from the outset. Indeed, the SEC's complaint had noted that for years Freddie had been coding billions of dollars of loans as "subprime" or "subprime-like" while reporting publicly that its exposure to subprime was "less than one percent."
This response prompted another article from Nocera that described what I had been doing as creating a "Big Lie"-in effect, making up numbers, even though they had just been corroborated by the SEC. "So this is how the Big Lie works," he wrote. "You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he's an 'expert' [this nasty remark refers to Ed Pinto, who was once the chief credit officer of Fannie and a life-long participant in the housing finance market]; out of thin air, he devises 'data.' You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own....Thus has Peter Wallison, a resident scholar at the American Enterprise Institute and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis....Rarely has his intellectual dishonesty been on such vivid display."
Following this attack-still without a shred of data-came a similar assault from Nocera's New York Times colleague, Paul Krugman, writing in his blog on January 9, 2012:
In a Dec. 23 column in the New York Times, Joe once again went after the Big Lie-the claim that Fannie Mae and Freddie Mac caused the financial crisis-and drove home the point that the people advancing this story aren't just wrong but are acting with intent, engaging in deliberate deception....Basically, Joe is arriving where I've been since 2000: what's going on in the discussion of economic affairs (and other matters, like justifications for war) isn't just a case where different people look at the same facts but reach different conclusions. Instead, we're looking at a situation in which one side of the debate isn't interested in the truth, in which scholarship is actually just propaganda.
It's important to keep in mind after reading this that these two-Nocera and Krugman-are at the top of their profession. What a commentary that is on the quality of the rest. You can imagine the trash that is written and spoken by those lower in the progressives' pecking order.
But then, of course, after those who disagree are called liars on the level of a Nazi propagandist, come the obsequious and disingenuous statements about willingness to engage in debate. Here is Nocera again, in his December 23 column: "Three years after the financial crisis, the country would be well served by a real debate about the role of the government in housing....To have that debate, though, we need a clear understanding of what role the government's affordable-housing goals did-and did not-play in the crisis. And that is impossible as long as the Big Lie holds sway." Huh?
Has there ever been a less sincere invitation? As Dana Milbank wrote recently in the Washington Post, "Nazi comparisons are the most extreme form of political speech; once one ties his political opponents to the most deplorable chapter in human history, all reasoned argument ceases." This country will never solve its problems until the left learns the lessons of tolerance and adult decorum.
Peter Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at AEI.