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For reasons that have always eluded me, the causes of the financial crisis have become a bloody battleground in the left/right war. One theater of combat is the question whether Fannie Mae and Freddie Mac—and government housing policy generally—might have caused the crisis. Given the importance of the crisis—the losses it has caused and the regulations it spawned—one would think that coming up with a credible answer would be in everyone’s interest, and that a vigorous debate would inform the public and provide guidance for public policy in the future.
However, if we take as an example the Democratic majority on the Financial Crisis Inquiry Commission, which was funded by Congress to tell the American people why we had a financial crisis in 2008, we can see that that the whole operation was politicized. The commission simply refused to consider any theory other than the left-wing narrative that blamed the private sector, the banks and the lack of regulation.
Even if they were right, one would think that their responsibility as citizens charged with a serious inquiry would impel them to look at all the evidence. Why was it, for example, that on the eve of the crisis 28 million loans–half the mortgages in the U.S.– were subprime or otherwise low quality, and why were 74 percent of those loans on the books of Fannie Mae and Freddie Mac or other government agencies and government-regulated entities? Questions like this were dismissed by the commission, which referred to the GSEs’ role as “marginal,” and treated objections as an unwarranted attack from the right.
Now along comes Oonagh McDonald, a former Labour member of Parliament, spokesperson for Labour on Treasury and Economics, and a former member of the UK’s Financial Services Authority. She can hardly be considered a right-wing ideologue. Yet she has written a thoroughly researched and heavily documented book, Fannie Mae and Freddie Mac, Turning the American Dream Into a Nightmare, (Bloomsbury 2012) in which she shows that an ideological bias in favor of low-income lending led the U.S. government—over a sixteen year period—to promote subprime and other low quality mortgages, degrade mortgage underwriting standards, and cause both the mortgage meltdown and the global financial crisis.
The McDonald book is remarkable for its relentless focus on the effects of a low-income lending ideology as a cause of the financial crisis. The existence of this bias is probably what makes the left so protective of Fannie and Freddie and U.S. housing policies, since together they implemented the kind of program that Liberals have always wanted. Other writers, most notably Gretchen Morgenson and Josh Rosner, in their book Reckless Endangerment, avoided the ideological aspect of Fannie and Freddie’s role in the financial crisis, focusing instead on the political reasons for their accretion of power and the political economy of their connection to low-income lending. But with the McDonald book, we are blessed with a thorough and clear-eyed view that could only be brought to the issue by a scholar looking in from outside.
So McDonald wades into the major issues without flinching. For example, on a favorite trope of our “progressives”– that Fannie and Freddie merely followed Wall Street into subprime lending:
It is simply not true to say that the entry into the subprime market was a late development [for the GSEs]. In an early paper , provided for the Office of Housing Policy Development, the authors point out that the “GSEs are increasing their business, in part, in response to higher affordable housing goals set by HUD in its new rule established in October 2000. In the rule, HUD identifies subprime borrowers as a market that can help Fannie Mae and Freddie Mac achieve their goals…”(p262)
Accordingly, readers who have been put off thus far by the spinning and sharp-elbowed jockeying for position in the debate about the causes of the financial crisis can now repair to a text written by a financial expert who is unambiguously not a member of any of the warring sects—there to get authoritative counsel like this about the causes of the financial crisis:
Clinton set the wheels in motion; Bush did little to stop the juggernaut of “affordable” or “subprime lending,” which rolled on without any obstacles in its way. But when house prices began to fall and interest rates began to rise, almost half of all outstanding mortgages were revealed as subprime….When it all went wrong, politicians both in the US and elsewhere sought to deflect attention from their own actions by the ever-popular sport of attacking and blaming the banks. Of course, many of the banks played their part as well, but the prime responsibility is a political one of seeking to increase home ownership at any price. (p328-9)
In a sense, on this much-debated issue about the recent past, McDonald gives us a window on ourselves.
Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. He was general counsel of the Treasury and White House counsel in the Reagan administration and a member of the Financial Crisis Inquiry Commission.
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