July 12, 2011

Wallison in the WSJ: Fannie Mae Caused the Home-Lending Mess

Filed under: Economy,Taxes & Government — Tom @ 9:05 am

What Peter Wallison writes in today’s Wall Street Journal is completely obvious to anyone with open eyes, but bears repeating repeatedly because the political hacks in Washington won’t let go of their “Wall Street did it” meme:

Government-Sponsored Meltdown
Fannie Mae did not contribute ‘marginally’ to the financial crisis. It was the source of the declining mortgage underwriting standards that brought down the system.

… The notion that the “banks led us into” the financial crisis echoes the narrative of the FCIC’s Democratic majority, which placed the blame for the financial crisis on the private sector and dismissed the idea that government housing policy could have been responsible.

… “Reckless Endangerment,” a new book about the causes of the crisis … (makes it) clear that it was Fannie Mae and the government housing policies it supported, pursued and exploited that brought the financial system to a halt in 2008.

After James A. Johnson, a Democratic political operative and former aide to Walter Mondale, became chairman of Fannie Mae in 1991, they note, it became a political powerhouse, intimidating and suborning Congress and tying itself closely to the Clinton administration’s support for the low-income lending program called “affordable housing.”

This program required subprime and other risky lending …

… Far from being a marginal player, Fannie Mae was the source of the decline in mortgage underwriting standards that eventually brought down the financial system. It led rather than followed Wall Street into risky lending.

… by 2008 half of all mortgages in the U.S. (27 million loans) were subprime or otherwise risky, and that 12 million of these loans were on the books of the GSEs.

… two-thirds of these subprime or risky loans were on the books of government agencies or firms subject to government control.

… if government housing policy, and not Wall Street, caused the financial crisis, what was the basis for Dodd-Frank’s extraordinary and growth-suppressing regulation on the financial system?

There is no basis, except insatiable statism.

Statists have used the “Wall Street did it” meme to institutionalize ruinous government intervention in the form of Dodd-Frank which is among regulatory reasons why the economy isn’t sufficiently growing and isn’t creating an acceptable level of jobs. The “need” for Dodd-Frank is as valid as the meme. Its harm to economic freedom and economic growth will be substantial.