Latest PJ Media Column (‘Larry Summers: A Casualty of the Left’s False ‘Financial Crisis’ Narrative’) Is Up
It will go up here at BizzyBlog on Friday (link won’t work until then) after the blackout expires.
Peter Wallison: Five Years Later: Don’t Mention the Feds
Washington and the media are peddling a narrative that discounts the government’s role in the financial crisis.
With the fifth anniversary of the Lehman Brothers collapse, the media have been full of analyses about what happened in those fateful days. We hear plenty about Wall Street rapacity but any discussion of the government’s central role in the disaster is neatly avoided. This historical airbrushing is something of a feat, given the facts.
At the time of Lehman’s failure, half of all mortgages in the U.S.—28 million loans—were subprime or otherwise risky and low-quality. Of these, 74% were on the books of government agencies, principally the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
On their face, these numbers suggest that the government’s housing policy had created the demand for these mortgages, and thus had something to do with Lehman’s failure and the financial crisis. But in recent days nearly all articles have focused on the 26% of mortgages that were the responsibility of the private sector. It is as though the vast majority of the subprime mortgages that the government bought didn’t exist.
Perhaps you haven’t noticed, but since the 2008 meltdown, the government’s housing specialist, the Department of Housing and Urban Development, has not been active in the debate over housing policy. That might seem odd, but given the department’s role in the mortgage meltdown, it’s no wonder the agency would prefer to stay out of the limelight.
… There is no doubt what really happened. Between 1997 and 2007, HUD’s affordable-housing policies under two administrations built an enormous mortgage bubble—nine times as large as any bubble in modern history—and when this bubble collapsed, it caused a 30%-40% decline in housing prices. This left homeowners who had limited financial resources and no equity in their houses unable to refinance or sell, causing an unprecedented number of mortgage defaults. Shocked by these numbers, investors fled mortgage-backed securities, making them useless for short-term financing by financial institutions like Lehman. The result was a panic and a financial crisis.
When it became obvious that government policy was at fault, even Barney Frank—at the time the chairman of the House Financial Services Committee and a principal backer of the affordable-housing goals—confessed that the policy had been misguided. On Larry Kudlow’s CNBC show in 2010, Mr. Frank said: “I hope by next year we’ll have abolished Fannie and Freddie. It was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.”
… If we ever hope to understand what led to the financial crisis five years ago—and how to avoid another one—we must start looking in the right places.
The left is constantly miscasting history to make sure that doesn’t happen. Read the whole thing.