Why the Left is Losing the Argument over the Financial Crisis

The American ^ | 12/28/2011 | By Peter J. Wallison and Edward Pinto

[SeekAndFind]

The day before Christmas, Joe Nocera did it again—wasted a perfectly good column with another attack on us, Peter Wallison and Ed Pinto.

It’s worth reading for what it says about the Left’s current situation. According to Nocera, we “almost single-handedly” have created a “myth that Fannie Mae and Freddie Mac caused the financial crisis.” Those who have fallen for this myth, according to Nocera, include congressional Republicans and the Wall Street Journal’s editorial page.

It’s somewhat implausible that two guys at a Washington think-tank, arguing that the financial crisis was caused by government housing policy, could create a widely accepted alternative to the conventional liberal narrative that the financial crisis was caused by the greed and lack of regulation of Wall Street. After all, the conventional narrative was created by the government, propagated by the New York Times, and accepted without question by just about every other major newspaper and electronic mass media outlet, foreign and domestic. Apparently, however, in Noceraworld, threats to the accepted narrative can never be fully suppressed.

It’s somewhat implausible that two guys at a Washington think-tank could create a widely accepted alternative to the conventional liberal narrative that the financial crisis was caused by the greed and lack of regulation of Wall Street.

We doubt that we have been as successful as Nocera fears, but we believe that Nocera and his ilk are losing the argument about what caused the financial crisis. If in fact our views have received sufficient credence to warrant the alarm of the New York Times, a reading of his attack piece will tell you why. The article is fully representative of the Left’s approach—don’t bother with facts, just call your opposition liars or worse (racists) and leave it at that. This name-calling is then dutifully repeated throughout the leftwing echo-chamber.

To the extent that we have had any success in challenging the conventional narrative about the causes of the crisis, it is because fair-minded people are persuaded by facts, not invective. Our argument is and has been that the financial crisis would not have occurred but for government housing policy implemented principally through Fannie and Freddie and the Department of Housing and Urban Development (HUD). Although there were a number of such policies, the most important were the affordable housing requirements first imposed on Fannie and Freddie in 1992 and expanded and tightened by HUD through 2007.

Summarized below are the original numbers we relied on, taken from Fannie and Freddie’s own data and from the views of bank regulators—and now supplemented with additional data from the Securities and Exchange Commission’s recent complaints against certain officers of Fannie and Freddie. Of particular interest are Fannie and Freddie’s non-prosecution agreements with the SEC, in which they agree with facts that confirm—and in many cases go beyond—our original research concerning the scope of the GSEs’ subprime and Alt-A exposure. These are facts, and Nocera and others who might wish it otherwise should become familiar with them.

For example, in its non-prosecution agreement Freddie agreed that as of June 30, 2008, it had $244 billion in subprime loans, comprising 14 percent of its credit guaranty portfolio, rather than the $6 billion it had previously disclosed. Freddie also agreed that it had $541 billion in reduced documentation loans alone, vastly more than the $190 billion in previously disclosed Alt-A loans which Freddie had said included loans with reduced documentation.   

While the SEC documents about $1.03 trillion in previously undisclosed subprime and Alt-A loans in Fannie and Freddie’s credit guaranty portfolios, an estimated $812.8 billion, or about 80 percent, were already accounted for in the totals of Fannie and Freddie subprime and Alt-A exposures included in Pinto’s Forensic Study and Wallison’s Dissent from the majority report of the Financial Crisis Inquiry Commission.

The SEC findings add $219 billion and 1.43 million loans to our original Fannie and Freddie subprime and Alt-A totals, bringing the combined subprime and Alt-A total to $2.041 trillion and 13.37 million loans.

The SEC findings add $219 billion and 1.43 million loans to our original Fannie and Freddie subprime and Alt-A totals, bringing the combined subprime and Alt-A total to $2.041 trillion and 13.37 million loans.

All told, after adding the SEC’s new data to our original estimates, there were approximately 28 million subprime and Alt-A loans outstanding on June 30, 2008, before the financial crisis, with a value of approximately $4.8 trillion. This was half of all mortgages in the United States. Of these loans, over 74 percent were on the books of U.S. government agencies and firms subject to government housing finance policies. This shows where the demand for these low quality loans came from. Fannie and Freddie were themselves exposed to more than 13 million subprime or Alt-A loans, or 65 percent of the government total.

The table below shows the values of the subprime and Alt-A loans originally included in Pinto’s Forensic Study and Wallison’s Dissent, supplemented by the data included in the SEC’s complaints and the non-prosecution agreements.

Fannie and Freddie subprime and Alt-A totals as of June 30, 2008

(All numbers de-duped to eliminate inclusion in more than one category.)

Table in billions of dollars

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies and Edward Pinto is a resident fellow at the American Enterprise Institute.

FURTHER READING: Wallison also writes “Where No Mortgage News Is Fit to Print,” “A Guaranteed Disaster,” and “The Financial Crisis on Trial.” Pinto contributes “Cleaning House: The Financial Crisis and the GSEs,” “Senate Undermines Obama—and the Country—on Housing,” and “New Bubble May be Building in 30-Year Mortgages.”

Footnotes

1 In 2001, federal regulators determined that a FICO score of less than 660 can be used to identify a subprime mortgage. http://www.federalreserve.gov/Boarddocs/SRletters/2001/sr0104a1.pdf

2 The GSEs published credit supplements at the time of their SEC filings. These supplements set forth loan characteristics with high risk. These included negative amortization, interest pnly, original LTV>90% (effectively >=95%), and Alt-A as disclosed by Fannie and Freddie.

3 In the case of both original LTV>90% and combined LTV>90%, the effective LTV is >=95%. In the case of original LTV>90%, this is confirmed by the fact that the LTV average for such loans was 97.4%. In the case of combined LTV, the 80/20 and 80/15 combinations would have resulted in a combined LTV>=95%.

4 These differ slightly from the Forensic Study/Dissent subtotals due to rounding and the need to change the de-duping hierarchy to incorporate the SEC additions.

5 $101.7 billion prior to de-duping.

6 $238 billion prior to de-duping.

7 $341 billion prior to de-duping.

8 $351 billion prior to de-duping.

[relictele]

Is it because their response to any problem or question is “more spending?”

[nathanbedford]

It looks like the authors are right on the numbers and wrong on the conclusion. I do not think that the truth has even got its boots on.

[theBuckwheat]

The multi-layered mirage of Keynesian economics is unraveling. People are beginning to understand that printing money is not the same as printing wealth. In fact when government creates money in any way, it dilutes the value of the existing stock of money, and thus steals private wealth.

Further, it is becoming plain that socialism is the ideology of death. It is based on the fraudulent belief that we all will somehow be better off if we each live at the expense of everyone else. This is morally bankrupt because it violates the Commandments that forbid coveting and theft. It is a lie because the socialist economic model cannot increase wealth, it can only divvy up what ever-decreasing wealth remains.

As more and more people wake up to the harsh reality of socialism, the socialists must become more shrill, hyperbolic and in the end, violent to maintain their mirage and power. The end game will be when socialists must violently suppress anyone who holds to liberty and property rights as protected in the Ten Commandments. Any such person left alive is carries the seed of opposition to socialism. But God is not mocked, nor will socialists prevail for long.

[TheBigIf]

And how are the authors wrong on their conclusion? They conclude that it was the creation of the fascist GSEs by the democrat party that lead to the financial crisis. Seems that conclusion is right on the money. TRILLIONS of dollars in bad loans forced upon the market by a democrat party political agenda. The democrats have been known for this type of shenanigans throughout their entire history. They have always been the party of institutionalized corruption.

[Sgt_Schultze]

The notoriously left-wing Village Voice agrees it was government policies (directed by Andrew Cuomo) that birthed the mortgage mess (link to article)

[iacovatx]

The ideological underpinnings of the housing market disaster were captured in the phrase, “affordable housing”. That phrase describes one of the many ways politicians buy votes from the masses.
Boosting home buying and ownership has for decades been viewed as a method of strengthening the economy and improving the general welfare of the American people. It is hard to blame politicians for not seeing risk in that because the risk was under-appreciated even by the risk assessment professionals such as the S&P rating people. However, those same politicians were unethical in aggressively pushing access to loans for the purpose of buying votes. The politicians pushed the mortgage industry out of the market and into the realm of politics. The result was a disaster in a vast sector of the economy that was greatly amplified by the use of derivative investment. Derivatives are mathematical inventions, not ideological, but they have tremendous power to amplify the raw dynamics of any investment and are beyond the understanding of politicians or the general population.

Unethical ideological/political use of power by politicians harnessed to the power of derivatives and ridden in an inherently uncertain system produced the disaster we’ve experienced. That system continues.

[Sgt_Schultze]

In fact when government creates money in any way, it dilutes the value of the existing stock of money, and thus steals private wealth.

Many folks just cannot grasp that concept. It makes it easier for them to understand if they are asked to imagine what would happen to the value of their diamond jewelery if perfect diamonds could suddenly be found lying on the ground plentifully among regular rocks, or on the beach.

[wayoverontheright]

No data is needed to conclude that the GSE’s created the credit crisis.

One needs only to know human nature.

Let me see....I’m a mortgage banker, and I need only find someone who wants to buy a house. Ability, stability, and track record no longer apply. If I get this person to sign the papers, I have a guaranteed buyer for the paper, and I make my money and wash my hands.

I cannot blame them for acting in this manner.

This whole thing was predictable, and actually predicted. It simply had to happen.

[FrogMom]

Ping.

[NDpapajoe]

We could eliminate the problem of Mortgage default, if we would revert to holding debtors to their vow to repay. As long as people can “walk away” from a mortgage, with no worries other than a dented credit rating, we are doomed.

There used to be Debtor’s Prisons for those who welched on loans. These days, they send a jingle letter, and are completely off the hook.

This is precisely where the trouble started — the day borrowers realized there was virtually no impact if they would simply default.

[LomanBill]

The ideological underpinnings of the housing market disaster were captured in the phrase, “affordable housing”.

 

 

The concept of the "ownership society" was not without merit.   Better to manufacture individuals with a stake in the system rather than allow others to mold them into a disenfranchised underclass for recruitment by Chavez and the Communists.

 

Unfortunately the organized criminal gaming by amoral parasites outweighed the merit.

 

Where's RICO, LEOs?

 

"Oops"  

BTW, as of 2007, none of the products peddled by Argent Mortgage / Ameriquest qualified for underwriting by Freddy/Fannie.   That was a goal those thieves were still aiming to achieve.

 

 

[LomanBill]

>>This is precisely where the trouble started —

Those borrowers are just Useful Idiots.

Without them, the amoral parasites who securitized those loans into AAA A$$Paper wouldn’t have been Empower(tm)ed.

It was the derivative a$$paper that poisoned the global economic infrastructure.

No need for “debters prison” — JUST ENFORCE THE EXISTING LAWS AGAINST FRAUD.

Where’s RICO, LEOs?

[nathanbedford]

I believe the authors are correct in the conclusions which you set forth but I fear that they are wrong in their conclusion that the world sees it their way.

[blam]