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The 2008 Financial Crisis Revisited

January 8, 2016 1 comment

A movie (The Big Short) has recently appeared that attempts to portray the events leading to the financial crisis of 2008. While I have not seen the movie but plan to do so, I have seen statements that the movie does not describe the role of the federal government in this fiasco. Whether or not that is true, there is some information easily available which provides an account of the government’s role in this crisis.

Peter Wallison is on the staff of the American Enterprise Institute.  He has written extensively on the financial crisis and he has a recent blog post giving his views on risk-taking by financial firms that was induced by the federal government.

I have also written previously on the crisis (read those posts here and here).  All of the information referred to in this post points to the affordable housing goals adopted by the federal government as providing incentives for financial firms to take on riskier mortgages. This does not mean that the federal government was the only cause of the crisis but it was a big part of the forces causing this latest U.S. recession.

More on the Housing Meltdown

November 18, 2011 1 comment

The official government version of the causes of the housing crisis is contained in a report by a special commission appointed to determine the causes of the housing bubble. The report suffers from political influences meant to shield politicians from being implicated as the architects of the housing meltdown.  Peter J. Wallison, affiliated with the American Enterprise Institute, served on the commission which produced the report, a report which Mr. Wallison refused to endorse. To read Mr. Wallison’s version of events, read this article.

The Origin of the U.S. Housing Collapse

November 8, 2011 1 comment

The most recent U.S. recession that began in December 2007 was a unique one in that it originated in the housing sector of the U.S. economy. The narrative emanating from U.S. politicians is that this recession was caused by financial market participants (Wall Street firms and banks) motivated by greed and/or incompetence. However, experience teaches that one should be skeptical of statements by politicians since they may have an incentive to distort the record to avoid accountability for the economic problems that they cause. Two books have been written providing an account of the origins of the housing market-led recession and both clearly implicate the U.S. government as being the originator of this recession. Thomas Sowell has written a book detailing the federal government’s role in this recession but the most damaging account of the government’s role is the book by Gretchen Morgenson and Joshua Rosner.  This book provides a very detailed account of the risk put into the banking system by politicians using Fannie Mae as a source of campaign contributions while claiming that their actions were motivated by the desire to raise home ownership rates in the U.S. This is a book well worth reading for an unbiased account of the actions of various politicians (and yes the book names names). The book details what Congressman Paul Ryan has described as “crony capitalism” involving politicians and firms in the private sector. Specifically, politicians could claim that people at the lower end of the income distribution were being helped by the government to achieve home ownership while Fannie executives funneled campaign contributions to the politicians and enriched themselves while purchasing loans made to these targeted individuals.

Finally, if you are wondering how it is that mortgage lending standards declined, endangering the U.S. banking system, look no further than an article that appeared some time ago in the Wall Street Journal.  As made clear in the article, lending standards declined at the behest of the U.S. government so that mortgages could be obtained by individuals at the lower end of the income distribution.

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