The outcome of the 2008 election centered around the financial collapse that hit just months before the vote. Even the most committed capitalists were taken by surprise at what seemed like a significant failure of capitalism. Outrage was magnified as taxpayer dollars were used to bail out Wall Street millionaires. In the months before the election we had little insight as to what caused this catastrophe.
Three years later we have collected insights from several good books on the subject. With the clarity of hindsight we see that there was much more than Wall Street greed involved. This is not to excuse the behavior of the self proclaimed financial masters of the universe who created self acknowledged crappy products as long as they could find suckers somewhere on the planet to buy their crap. Their hubris rationalized absurd leverage because they bought into the “this time it’s different” mindset that seems to accompany every financial collapse. They replaced an old school philosophical understanding of risk with a delusional mathematical certainty based on mathematical models that had soon to be realized severe limitations when applied to human action. It is amazing what people will believe when they get paid outrageous sums.
But this was not enough to explain what happened. As Thomas Sowell noted, blaming this collapse on greed is like blaming an airplane crash on gravity. Greed has always been with us; why would it show so strongly at this time?
This excess was fed by the very institutions that claim to protect us. Rating agencies gave higher ratings than merited because of implied government guarantees. Worldwide investors poured money into this market because because of the high scores from the ratings agencies. But the center of the implosion was the housing market and this bust was the direct effect of Federal housing policies and the two Macs; Freddie and Fannie. Wall Street served the political aims of a government that thought everyone should own a home, regardless of whether they could afford it. To facilitate this objective Freddie and Fannie threw prudent lending out the window.
At The American Peter J. Wallison and Edward Pinto write Why the Left Is Losing the Argument over the Financial Crisis, 12/27/11.
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.
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.
HKO further comment:
We are only now beginning to see Washington take responsibility for their role in this crisis. Any effort, law, or regulation that seeks to either solve this problem or prevent such a crisis from being repeated, that does not acknowledge and address this important factor is doomed to fail.