Monday, August 19, 2013

The 2008 Financial Crisis Explained

The Financial Crisis Explained: Why Complexity Wasn’t the Problem
We are nearing the fifth anniversary of the 2008 financial crisis, and despite an abundance of evidence, the media and the general public still seem largely misinformed about the hand of government in planting the seeds for the meltdown. The twitchy finger of that hand was the federal government’s aggressive affordable housing policies.

Most folks, however, still believe that the cause of the crisis was some combination of Wall Street greed and government deregulation of financial markets. There also exists the impression that the housing finance market, and especially securitization, had just gotten too darned complex, and that that complexity caused the crisis.

I confess that until I studied the details carefully, I held the same impression. . .
Last two paragraphs:
AEI’s Peter Wallison and Edward Pinto were courageous in identifying the real causes from the very beginning, and the numbers that subsequently emerged confirmed their claims. As a result of government efforts to expand homeownership, by 2008 about half of the loans in the market — some 27 million loans — were risky, subprime, or otherwise nontraditional. Of these, Fannie Mae and Freddie Mac held almost half — 12 million. FHA and other federal agencies (such as the Veterans Administration and Federal Home Loan Banks) held 5 million, and Community Reinvestment Act and HUD programs had another 2.2 million. That’s a whopping total of 19.2 million risky loans held by entities controlled by or within the federal government, leaving just 7.8 million for Countrywide, Wall Street, and other private institutions.

Five years on, it should be obvious that the federal government’s well-meaning but misguided affordable housing policies played a decisive role in the crisis.

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