Wallison: Still Wrong About Genesis of Housing Crisis

[Derechos]

If you’ve been closely following the housing finance reform debate, you may have come across a pair of shrill blog posts penned by Peter Wallison, a senior fellow at the American Enterprise Institute and a Republican appointee to the Financial Crisis Inquiry Commission. He responded to my February 2011 article, “Faulty Conclusions Based on Shoddy Foundations,” which criticized the research underlying Wallison’s dissent from the majority of the members of that commission, and his contention that U.S. affordable housing policies caused the global financial crisis.

In these blog posts on The American Spectator’s blog on May 24 and on AEI’s blog on May 26, Wallison criticizes ”Faulty Conclusions” as “fallacious,” “fraudulent,” and “deceptive”; claims that it contains a “fake” chart; and describes the article as a “political screed.”

As I describe below, these accusations are baseless and distract from the fact that Wallison does not actually address the main arguments of “Faulty Conclusions.” Wallison does not contradict the claim that his FCIC dissent depends critically on the categorization of millions of home mortgage loans as “high risk” that are not actually high risk. Wallison also fails to answer other serious issues with his arguments that were pointed out in “Faulty Conclusions.”

This issue brief will reexamine my core criticisms of Wallison’s dissent from the Financial Crisis Inquiry Commission and respond to his criticisms of my column “Faulty Conclusions.”


http://www.ritholtz.com/blog/2011/07/why-wallison-is-wrong-about-the-genesis-of-the-u-s-housing-crisis/

Krugman's blog - Evil > Stupid http://krugman.blogs.nytimes.com/2011/07/15/evil-stupid/

Mike Konczal reads the Democratic report on conduct at the Financial Crisis Inquiry Commission (pdf), which has some fairly shocking evidence about Peter Wallison, who has been pushing the clearly false line that Fannie and Freddie were actually leading the charge into high-risk lending.

As Konczal says, all of this stuff relies on a form of three-card monte: you talk about “subprime and other high-risk” loans, lumping subprime with other loans that are not, it turns out, anywhere near as risky as actual subprime; then use this essentially fake aggregate to make it seem as if Fannie/Freddie were actually at the core of the problem.

But was this self-conscious? Do these people know what they’re doing?

Yes.

Wallison was serving as a member of what was supposed to be an impartial commission examining the facts. But:


…on November 3, 2010, the day after the mid-term congressional elections in which Republicans took control of the House, Republican Commissioner Peter Wallison emailed Republican Commissioner Douglas Holtz-Eakin: “It’s very important, I think, that what we say in our separate statements not undermine the ability of the new House GOP to modify or repeal Dodd-Frank.”

[SoCalDem]

1. Millions of loans are high risk...Not necessarily sub-prime

but still high risk..

When people agree to pay 30+ years for a several-hundreds of thousands of dollars-worth of house, and their INCOME/SAVINGS/DEBT-RATIO does not warrant such a purchase, that is high risk.

No-down/low-down on a house loans were the bandaid on the economy. Don't we all remember Greenspan remarking frequently about the "irrational exuberance" in the housing market? Housing and its attendant industries were what was propping up the dying economy of GW Bush for quite a few years.

I once saw an "expert" on some show commenting on house purchases, who said "A person earning $40K should not be looking at houses over $400K". I gasped when I heard her say that..

Her theory was that their income would rise sufficiently so that when the interest-only period of the loan ended a few years later, they would be "ready" and making enough money to "keep up".

A quick look at the income graph that shows how wages have been flat or decreasing for 40 years now, would prove her wrong..and millions of people who lost houses proved it.

[Igel]

2. You have to read these kinds of things really closely.

They split hairs, leave out nuances, shift from a general use of a term to a precise use (thereby changing the definition mid-argument).

The argument that the CRA was responsible, that Freddie/Fannie led the way, that the problem was all sub-prime lones, is usually ham-fisted and can be picked apart fairly easily.

The counterarguments are leaky. They show that the CRA forced no lender and had no legal teeth in this fight; that Freddie/Fannie didn't lead the way/weren't the largest providers/etc., that subprime loans were a pittance and therefore couldn't matter all that much.

Neither is worth its weight in diarrhea.

I've seen parts of the argument implicating the CRA, subprime loans, Fannie/Freddie made with the proper delicacy to hold water. The claims have to be made with an appreciation not just for legality, but polical pressure at various levels of government, of PR pressure. Of actual numbers of mortgages and how they were evaluated. Of changes in the law and regulations that helped banks under certain conditions be more socially responsible--but which led to some nasty securitization practices. That Fannie/Freddie (whichever, I forget now) were crucial in the process, opened the floodgates, and later returned to the torrent. The counterclaims against those parts fail mostly because the argument is nuanced and pulls in different kinds of information from a few dozen sources in a way that is compelling. The argument looks at changes in PR and political pressure, then looks at how regulatory changes and the numbers of mortgages for given cities and neighborhoods altered. One even looked at specific protests and threats from community and the bank's response. When you get cause and effect linked causally and temporally the argument is hard to shake, and the usual counterclaims are too general and even hamfisted (in turn) to dent them.

At the same time, such arguments sleight the problem from the private sector (and Freddie/Fannie) side: That when there's a legal and profitable process to offload mortgages, good, bad or indifferent, that banks would take advantage of that process to the full--and that nobody bothered to think about the consequences of something done to be socially responsible. Yeah, the banks were greedy. Like that's a surprise. The way the mortgage providers ran the process was sloppy and let people commit fraud because both the providers and the customers thought it in their best interest. Sometimes they encouraged the fraud, sometimes they overlooked it, sometimes they were indifferent to it. In other words, people on both sides of the desk were all too often greedy, as well. On the other hand, a lot of what the mortgage providers did was perfectly legal because the regs and the laws said so or didn't say otherwise. The process was set up to be sloppy because home ownership was a big deal for Bush. And for Clinton. (A lot of the key regulatory steps happened under Clinton and *didn't* involve Congress--and were greeted very warmly by a lot of people rather to the left of center. Not all of them. (D) like to focus on the ones under *; (R) like to assume only the ones under Clinton actually mattered. If you cover one eye you lose depth of field.)


My concluding comment is that "impartial committees" are seldom impartial when you look at individuals. The usual goal is to get a group of people as impartial as possible, but to select them so that when taken as a group their biases and partisan interests cancel out, leaving only the bits that presumably are true. Presumably there were Democrats on the "impartial committee" as well, and if you managed to take a look at all of their personal communication I doubt they'd be judged really impartial.