Hidden in plain sight : what really caused the world's worst financial crisis and why it could happen again

The 2008 financial crisis--like the Great Depression--was a world-historical event. What caused it will be debated for years, if not generations. The conventional narrative is that the financial crisis was caused by Wall Street greed and insufficient regulation of the financial system. That narrative produced the Dodd-Frank Act, the most comprehensive financial-system regulation since the New Deal. There is evidence, however, that the Dodd-Frank Act has slowed the recovery from the recession. If insufficient regulation caused the financial crisis, then the Dodd-Frank Act will never be modified or repealed; proponents will argue that doing so will cause another crisis. A competing narrative about what caused the financial crisis has received little attention. This view, which is accepted by almost all Republicans in Congress and most conservatives, contends that the crisis was caused by government housing policies. This book extensively documents this view. For example, it shows that in June 2008, before the crisis, 56 percent of all US mortgages were subprime or otherwise low-quality. Of these, 76 percent were on the books of government agencies such as Fannie Mae and Freddie Mac. When these mortgages defaulted in 2007 and 2008, they drove down housing prices and weakened banks and other mortgage holders, causing the crisis. After this book is published, no one will be able to claim that the financial crisis was caused by insufficient regulation, or defend Dodd-Frank, without coming to terms with the data this book contains. The 2008 financial crisislike the Great Depressionwas a world-historical event. What caused it will be debated for years if not generations. The conventional narrative about the financial crisis is that it was caused by greed on Wall Street and insufficient regulation of the financial system. That narrative produced the Dodd-Frank Act, the most comprehensive regulation of the financial system since the New Deal. There is evidence, however, that the Dodd-Frank Act has slowed the recovery from the recession. If insufficient regulation caused the financial crisis, then the Dodd-Frank Act will never be modified or repealed; proponents will argue that doing so will bring back another financial crisis. However, there is a competing narrative about what caused the financial crisis that has received very little attention in the mainstream media. This view, which is accepted by almost all Republicans in Congress and most conservatives and conservative intellectuals, contends that the financial crisis was caused by the governments housing policies. This book provides extensive documentation of this view. For example, it shows that in June 2008, before the crisis, there were 32 million subprime or other low quality mortgages in the US financial system58 % of all US mortgages. Of these, 76% were on the books of government agencies such as Fannie Mae and Freddie Mac. When these mortgages defaulted in 2007 and 2008 they drove down housing prices 30-40% and weakened banks and others that held these mortgages, causing the financial crisis. After the publication of this book, no one will be able to claim that the financial crisis was caused by insufficient regulation, or defend the extensive government regulation in Dodd-Frank, without coming to terms with the data this book contains. The 2008 financial crisis—like the Great Depression—was a world-historical event. What caused it will be debated for years, if not generations. The conventional narrative is that the financial crisis was caused by Wall Street greed and insufficient regulation of the financial system. That narrative produced the Dodd-Frank Act, the mostcomprehensive financial-system regulation since the New Deal. There is evidence, however, that the Dodd-Frank Act has slowed the recovery from the recession. If insufficient regulation caused the financial crisis, then the Dodd-Frank Act will never be modified or repealed; proponents will argue that doing so will cause another crisis.A competing narrative about what caused the financial crisis has received little attention. This view, which is accepted by almost all Republicans in Congress and most conservatives, contends that the crisis was caused by government housing policies. This book extensively documents this view. For example, it shows that in June 2008, before the crisis, 58 percent of all US mortgages were subprime or other low-quality mortgages. Of these, 76 percent were on the books of government agencies such as Fannie Mae and Freddie Mac. When these mortgages defaulted in 2007 and 2008, they drove down housing prices and weakened banks and other mortgage holders, causing the crisis.After this book is published, no one will be able to claim that the financial crisis was caused by insufficient regulation, or defend Dodd-Frank, without coming to terms with the data this book contains. Contents 8 preface 12 acknowledgments 18 Introduction 24 PartIThe Basics 23 The Difference between Primeand Nontraditional Mortgages 48 The Financial Crisis InquiryCommission Report and OtherExplanations for the Crisis 62 A Short History ofHousing Finance in the U.S. 121 PartIIGovernment HousingPolicies Take Effect 144 HUD’s Central Role 146 The Decline inUnderwriting Standards 181 Force Fed 203 Going Viral 240 PartIIIThe Financial Crisisand Its Accelerants 257 The Great Housing Price Bubble 258 Flying Blind into a Storm 269 31 Million Nontraditional MortgagesPrecipitate a Crisis 286 Fair-Value AccountingScales Up the Crisis 299 PartIvFrom Bad to Worse 327 From Bad to Worse 328 The False Narrativeand the Future 363 notes 384 INDE X 414 Introduction The difference between prime and nontraditional mortgages (NTMS) Red herrings : other explanations for the crisis The housing finance market before the affordable housing goals Government housing policies kick in The affordable housing goals and the decline in underwriting standards Force fed : the affordable housing goals, the gses, and the NTMS Going viral : competition spreads the gses' reduced underwriting standards to the wider market The great housing bubble Ignorance and bliss : what was known about the NTM market before the crisis How 32 million NTMS precipitated a financial crisis Fair value accounting and collateral damage Bad to worse : the government response Conclusion. The 2008 financial crisis, like the Great Depression, was a world-historical event. What caused it will be debated for years, if not generations. The conventional narrative is that the financial crisis was caused by Wall Street greed and insufficient regulation of the financial system. That narrative produced the Dodd-Frank Act, the most comprehensive financial-system regulation since the New Deal. There is evidence, however, that the Dodd-Frank Act has slowed the recovery from the recession. If insufficient regulation caused the financial crisis, then the Dodd-Frank Act will never be modified or repealed; proponents will argue that doing so will cause another crisis.