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Co-Director of AEI’s Program on Financial Policy Studies highlights key points from his book

On June 23, 2017, at The Institute of World Politics, Peter J. Wallison gave a lecture about his book, Hidden In Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again. In this book lecture, Wallison described what really caused the Financial Crisis of 2008. Wallison was a member of the Financial Crisis Inquiry Commission (FCIC), a commission appointed by Congress to investigate and determine the causes of the Financial Crisis. However, he explained that he dissented from the commission’s report, primarily because he disagreed with the report’s explanation of what caused the crisis. In the official report, the FCIC blamed the crisis on excessive risk taking and greed, leading the American public to believe that the private sector caused the problem. The report did not provide substantial evidence for this explanation. In fact, the FCIC was given data that was left out of their final report. Wallison’s book utilized the data that was not included in the FCIC report in order to show a clearer picture of what actually caused the crisis.

In the book lecture, Wallison displayed significant data to show how the U.S. government’s housing policies were really to blame for the crisis, not lack of regulation of the financial system. He described how there was a buildup of subprime and other low-quality mortgages in our financial system and then a meltdown occurred. He also explained how the buildup of sub-prime mortgages arose. His first graph showed the federal government’s role in the sub-prime mortgages. The private sector had a small role, while 76% of those mortgages were on the books of government agencies, mostly Fannie Mae and Freddie Mac. The government created the demand for the low-quality mortgages, so the ultimate guarantor was the government.

Wallison explained that the data reflecting the government’s involvement and the decline of the mortgage market didn’t show up in the FCIC report. Based on the FCIC’s report, the Dodd Frank Act was passed to regulate the private sector, but recovery from the crisis was slow since this Act did not address the issues in the government’s housing policies. Wallison also described the key issues with housing policies. When the Affordable Housing Goals were created, the government set up a system of quotas to help lower income families buy houses. Before this, Fannie Mae and Freddie Mac had stricter regulations and would not buy mortgages that weren’t prime mortgages. However, the new quotas forced Fannie Mae and Freddie Mac to reduce their underwriting standards. When they changed their standards, everyone else did the same. Eventually, housing prices went up, the mortgage market declined during 2007 to 2008, and then the market collapsed. Because Fannie Mae and Freddie Mac were so large, the collapse was bigger than anything the country had seen before, with 30 – 40% loss in mortgage values across the country. People lost their homes, and banks were unable to carry the mortgages because they had no value anymore.

Throughout the lecture, Wallison provided valuable insight into the cause of the Financial Crisis by displaying data that the FCIC kept hidden. Wallison believes there is a good chance that in 5 to 10 years there will be another crisis because the issues with housing policies were not addressed.