Passing Laws That Ignore The Problem

On July 12, Peter Wallison posted an article at the Wall Street Journal concerning the causes of the financial meltdown that the country recently experienced.  Peter Wallison is a senior fellow at the American Enterprise Institute and was a member of the Financial Crisis Inquiry Commission who dissented from the majority report.

Mr. Wallison is reporting on a new book which refutes the government commission’s conclusion that the “greed on Wall Street and faulty risk management at banks and other financial firms” were responsible for the collapse of the housing market. 

Mr. Wallison reports:

“With the publication of “Reckless Endangerment,” a new book about the causes of the crisis, this story is beginning to unravel. The authors, Gretchen Morgenson, a business reporter and commentator for the New York Times, and Josh Rosner, a financial analyst, make clear that it was Fannie Mae and the government housing policies it supported, pursued and exploited that brought the financial system to a halt in 2008.”

So why is the government commission telling us a different story?   James A. Johnson, a Democratic political operative and former aide to Walter Mondale, became chairman of Fannie Mae in 1991.  At that point Fannie Mae became political–aligning itself with those in Congress who wanted to make homeownership possible for people who had not previously able to obtain mortgages.  This is a great goal, but when put in practice causes problems.

The article reports:

“”Under Johnson,” write Ms. Morgenson and Mr. Rosner, “Fannie Mae led the way in encouraging loose lending practices among banks whose loans the company bought. . . . Johnson led both the private and public sectors down a path that led directly to the financial crisis of 2008.””

The above information does not appear in the government commission’s report.  The commission also heard testimony that by 2008 half of all mortgages in the U.S. (27 million loans) were subprime or otherwise risky, and that 12 million of these loans were on the books of the GSEs.  Somehow that was overlooked in the conclusions drawn.

The article explains why the Dodd-Frank Act did not address the problem of Fannie Mae:

“The principal sponsors of that Dodd-Frank Act, former Sen. Chris Dodd and former House Financial Services Committee Chair Barney Frank, were also the principal supporters and political protectors of Fannie Mae and Freddie Mac, and the government housing policies they implemented.

“It is little wonder then that legislation named after them would place the blame for the financial crisis solely on the private sector and do nothing to reform a government-backed housing finance system that will increasingly be seen as the primary cause of the devastating events of 2008.”

To add to the problem, on July 9, I reported ( that Eric Holder’s justice department has asked banks to relax their lending standards.  Because we did not properly address the problem the first time, we are destined to repeat our past mistake.