"The True Origins of This Financial Crisis". (Peter J. Wallison, American Spectator, Feb. 2009.)
Two narratives seem to be forming to describe the underlying causes of the financial crisis. One, as outlined in a New York Times front-page story on Sunday, December 21, is that President Bush excessively promoted growth in home ownership without sufficiently regulating the banks and other mortgage lenders that made the bad loans. The result was a banking system suffused with junk mortgages, the continuing losses on which are dragging down the banks and the economy. The other narrative is that government policy over many years--particularly the use of the Community Reinvestment Act and Fannie Mae and Freddie Mac to distort the housing credit system-- underlies the current crisis. The stakes in the competing narratives are high. The diagnosis determines the prescription. If the Times diagnosis prevails, the prescription is more regulation of the financial system; if instead government policy is to blame, the prescription is to terminate those government policies that distort mortgage lending.
There really isn’t any question of approach is factually correct: right on the front page of the Times edition of December 21 is a chart that shows the growth of home ownership in the United States since 1990. In 1993 it was 63 percent; by the end of the Clinton administration it was 68 percent. The growth in the Bush administration was about 1 percent. The Times itself reported in 1999 that Fannie Mae and Freddie Mac were under pressure from the Clinton administration to increase lending to minorities and low-income home buyers--a policy that necessarily entailed higher risks. Can there really be a question, other than in the fevered imagination of the Times, where the push to reduce lending standards and boost home ownership came from?
For those keeping score at home, John H. Pilla provides a handy list of some of the key events in the federal government's intervention in the housing market.
Note: I don't think the Fannie Mae/Freddie Mac/CRA influence was enough, by itself, to cause the problem. (For one thing, it doesn't explain the timing.) Like most other big economic/social/political disasters, there are multiple causes. You need a "perfect storm" for things to go this wrong. I'll post a list of links tomorrow or Tuesday of the other key factors: heavy regulaton of land use in some areas, abnormally low interest rates, regulatory arbitrage, the misincentives of the ratings agencies, and mark-to-market accounting. All are connected, at least somewhat, to government.