The Financial Crisis – Congressional Report Blames – The Government

Those who are familiar to the posters on Gather know the standard response for the causes of the recent financial crisis; everything is blamed on the previous administration, and the economy is no exception.  Government deregulation is the cause and the only solution, they insist, is more government regulation and more government intervention in the markets and in our lives.

Thus when I saw the following news article, "Federal Government Was Culprit in Housing and Economic Crisis, Says Congressional Report" even I thought it was just another article that one could easily dismiss as a "he said / she said" spat.  But the article was about a congressional report, submitted on July 7^th.  The article gives a link to the report, a PDF document that is 26 pages long:

U.S. House of Representatives

Committee on Oversight and Government Reform

Darrell Issa (CA-49), Ranking Member

The Role of Government Affordable Housing Policy in Creating the Global Financial Crisis of 2008

Here is the introduction of the report:

The housing bubble that burst in 2007 and led to a financial crisis can be traced back to federal government intervention in the U.S. housing market intended to help provide homeownership opportunities for more Americans. This intervention began with two government-backed corporations, Fannie Mae and Freddie Mac, which privatized their profits but socialized their risks, creating powerful incentives for them to act recklessly and exposing taxpayers to tremendous losses. Government intervention also created "affordable" but dangerous lending policies which encouraged lower down payments, looser underwriting standards and higher leverage. Finally, government intervention created a nexus of vested interests - politicians, lenders and lobbyists - who profited from the "affordable" housing market and acted to kill reforms. In the short run, this government intervention was successful in its stated goal - raising the national homeownership rate. However, the ultimate effect was to create a mortgage tsunami that wrought devastation on the American people and economy. While government intervention was not the sole cause of the financial crisis, its role was significant and has received too little attention.

In recent months it has been impossible to watch a television news program without seeing a Member of Congress or an Administration official put forward a new recovery proposal or engage in the public flogging of a financial company official whose poor decisions, and perhaps greed, resulted in huge losses and great suffering. Ironically, some of these same Washington officials were, all too recently, advocates of the very mortgage lending policies that led to economic turmoil. In a number of cases, political officials even engaged in unethical conduct, helping their political allies, family members and even themselves obtain lucrative positions in the mortgage lending industry and other benefits. At a time when government intervention in private markets has become alarmingly common, government "affordable housing" initiatives offer important lessons about the dangers of government efforts to manipulate or conjure outcomes in the market.

WOW! I would have never expected something like this, "Ironically, some of these same Washington officials were, all too recently, advocates of the very mortgage lending policies that led to economic turmoil," to be found in a report produced by, of all people, Congress.  You can't just dismiss this as another Faux News report.  This report is clearly a must read and at 26 pages it is an easy read.  It is footnoted to support all the statements it makes.

The article in CNSNews also quotes Darrel Issa in his remarks to the Heritage Foundation:

"That is the perfect smoking gun that tells how Barney Frank [D-Mass.], the Clinton administration and others would do it in those days," Rep. Darrell Issa (R-Calif.), the ranking member on the House Oversight and Government Affairs Committee, said Tuesday in a speech at the Heritage Foundation.

I know those who want to blame Bush for everything will not be convinced.  They will insist that even more regulation is needed and that everyone deserves their own home, whether they can afford it or not.  I will end with a response in the report to those, like Congressman Barney Frank (D-MA), who insist that Fanny and Freddie are not to blame.

Government actions distorted the housing market, yet advocates of affordable housing policies, such as Congressman Barney Frank (D-MA), have asserted that those who criticize these policies seek to place blame for the financial crisis solely on borrowers of modest means.²⁷ This misses the mark entirely. In fact, responsibility for the erosion of mortgage lending standards, which began with government affordable housing policy, rests squarely on the policy makers who advocated these ill-conceived policies in the first place. Borrowers quite naturally responded to the incentives they were given, irrespective of their socioeconomic status, and risky lending spread to the wider mortgage market.

²⁷ Johnson, Glen, "Frank Says GOP Housing Attacks Racially Motivated," Associated Press, Oct. 6, 2008.