AEI's Wallison: Government Escaping Blame for Role in Financial Crisis

Friday, 20 Sep 2013 09:40 AM

By Dan Weil

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As we mark the fifth anniversary of Lehman Brothers' collapse this month, the government is getting off the hook for its role in the financial crisis, says Peter Wallison, a senior fellow at the American Enterprise Institute.

"We hear plenty about Wall Street rapacity, but any discussion of the government's central role in the disaster is neatly avoided," he writes in The Wall Street Journal. "This historical airbrushing is something of a feat, given the facts."

The Department of Housing and Urban Development (HUD) pushed for the issuance of sub-prime mortgages, Wallison contends.

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"Between 1997 and 2007, HUD's affordable-housing policies under two administrations built an enormous mortgage bubble — nine times as large as any bubble in modern history — and when this bubble collapsed, it caused a 30 to 40 percent decline in housing prices," Wallison writes.

As a result, non-wealthy homeowners couldn't refinance their mortgages or sell their homes, leading to massive numbers of mortgage defaults, he explains.

"Shocked by these numbers, investors fled mortgage-backed securities, making them useless for short-term financing by financial institutions like Lehman. The result was a panic and a financial crisis."

He concludes, " If we ever hope to understand what led to the financial crisis five years ago — and how to avoid another one — we must start looking in the right places."

Like Wallison, Robert Reich, a public policy professor at the University of California, Berkeley, thinks the government hasn't learned any lessons from the financial crisis, but he comes at that view from a much different angle than Wallison does.

"The biggest Wall Street banks are far larger now than they were then," Reich writes on his blog.

"And the Dodd-Frank rules designed to stop them from betting with the insured deposits of ordinary savers are still on the drawing boards — courtesy of the banks' lobbying prowess."

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Related Stories:

Hank Paulson: Another Financial Crisis Is 'a Certainty'

Morgan Stanley CEO Gorman: Chance of Another Financial Crisis 'Close to Zero'

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