Cover image for Hidden in plain sight : what really caused the world's worst financial crisis and why it could happen again
Hidden in plain sight : what really caused the world's worst financial crisis and why it could happen again
Wallison, Peter J., author.
Personal Author:
First American edition.
Publication Information:
New York, New York : Encounter Books, 2015.
Physical Description:
xviii, 411 pages : charts ; 24 cm
The basics. Introduction : What really caused the world's worst financial crisis and why it could happen again ; The difference between prime and nontraditional mortgages : the importance of sound underwriting standards ; The Financial Crisis Inquiry Commission report and other explanations for the crisis : why conventional explanations for the crisis are inadequate ; A short history of housing finance in the U.S. : how and why housing finance was substantially changed in 1992 -- Government housing policies take effect. HUD's central role : how HUD used the affordable-housing goals to reduce underwriting standards ; The decline in underwriting standards : how the affordable-housing goals forced an increased in nontraditional mortgages ; Force fed : why the affordable-housing goals, and not market share or profit, were the sole reason the GSEs acquired nontraditional mortgages ; Going viral : why and how reduced underwriting standards spread to the wider market -- The financial crisis and its accelerants. The great housing price bubble : how loosened underwriting standards stimulated its growth ; Flying blind into a storm : how the GSEs' failure to disclose their acquisition of nontraditional mortgages magnified the crisis ; 31 million nontraditional mortgages precipitate a crisis : why even government=backed mortgage securities were contributors ; Fair-value accounting scales up the crisis : how mark-to-market accounting made financial firms look weak or unstable -- From bad to worse. From bad to worse : how government blunders turned a mortgage meltdown into an investor panic and financial crisis ; The false narrative and the future : why the failure to understand the causes of the crisis may lead to another.
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HD7293.Z9 W35 2015 Adult Non-Fiction Open Shelf
HD7293.Z9 W35 2015 Adult Non-Fiction Non-Fiction Area

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The 2008 financial crisis--like the Great Depression--was a world-historical event. What caused it will be debated for years, if not generations. The conventional narrative is that the financial crisis was caused by Wall Street greed and insufficient regulation of the financial system. That narrative produced the Dodd-Frank Act, the most comprehensive financial-system regulation since the New Deal. There is evidence, however, that the Dodd-Frank Act has slowed the recovery from the recession. If insufficient regulation caused the financial crisis, then the Dodd-Frank Act will never be modified or repealed; proponents will argue that doing so will cause another crisis.

A competing narrative about what caused the financial crisis has received little attention. This view, which is accepted by almost all Republicans in Congress and most conservatives, contends that the crisis was caused by government housing policies. This book extensively documents this view. For example, it shows that in June 2008, before the crisis, 56 percent of all US mortgages were subprime or otherwise low-quality. Of these, 76 percent were on the books of government agencies such as Fannie Mae and Freddie Mac. When these mortgages defaulted in 2007 and 2008, they drove down housing prices and weakened banks and other mortgage holders, causing the crisis.

After this book is published, no one will be able to claim that the financial crisis was caused by insufficient regulation, or defend Dodd-Frank, without coming to terms with the data this book contains.

Author Notes

Peter J. Wallison holds the Arthur F. Burns Chair in Financial Policy Studies and is co-director of AEI's program on Financial Policy Studies. From June 1981 to January 1985, he was General Counsel of the United States Treasury Department, where he had a significant role in the development of the Reagan Administration's proposals for deregulation in the financial services industry. His most recent book is Bad History, Worse Policy: How a False Narrative about the Financial Crisis Led to the Dodd-Frank Act (AEI Press 2013).He testifies frequently before committees of Congress, and is a frequent contributor to the op-ed pages of the Wall Street Journal and other print and online journals. He has also been a speaker at many conferences on financial services, housing, the causes of the financial crisis, the Dodd-Frank Act, accounting, and corporate governance, and is a member of the Shadow Financial Regulatory Committee, the Council on Foreign Relations, the SEC Advisory Committee on Improvements to Financial Reporting (2008), co-Chair of the Pew Financial Reform Task Force (2009), and a member of the congressionally- authorized Financial Crisis Inquiry Commission (2009-2011). In May 2011, for his work in financial policy, Mr. Wallison received an honorary doctorate in Humane Letters from the University of Colorado.

Reviews 1

Choice Review

Wallison, dissenting member of the congressional Financial Crisis Inquiry Commission investigating the recent financial crisis, believes analysis indicates Congress enabled the crisis by pushing regulators to set affordable housing goals. From 1991 to 2003, Fannie Mae and Freddie Mac--government-sponsored enterprises (GSEs)--obtained funds through the US Treasury that increased their loan share from 28.5 percent to 46.3 percent. The Department of Housing and Urban Development directed GSEs to purchase low- to moderate-income loans of 42 percent of total units financed in 1997, 50 percent in 2001, and 56 percent in 2008. Quotas meant lower standards (lower down payments, required income, and credit scores), which increased housing demand and prices at all income levels. The FDIC also required banks to meet Community Reinvestment Act loan quotas in underserved communities. Data supports the argument that loans were made to meet quotas, not increase profits or market share. GSEs traditionally purchased only prime loans, thus sale of their mortgage pools went unquestioned while 31 million (57 percent) were nontraditional. Banks struggled to meet capital standards, and ultimately the GSEs were declared insolvent. The Commission did not recognize these points, Wallison says, and concludes there will be another crisis. For the view from inside a GSE, readers should see The Mortgage Wars (CH, Jun'14, 51-5697), by former Fannie Mae CFO Timothy Howard. Summing Up: Recommended. All readers. --Edward C. Erickson, California State University, Stanislaus

Table of Contents

Prefacep. xi
Acknowledgmentsp. xvii
Part I The Basics
1 Introductionp. 3
What Really Caused the World's Worst Financial Crisis and Why It Could Happen Again
2 The Difference between Prime and Nontraditional Mortgagesp. 27
The Importance of Sound Underwriting Standards
3 The Financial Crisis Inquiry Commission Report and Other Explanations for the Crisisp. 41
Why Conventional Explanations for the Crisis Are Inadequate
4 A Short History of Housing Finance in the U.S.p. 100
How and Why Housing Finance Was Substantially Changed in 1992
Part II Government Housing Policies Take Effect
5 HUD's Central Rolep. 125
How HUD Used the Affordable-Housing Goats to Reduce Underwriting Standards
6 The Decline in Underwriting Standardsp. 160
How the Affordable-Housing Goals Forced an Increase in Nontraditional Mortgages
7 Force Fedp. 182
Why the Affordable-Housing Goals, and Not Market Share or Profit, Were the Sole Reason the GSEs Acquired Nontraditional Mortgages
8 Going Viralp. 219
Why and How Reduced Underwriting Standards Spread to the Wider Market
Part III The Financial Crisis and its Accelerants
9 The Great Housing Price Bubblep. 237
How Loosened Underwriting Standards Stimulated Its Growth
10 Flying Blind into a Stormp. 248
How the GSEs' Failure to Disclose Their Acquisition of Nontraditional Mortgages Magnified the Crisis
11 31 Million Nontraditional Mortgages Precipitate a Crisisp. 265
Why Even Government-Backed Mortgage Securities Were Contributors
12 Fair-Value Accounting Scales Up the Crisisp. 278
How Mark-to-Market Accounting Made Financial Firms Look Weak or Unstable
Part IV From Bad to Worse
13 From Bad to Worsep. 307
How Government Blunders Turned a Mortgage Meltdown Into an Investor Panic and Financial Crisis
14 The False Narrative and the Futurep. 342
Why the Failure to Understand the Causes of the Crisis May Lead to Another
Notesp. 363
Indexp. 393