I got on The New York Times a couple of weeks ago for running a fallacious op-ed from the American Enterprise Institute’s Peter Wallison.
Wallison, who before the crisis loudly and repeatedly criticized the government for not forcing banks to do more subprime lending, has in the last five years become the leading proponent of the transparently bogus and thoroughly discredited notion that the government forced banks to do all that subprime lending.
Moynihan’s famous dictum applies here in spades, especially given the monumental nature of the event and that the facts are readily available, including to op-ed editors.
And yet they still wave already-debunked stuff through. The latest is Bloomberg View, which printed a Wallison column last week arguing that shadow banking, or more specifically, asset managers, shouldn’t be regulated.
Here, I suppose, reasonable people may differ. Let’s just say this is within the bounds of opinion writing, even if it stretches them a fair way. One can believe that shadow banking—a catch-all term for lending and investing activities by financial institutions not overseen by bank regulators—shouldn’t be regulated. But it’s beyond dispute that un- or under-regulated shadow banking was a critical contributor to the financial crisis. To say otherwise is to fly in the face of established fact.
Who remembers, for instance, AIG Financial Products, a shadow-banking linchpin of the Wall Street securitization machine? Further down, Wallison shifts his focus from shadow banking to the asset-management industry (which is a key part of the shadow-banking system) writing that “It is difficult to see how asset managers, of whatever size, could create systemic risk.”
But it’s really not. It’s only been 15 years since the disintegration of Long Term Capital Management threatened to cause a full-bore financial crisis. And it’s just been five years since Reserve Primary broke the buck, setting off a $300 billion run on money-market funds, which were crucial financiers of Wall Street’s short-term loans.
In fact, shadow banking (and it’s important to remember that asset management is a big subset of this giant industry) in large part was the crisis, as Fed Governor Daniel Tarullo explains fairly accessibly here.
Wallison used to be co-director of something called the Financial Deregulation Project, by the way.
In any case, things really go around the bend when Bloomberg lets him go on and make use of oft-debunked housing-crisis figures that are used to underpin his entire crisis argument, yet again:
An alternative view is that the financial crisis was caused by the U.S. government’s housing policies, which — principally through the affordable-housing goals imposed on Fannie and Freddie in 1992 — forced reductions in mortgage underwriting standards. By 2008, 58 percent of all mortgages were subprime or otherwise weak, and 76 percent of these risky mortgages were on the books of U.S. government agencies, principally Fannie and Freddie. When the housing bubble deflated in 2007 and 2008, these risky mortgages defaulted in unprecedented numbers, driving down housing prices and setting up the financial crisis.
“An alternative view,” is one way to put it. Wallison’s line that the crisis was caused by the government’s “forced reductions in mortgage underwriting standards” has been discredited so many times, including by his Republican colleagues on the Financial Crisis Inquiry Commission, that I won’t bother here. Suffice it to say, it flies in the face of all the facts (read this, this, this, and this if you haven’t followed the story).
But it’s illustrative to note the sleight of hand in Wallison’s sentence here (emphasis mine): “By 2008, 58 percent of all mortgages were subprime or otherwise weak, and 76 percent of these risky mortgages were on the books of U.S. government agencies.”
“Or otherwise weak” is the rhetorical trick Wallison and his colleague Edward Pinto have used repeatedly to manipulate the numbers into saying what they want them to say. Except even then, they don’t add up for the AEI team. The “otherwise weak” mortgages held by Fannie Mae and Freddie Mac were far, far better performing than the dross spun out by Wall Street. The FCIC found that 6 percent of Fannie and Freddie’s AEI-defined “subprime or otherwise weak” loans were seriously delinquent, while 28 percent of Wall Street’s were.
Moreover, when Wallison says that “When the housing bubble deflated in 2007 and 2008, these risky mortgages defaulted in unprecedented numbers, driving down housing prices and setting up the financial crisis,” it’s worth noting that Fannie and Freddie’s serious delinquency rates in the third quarter of 2008, when the bottom fell out of the financial system, were 1.7 percent and 1.3 percent, respectively, well below the overall market rate of 5.2 percent and Wall Street’s supbrime rate of 20 percent, according to the Bush administration’s Federal Housing Finance Agency.