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The painful task of taking on the left.
It’s always painful to take on the myths and ideological narratives of the left. The pundits of the liberal (excuse me, “progressive”) media make a pretense of listening to reason, but when their views are challenged, they become abusive. You are not honestly trying to find the truth; you are making up data, actually lying. If you are skeptical about anthropogenic global climate change, you’re not just a skeptic—you’re a denier (as in Holocaust denier). And if you disagree with the standard left-wing narrative about the financial crisis, even if you can support your position with data, you are using the “Big Lie” technique (again, repulsively invoking the likes of Goebbels). This attitude and way of dealing with disagreement should have no place in our political system, but seems to have become the stock in trade of the most respected spokesmen of the left.
One good example of this is my dispute with Joe Nocera, a columnist for the New York Times. It began in January 2011, shortly after I had dissented from the majority report of the Financial Crisis Inquiry Commission (FCIC). In that dissent, I argued that the financial crisis was caused by the government’s housing policies, and not—as the government and the mainstream media had been saying since 2008—by predatory lending, greed on Wall Street, and insufficient regulation of the private sector.
As outlined in my dissent, the principal executors of these government policies were two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, which were chartered by Congress to operate a secondary market in residential mortgages. Under a 1992 law, Fannie and Freddie were required to meet certain “affordable housing” goals when they bought loans from banks and other mortgage originators. Initially, the quota was that 30 percent of all loans they acquired had to be made to borrowers at or below the median income in their communities.
This initial goal was probably realistic: it was possible to meet a 30 percent quota without compromising underwriting standards. However, the Department of Housing and Urban Development (HUD) was given administrative control of the housing goals, and over time, on its own initiative and under pressure from Congress, HUD raised and tightened them. By 2000 they reached 50 percent, and 55 percent by 2007, with special subgoals that imposed quotas for borrowers at or below 80 percent and 60 percent of median income. These more aggressive goals required the GSEs to reduce their underwriting standards, so much so that by 2008, just before the financial crisis, the GSEs and other government agencies held or had guaranteed more than 20 million subprime and other low-quality loans-74 percent of the 28 million such loans then outstanding. It was the delinquencies and defaults among these loans, I argued, that caused the mortgage meltdown and the financial crisis.
Referring to my dissent in his Times column, Nocera called it “loony,” at the same time reasserting the conventional narrative of the left: that while Fannie Mae and Freddie Mac had made some regrettable errors in buying subprime and other low-quality loans, they had simply followed Wall Street in search of market share and profit. Admittedly, “loony” isn’t a terrible epithet, but it does the job; it delegitimizes the argument and places it outside the permissible range of reasoned discussion. But things got a lot worse, and Nocera and his ideological ilk got a lot more abusive, as my dissent began to garner more attention and adherents.
In early 2011, it was easy to dismiss an argument that the financial crisis would not have occurred but for the government’s housing policy. The idea that Wall Street and the private sector were responsible for the crisis was deeply imbedded in the public’s consciousness after the 2008 presidential campaign. Barack Obama had declared in the debates with John McCain that the crisis was the result of “Repub-lican deregulation,” and McCain himself stated that “Wall Street greed” was responsible. This narrative was picked up and treated by the media as received wisdom.
But the claim that the financial crisis would not have occurred without the government’s housing policies had one important asset the left’s narrative lacked: it was based on data. The fact that, in June 2008, 74 percent of all subprime and other low-quality mortgages were on the books of the GSEs and other government-backed or regulated entities was a pretty good indication that the government had created the demand—that is, a buyer—for these mortgages. The foundation of the left’s narrative, on the other hand, was made up of anecdotes-stories about predatory lending, about greed, about inadequate risk management and inattentive regulators. That was the essence of the FCIC’s majority report, from which I’d dissented.
All these bad things occurred, of course, but the policy question-the reason the whole issue is important-was whether these problems would have caused a financial crisis on their own, without the government’s role in fostering the creation of vast numbers of substandard mortgages. If lack of adequate regulation caused the financial crisis, the Dodd-Frank Act was the right answer. On the other hand, if the crisis would not have occurred but for the government’s housing policy, Dodd-Frank was a counterproductive overreaction that would ultimately harm our financial system and suppress economic growth. When three-quarters of all subprime mortgages were on the government’s books, the data says that the government’s housing policy was the principal reason for the mortgage meltdown and the resulting financial crisis.
As the data on government housing policy became more widely known, opinions about the causes of the financial crisis began to change. Most Republican members of Congress and virtually all the Republican candidates for president adopted the analysis that I had outlined in my dissent, arguing that government housing policy and Fannie and Freddie were at the heart of the 2008 financial crisis. Republicans in Congress and all of those running for president began to call for the repeal of Dodd-Frank.
Even some close analysts of the financial system began to have second thoughts. Michael Cembalest, the chief investment officer for JPMorgan Chase, who had written in 2009 that the private sector was primarily responsible for the financial crisis, retracted that view in a May 2011 report, after seeing the data in my dissent and the work of my AEI colleague, Edward Pinto. Later in 2011, Gretchen Morgenson, a Times business columnist, and Joshua Rosner, a widely respected financial analyst, published Reckless Endangerment, a book that blamed Fannie Mae for the financial crisis. Finally, in December 2011, the Securities and Exchange Commission sued six of the top officials of Fannie and Freddie for failing to disclose the number of subprime and other low-quality loans that both firms had acquired before they became insolvent. In connection with the suit, the SEC obtained admissions from Fannie and Freddie that they had held or guaranteed 13.6 million subprime and other low-quality loans, corroborating Pinto’s work and the estimate in my dissent.
At that point, I wrote an op-ed for the Wall Street Journal, pointing out that the SEC had confirmed the fundamental elements of my dissent, and that Fannie and Freddie had misled analysts, risk managers, and regulators, as well as their own investors, about the risks they were creating in the mortgage market. The severity of the mortgage meltdown and the resulting financial crash were a direct result of the shock created by the sudden delinquency and failure of the subprime and other low-quality loans these two firms had made under HUD’s affordable housing requirements.
All this was just too much for Nocera. It was clear that he and the left were gradually losing the argument over what caused the financial crisis. On December 20, he wrote in his column:
Over at the conservative American Enterprise Institute, two resident scholars, Peter Wallison and Edward Pinto, have concocted what has since become a Republican meme: namely, that Fannie Mae and Freddie Mac were ground zero for the entire crisis, leading the private sector off the cliff with their affordable housing mandates and massive subprime holdings. The truth is the opposite: Fannie and Freddie got into subprime mortgages, with great trepidation, only in 2005 and 2006, and only because they were losing so much market share to Wall Street.…The reality is that Fannie and Freddie followed the private sector off the cliff instead of the other way around.
This sounds vaguely as though Nocera knows something about the subject. “The truth is…” he tells us from the op-ed page of the august New York Times.
But that view, devoid of data, which simply reasserts the agreed narrative of the left, is contradicted by Nocera’s own 2010 book, All the Devils Are Here, written with financial writer Bethany McLean. There, he and McLean noted that Fannie and Freddie began acquiring subprime loans as early as 2000 in order to comply with the affordable housing requirements set by HUD. “In the end,” they wrote, “…it didn’t really matter whether Fannie and Freddie moved into riskier mortgages quickly or slowly, reluctantly or gleefully. What mattered was that they entered this new market at all. In doing so, they gave their imprimatur to what had previously been an entirely separate universe. A line that was absolute was now blurring. The whole definition of subprime was ‘the stuff that Fannie and Freddie wouldn’t touch’ a former executive explains. No longer.”
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