AEI on the Causes of the Financial Crisis
American Enterprise Institute (AEI)
“Dodd-Frank Reform Lunch Briefing: What Really Caused
the Financial Crisis and Why It Could Happen Again”
Wednesday, February 11, 2015
Key Topics & Takeaways
- Results of the Dodd-Frank Act: In Rep. Hensarling’s opinion “banks are getting bigger, small banks are getting smaller, and middle income accounts are shrinking” as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
- Source of the Financial Crisis: Rep. Hensarling said that many criticize greed on Wall Street as a cause for the crisis, but “when in our history has there not been greed on Wall Street?”
- Moral Hazard: Peter Wallison emphasized that a “classic story of moral hazard” occurred in the run-up to the financial crisis. He said the markets relied on “what they thought was government policy,” but when the government allowed the collapse of Lehman Brothers after it rescued Bear Stearns, investors wanted cash immediately and banks were unable to lend to one another.
Witness
- Representative Jeb Hensarling, Chairman, House Committee on Financial Services (R-Texas)
- Peter J. Wallison,Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute
Keynote Address
In his keynote address, the House Committee on Financial Services Chairman Jeb Hensarling (R-Texas) said it is important to create a more sustainable housing market and referred to AEI’s Peter Wallison as the authority on the crisis. In his opinion “banks are getting bigger, small banks are getting smaller, and middle income accounts are shrinking” as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.Hensarling said that many criticize greed on Wall Street as a cause for the crisis, but “when in our history has there not been greed on Wall Street?” Hensarling argued that it was not deregulation that caused the crisis, but it was “dumb regulation” that allowed institutions to lend to people who could not afford their homes. He stated that Hidden in Plain Sight by Peter Wallison demonstrates this problem.
Hensarling explained that the Federal Housing Administration (FHA) and the Federal Housing Finance Agency (FHFA) are “in a race to the bottom to loan in subprime transactions” with taxpayer dollars and the federal government is still involved in the housing market. However, Hensarling argued that if the FHA were federally regulated, instead of federally owned, it would be closed down.
He suggested that the economy should grow from “Main Street up, not Wall Street down” and the House Financial Services Committee will work on a “sustainable housing policy for homeowners, taxpayer, and the economy.” He said, “I do not want the federal government to have a sustained role in our housing market.”
Remarks
Peter Wallison said his book, Hidden in Plain Sight, examines “what really caused the world’s financial crisis” and sets the record straight. He said the facts show that 13 million subprime mortgages were on the books in June 2008 and 76 percent of the losses in 2009 were backed by government agencies. Wallison added that “we are still in the midst of the slowest economic growth since the 1960s” and the “Dodd-Frank is illegitimate” because it was enacted without consideration of the real causes of the crisis.
Instead, Wallison argued that the federal government caused the crisis when Congress adopted affordable housing goals in 1992 and when the authority to administer the goals was given to the U.S. Department of Housing and Urban Development (HUD). After the affordable housing goal numbers were increased, Wallison said that a huge influx of new buyers came into the market and created the housing bubble. Wallison also highlighted that Fannie Mae and Freddie Mac failed to disclose how many subprime loans they held and have since been sued by the Securities and Exchange Commission. In this way, Wallison said the government’s actions created incentives in the market. He explained that the securities “had to be marked to market” and when investors fled, the market the value of the securities plummeted, making firms looked unstable or possibly insolvent. Wallison emphasized that a “classic story of moral hazard” occurred. He said the markets relied on “what they thought was government policy,” but when the government allowed the collapse of Lehman Brothers after it rescued Bear Stearns, investors wanted cash immediately and banks were unable to lend to one another. According to Wallison, this proved that the interconnectedness of financial institutions was imaginary.
Question and Answer
Restoring Confidence in the Markets
An audience member asked Wallison when confidence was restored in the markets. Wallison said that confidence in the markets was not restored until accounting methods were changes.
For more information on this event, please click here.
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American Enterprise Institute (AEI)
“Dodd-Frank Reform Lunch Briefing: What Really Caused
the Financial Crisis and Why It Could Happen Again”
Wednesday, February 11, 2015
Key Topics & Takeaways
- Results of the Dodd-Frank Act: In Rep. Hensarling’s opinion “banks are getting bigger, small banks are getting smaller, and middle income accounts are shrinking” as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
- Source of the Financial Crisis: Rep. Hensarling said that many criticize greed on Wall Street as a cause for the crisis, but “when in our history has there not been greed on Wall Street?”
- Moral Hazard: Peter Wallison emphasized that a “classic story of moral hazard” occurred in the run-up to the financial crisis. He said the markets relied on “what they thought was government policy,” but when the government allowed the collapse of Lehman Brothers after it rescued Bear Stearns, investors wanted cash immediately and banks were unable to lend to one another.
Witness
- Representative Jeb Hensarling, Chairman, House Committee on Financial Services (R-Texas)
- Peter J. Wallison,Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute
Keynote Address
In his keynote address, the House Committee on Financial Services Chairman Jeb Hensarling (R-Texas) said it is important to create a more sustainable housing market and referred to AEI’s Peter Wallison as the authority on the crisis. In his opinion “banks are getting bigger, small banks are getting smaller, and middle income accounts are shrinking” as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.Hensarling said that many criticize greed on Wall Street as a cause for the crisis, but “when in our history has there not been greed on Wall Street?” Hensarling argued that it was not deregulation that caused the crisis, but it was “dumb regulation” that allowed institutions to lend to people who could not afford their homes. He stated that Hidden in Plain Sight by Peter Wallison demonstrates this problem.
Hensarling explained that the Federal Housing Administration (FHA) and the Federal Housing Finance Agency (FHFA) are “in a race to the bottom to loan in subprime transactions” with taxpayer dollars and the federal government is still involved in the housing market. However, Hensarling argued that if the FHA were federally regulated, instead of federally owned, it would be closed down.
He suggested that the economy should grow from “Main Street up, not Wall Street down” and the House Financial Services Committee will work on a “sustainable housing policy for homeowners, taxpayer, and the economy.” He said, “I do not want the federal government to have a sustained role in our housing market.”
Remarks
Peter Wallison said his book, Hidden in Plain Sight, examines “what really caused the world’s financial crisis” and sets the record straight. He said the facts show that 13 million subprime mortgages were on the books in June 2008 and 76 percent of the losses in 2009 were backed by government agencies. Wallison added that “we are still in the midst of the slowest economic growth since the 1960s” and the “Dodd-Frank is illegitimate” because it was enacted without consideration of the real causes of the crisis.
Instead, Wallison argued that the federal government caused the crisis when Congress adopted affordable housing goals in 1992 and when the authority to administer the goals was given to the U.S. Department of Housing and Urban Development (HUD). After the affordable housing goal numbers were increased, Wallison said that a huge influx of new buyers came into the market and created the housing bubble. Wallison also highlighted that Fannie Mae and Freddie Mac failed to disclose how many subprime loans they held and have since been sued by the Securities and Exchange Commission. In this way, Wallison said the government’s actions created incentives in the market. He explained that the securities “had to be marked to market” and when investors fled, the market the value of the securities plummeted, making firms looked unstable or possibly insolvent. Wallison emphasized that a “classic story of moral hazard” occurred. He said the markets relied on “what they thought was government policy,” but when the government allowed the collapse of Lehman Brothers after it rescued Bear Stearns, investors wanted cash immediately and banks were unable to lend to one another. According to Wallison, this proved that the interconnectedness of financial institutions was imaginary.
Question and Answer
Restoring Confidence in the Markets
An audience member asked Wallison when confidence was restored in the markets. Wallison said that confidence in the markets was not restored until accounting methods were changes.
For more information on this event, please click here.