Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

Role of the feds in the financial crisis

Back in September, Peter Wallison said Five Years Later: Don’t Mention the Feds – Washington and the media are peddling a narrative that discounts the government’s role in the financial crisis.

He makes the same point I’ve mentioned before. Specifically, that federal legislation required Fannie Mae and Freddie Mac to buy subprime loans. Over time, the portion of their acquisitions that had to be subprime was increased.

There is a lot of blame to go around. The point I’m trying to make is the big banks don’t get 100% of it.

We need to keep in mind the role that intentional policy played in contributing to the ’08 financial crisis.

By the time Lehman failed, 74% of the subprime loans were on the books of Fannie and Freddie.

Here’s a one paragraph summary of the cascade from subprime requirements, to housing bubble, to popped bubble, to collapse in housing prices, to defaults, to unknown values on MBS paper, to panic, to crisis:

There is no doubt what really happened. 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%-40% decline in housing prices. This left homeowners who had limited financial resources and no equity in their houses unable to refinance or sell, causing an unprecedented number of mortgage defaults. 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.

For far more details, check out the full article.

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