3. WHAT CAUSED THE COMMERCIAL BUBBLE?
Third, Wallison ignores the parallel bubble-bust cycle we experienced in commercial real estate, which does not have affordable housing policies of the sort he criticizes for Fannie and Freddie. Commercial real estate values experienced a peak-to-trough price decline of 45 percent, which was considerably worse than the 33 percent peak-to-trough price decline we saw in residential real estate. If, as Wallison contends, it was affordable housing policies that caused the residential real estate bubble, then what caused the bubbles in commercial real estate? Moreover, why did we have similar surges in credit liquidity in student loans, auto loans, and credit cards? The mainstream narrative advanced by Rep. Frank and most others--that it was unregulated securitization on Wall Street that drove the financial crisis--explains these parallel bubbles fairly well; the argument advanced by Wallison does not.
Moreover, as Wallison's fellow Republican-appointed commissioners on the FCIC noted, many other countries, including the United Kingdom, Australia, Ireland, and the United Kingdom, all had contemporaneous housing bubbles. Again, the mainstream narrative--that poorly regulated new forms of financing drove asset bubbles--explains this fact rather well; Wallison's argument does not.
In short, there are many reasons, of which I've provided just a few, why Peter Wallison's argument has been rejected by his fellow Republican-appointed FCIC commissioners.
Unfortunately, some people will, for ideological and other reasons, always believe that any market failures must necessarily be the fault of government intervention, no matter how convincing and overwhelming the evidence is against this proposition. I believe we should join with the more nuanced view taken by Rep. Frank, who has rejected the proposition that U.S. housing policies caused the financial crisis, while at the same time acknowledging that these policies were flawed and need major revisions.
Editor's Update: Peter Wallison responds via email.
"Now that the SEC has sued Fannie Mae and Freddie Mac for failure to disclose the subprime and other low quality loans they held and securitized, this really is the last time we'll hear from David Min and others who have been trying to protect the government from blame for the financial crisis.
"The SEC's suit is based on the failure of Fannie and Freddie to disclose the poor quality of the mortgages that they were buying, holding and securitizing. As the SEC said in its press release on the suit: "Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was." This explains why Min and others--despite the insolvency of Fannie and Freddie-- have continue to argue that the two companies did not hold substantial amounts of subprime and other low quality loans. Fannie and Freddie simply failed to disclose this information.