Economics, Financial Services, Pethokoukis

Are Bill Clinton’s housing policies really going to get off scot-free for contributing to the housing bubble?


One downside to President Obama not nominating Larry Summers for Fed chairman is that it deprives the Senate of an obvious opportunity to investigate the role of US housing policy in the housing collapse and subsequent financial crisis. As Charlie Gasparino wrote yesterday: “The myth promoted by President Obama and his minions in the media is, of course, that economic deregulation pushed by Republicans and President George Bush caused the meltdown.”

The reality, as AEI’s Peter Wallison highlights in a WSJ op-ed today:

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.

One of those two administrations that Wallison mentions is the Bill Clinton administration in whose Treasury department Summers served, including as Treasury secretary. Senate Republicans would have likely pressed Summers on the mistakes of Clinton housing policy and the lessons that should have been learned. Of course there is no reason the subject cannot be raised with any eventual Fed nominee given the central bank’s role as financial regulator and since many GOPers think a too-loose Fed monetary policy also contributed to the housing boom.

I would also add that housing prices only fell about 10% from mid-2006 through 2008. An interesting counterfactual is what would have happened housing prices had the Fed not engaged in a passive tightening in 2008, which almost surely greatly worsened the economic downturn and Wall Street turmoil, and instead engaged in aggressive easing, including unconventional monetary policy if necessary. If only the Fed has been targeting the level of nominal GDP back then.

6 thoughts on “Are Bill Clinton’s housing policies really going to get off scot-free for contributing to the housing bubble?

  1. Must be myth Wednesday here. I have challenged posters here, and Mr. P by default, to produce one study not authored by fellows called Wallison or Pinto that says that Clinton did it in the Rose Garden with a fountain pen. Thew accepted wisdom is that Fannie and Freddie only got serious about subprime lending after Wall Street syndicators stole their lunch. AEI, of course, can’t abide that judgment because markets are never wrong in their worldview, hence, alternatively, the Fed did it in 2008 in the boardroom with fiscaly policy.

    Both overlook the role of homeowners treating their homes like ATMS. Look at the chart here comparing refinancings to originations.

    In NO year 2001-08 did originations surpass refis. In 2003, lenders did 15 million refis, turning over about a third of mortgage debt outstanding.
    The point here is that refis don’t count in CRA compliance. The additional point is that these mortgages can be and were just as stupid — no doc, low doc, ridiculous appraisals and on and on. Even 80 percent ltv loans made in 2005 are underwater in markets like Las Vegas, Fresno and Miami,
    So, in fact, it was Alan Greenspan who did it in the early oughts by pushing rates to 50-year lows and then blindly assuming, along with everyone else, that home values could not fall in national aggregate.

  2. So why is Pethokoukis and others at AEI keep trying to avoid the real reason for this massive push for subprime?

    Because lower-income blacks and hispanics didn’t have enough of a credit score/savings and if they didn’t get a home it’d be ‘racist’ so they pushed this. And sorry but Dubya is just as guilty in his first administration.

    We’re hearing the same echoes from the Obama administration this time.
    I think that right after a bubble it’ll be harder to implement even if his nominee, Mel Watts, has promised to do so.

    I think if the dems win 2016 too(which they will, they will win every election from now on, just like in California’s election to the senate) the real push will begin.

  3. Guys, the real problem here is so simple: a ready market for junk, driven by the belief that junk can be turned into jewels if it is parsed ever so selectively:

    1) Quants claim a nifty (but now-proven false) ability to make high-risk mortgages appear to be low-risk.
    2) The ratings agencies, who should know better, cheer this ability, and bless the results with high ratings.
    3) Investors like high-rated investment opportunities, so they buy-buy-buy (unwittingly).
    4) Demand drives the market to turn more and more junk into jewels, so underwriting standards go out the door.
    5) Everyone wins, until everyone realizes that junk is still just junk, and the party is over.

    This scenario is not so much a policy failure–on anyone’s part–as it is an outright fraud, perpetuated by a market misled at every step. This is the SEC’s realm, and they simply weren’t up to the task.

    Moral: Low-risk, high-reward investments cannot exist.

  4. The real estate market for large commercial properties also busted in 2007-8. This is market defined by institutional buyers, sellers and financiers and no federal involvement.
    As for residential, the home mortgage tax deduction propels many into the housing market especially in the mid-upper range. Yes that is also social engineering. ..
    The short story is the Fed did it…not Clinton or Bush jr….but it did happen on Bush jr.’s watch.

  5. As a foreclosure attorney, I had a front row seat on the failures of the “anything goes” policies of the 1997-2008 mortgage bubble. And the government, which has never been a good debt collector, has compounded the problem by its inability to liquidate or adjust the mountain of bad mortgage debt that these policies produced. The government, as was done in the 1990s after the S&L bubble, should auction off all bad VA/FHA/Fannie/Freddie debt, stripped of government insurance to the highest bidders.

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