AEI's Wallison Wimps Out On Minority Mortgage Meltdown
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The May issue of the conservative magazine American Spectator features The True Story of the Financial Crisis by Peter J. Wallison, [Email him]an American Enterprise Institute fellow and one of the ten members of Congress'sFinancial Crisis Inquiry Commission, which reported in late January. Wallison dissented [PDF] from the final report. His article demonstrates the strengths and weaknesses of mainstream conservatism in the Obama Era.

Wallison explanation for his dissent is all too credible:

"There was no alternative. The Commission's management—particularly its chairman, Philip Angelides, a former Democratic treasurer of California and unsuccessful gubernatorial candidate—would not allow the staff to pursue any theories about the causes of the financial crisis other than those embodied in the standard left-wing narrative. And in the end a majority of the commissioners—never having been presented with any contrary evidence—signed on to a report that said the financial crisis could have been avoided if there had been better regulation of the private sector."

(Helpful links added to quotations throughout).

Wallison notes acidly:

"The question I have been most frequently asked about the Commission is why Congress bothered to authorize it at all. Without waiting for the Commission's report, Congress passed and the president signed the Dodd-Frank Act (DFA), far-reaching and highly consequential regulatory legislation that I believe will have a strong adverse effect on U.S. economic growth in the future. In enacting the DFA, Congress and the president acted without seeking to understand the true causes of the wrenching events of 2008, perhaps following the precept of the President's chief of staff—'Never let a good crisis go to waste.'"

The Obama Administration is now suing more banks for not lending enough to minorities—inevitably weakening credit standards in the process, which was exactly the mistake that both Wallison and I believe led to the Crash of 2008. As a member of the Establishment Beltway Right, Wallison could be an important voice in opposing this farcical, but apparently inevitable, rerun of history.

But, unfortunately, Wallison wimps out on explaining exactly what these "housing policies" were about: getting more mortgage money into the hands of blacks and Hispanics. What the U.S. had in 2007-2008 was a"Minority Mortgage Meltdown", and it precipitated our first "Diversity Recession". Wallison cannot bring himself to be so frank.

Overall, Wallison puts forward an argument similar to what I've been making since subprime mortgages went south in early August 2007: the cause was the degradation of traditional mortgage credit standards. Traditional credit standards were overridden on the grounds that they were just excuses for racial discrimination (although Editor Peter Brimelow and Leslie Spencer had exploded the Boston Fed's alleged proof of this discrimination in ForbesMagazine back in 1993, to no applause).

Wallison writes:

"So, for example, while one in 200 mortgages involved a down payment of 3 percent or less in 1990, by 2007 it was one in less than three. Other credit standards had also declined."

As we saw in newspaper headlines at the time, bad mortgages led to the 2008 crash. A domino effect ran from dubious mortgages, primarily in the four Sand States, to the whole world through the newly-invented mechanism offinancial derivatives. Wallison recounts:

"The inquiry has to begin with what everyone agrees was the trigger for the crisis — the so-called mortgage meltdown that occurred in 2007. That was the relatively sudden outbreak of delinquencies and defaults among mortgages, primarily in a few states —California, Arizona, Nevada, and Florida…" 

Unfortunately, Wallison puts too much confidence in the good faith of liberal pundits when he continues:

"No one disputes that the losses on these mortgages and the decline in housing valuesthat resulted from the ensuing foreclosures weakened financial institutions in the U.S. and around the world and were the precipitating cause of the crisis."

Actually liberal pundits like Paul Krugman or Brad DeLongquite commonly do dispute exactly that, when challenged about the impact of federal interference in the mortgage markets. They imply that the worldwide spread of the crisis means that the history we watched unfold didn't really happen.

It's pettifoggery as ridiculous as somebody arguing that because the worst fighting during World War I was in France and Belgium, then what could the assassination of the Archduke Franz Ferdinand in Sarajevo have to do with starting the war? But it often works on the gullible.

There are three main differences between my analysis and Wallison's:

In Wallison's retelling, however, the Community Reinvestment Act and the Fannie Mae and Freddie Macquotas were solely about making mortgages more available to "low-income" borrowers.

That's an airbrushing of the history that's readily available to anybody with a web browser and a search engine. But it's characteristic of cowardly mainstream Republican thinking in the Obama Era.

  • Second, Wallison pushes his own argument beyond the bounds of plausibility by claiming "nothing else" but federal housing policies caused the 2008 collapse.

Wallison is certainly right to direct attention to the baneful impact of the feds in initiating the disaster. Nevertheless, why does he feel the need to make the unlikely assertion that nothing else was responsible? That's like saying that the assassination of the Archduke Franz Ferdinand and nothing else was responsible for World War I, or that Pearl Harbor was the sole cause of American involvement in World War II.

With events of this historic magnitude, there are always going to be multiple roots. Yet it's fair to say that Pearl Harbor was the direct cause of America going to war.

And without overstating the role of Pearl Harbor, America learned a crucial lesson from it: don't allow sneak attacks.

When I think back on my life, it's striking how much of the energies of people close to me were devoted to preventing another Pearl Harbor. My uncle spent much of WWII as a weatherman in the godforsaken Aleutian Islands keeping an eye out to make sure the Japanese fleet didn't follow a storm front across the North Pacific as they had in December 1941. Four decades later, my brother-in-law was in even more remote Thule, Greenland watching radar monitors of big Soviet Bear bombers playing games over the Arctic. My father worked for years on the Lockheed F-104, a minimalist "missile with a man in it" fighter designed to intercept these Soviet nuclear bombers.

America took Pearl Harbor seriously. And guess what? We actually learned lessons. For almost sixty years afterDecember 7, 1941, the U.S. spent a fortune to detect, deter, and defeat any more sneak attacks, and it worked.

But there's no evidence that anybody has learned much of anything from the mortgage meltdown.

  • Third, Wallison puts most of the blame on the Clinton Administration. In contrast, I see the Clinton Administration (along with the first Bush Administration) as loading the gun. But the second Bush Administration pulled the trigger.

The Democrats' 1990s efforts to funnel more mortgage money to their minority and lower income constituents have been detailed in two books, both nearly universally ignored. Alyssa Katz's 2009 work Our Lot, described, from the perspective of an abashed liberal, how Clinton's Housing and Urban Development secretaries Henry Cisneros and Andrew Cuomo (now governor of New York) and Fannie Mae chairman Jim Johnson had tilted the credit evaluation system in favor of minorities. Paul Sperry's 2011 book The Great American Bank Robbery recounts this history from a conservative perspective.

Still, the Clinton Administration felt it had to keep its minority mortgage machinations on a small scale to avoid attack from Republicans. But when George II took power, other Republicans took their eye off the ball, trusting their man in the White House to look after their interests.


Bush apparently really believed he could bring Hispanics into the GOP, despite overwhelming evidence to the contrary. A major feature of his campaign was the"ownership society", especially expandinghomeownership among minorities.

It seemed like a free lunch: just pass the word to regulators and lenders that the President looked favorably on firms taking bigger risks to lend more to minorities, and the magic of the market would turn Democratic Hispanics into home-owning Republicans. What could go wrong?

Bush's role in the mortgage meltdown has been almost universally overlooked—because Republicans like Wallison want to blame it on Democrats, and Democrats don't want any blame associated with minorities.

George W. Bush himself, however, recently conceded a fair amount of my case against him. On p. 449 of the ex-President's bestselling memoir Decision Points, Bush writes:

"At the height of the housing boom, homeownership hit an all-time high of almost 70 percent. I had supported policies to expand homeownership, including down-payment assistance for low-income and first-time buyers. I was pleased to see the ownership society grow."

Bush doesn't mention that he had entitled the main venue for promoting expanding homeownership the White House Conference on Increasing Minority Homeownership. There, on October 15, 2002, he called for 5.5 million additional minority-owned homes by 2010.

On the other hand, Bush's misbegotten effort had largely disappeared down the memory hole, so I must say that I'm impressed that he dredges it up in order to accept some of the blame. He writes:

"But the exuberance of the moment masked the underlying risk. Together, the global pool of cash, easy monetary policy, booming housing market, insatiable appetite for mortgage-backed assets, complexity of Wall Street financial engineering, and leverage of financial institutions created a house of cards."

That's a pretty reasonable list of causes Bush gives, especially compared to Wallison's excessively narrow focus.

I would add to Bush's list the Hispanic population growth that the President's tolerance of legal and illegal immigration and his push for more home construction facilitated. The rising population made it seem for a while as if all that home construction in the exurbs actually made sense.

Bush concludes:

"This precarious structure was fated to collapse as soon as the underlying card—the nonstop growth of housing prices—was pulled out. That was clear in retrospect. But very few saw it at the time, including me."


Bush's list of causes sounds old-fashioned for a Republican, in that it attributes a role to market excess. During the Obama Era, in contrast, a peculiarly dogmatic free market ideology seems to have become popular among many Republicans.


As demographic change slowly turns the Democratic Party into the Nonwhite Party, the GOP is becoming, by default, the White Party (relatively speaking). There are worse things a party could be. Yet this is considered by the GOP elite to be too horrifying to admit.

To rebuff the Democrat's intolerable charge that white Republicans look to the GOP to protect the interests ofthemselves and their posterity—to adapt the preamble to the U.S. Constitution, a wholly white creation—many white Republicans during the Obama Era have embraced the idea that they act solely on ideological principles.

In this worldview, the private sector can only go wrong when the government holds a gun to its head.

But I spent many years in the business world. I find this an overly flattering view of my own and my former colleagues' prowess. We regularly fell for extraordinary popular delusions and the madness of crowds, even when we weren't being prodded along by the government.

Some Republicans looking for an ideology have turned to the late novelist Ayn Rand. Yet, while the recent low-budget movie version of Atlas Shrugged may have flopped at the box office, it was a welcome reminder that Rand herself held a more three-dimensional view of the potential culpability of individuals in all walks of life.

Atlas Shrugged is full of crony capitalists who corrupt the politicians and bureaucrats as much as the government corrupts them. Rand would have been outraged by bankers who promoted bad loans in the name of diversity, such asAngelo Mozilo of Countrywide, Kerry Killinger of Washington Mutual, and Roland Arnall of Ameriquest.

Wallison, apparently, is not. And that leaves his Republican Party ominously vulnerable, not just to race hustlers, but to the same corporate con-men whose blind quest for cheap labor drove the Bush Administration to its disastrous amnesty defeats of 2006 and 2007.


[Steve Sailer (email him) is movie critic for The American Conservative. His website features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

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