How Housing Policy Caused the Financial Crisis

The 2008 financial crisis "proved that financial markets are not self-regulating," says political scientist Francis Fukuyama in a recent interview with the website TheBrowser:

"[Peter Wallison] lays it all at the door of Fannie and Freddie and government intervention. It seems to me transparently designed to exonerate free markets...I like free markets...[but] that particular conclusion I just find astonishing."

Fukuyama isn't alone in depicting Wallison as an uncomprimising ideologue who thinks government deserves all the blame. New York Times columnist Joe Nocera called Wallison's work "loony" and accused him of helping to concoct "what has since become a Republican meme." Even pro-free market economist Russ Roberts took Wallison to task for downplaying the role of investment banks in causing the crisis.

So who is Peter Wallison? He's a scholar at The American Enterprise Institute and was a leading member of the 10-person Financial Crisis Inquiry Commission, a government-created body charged with looking into the causes of the 2008 meltdown. After a year of hearings and deliberation, the commission produced its official report which laid most of the blame on deregulation and private sector avarice. Wallison publicly broke with the commission over the report.

"Instead of pursuing a thorough study," says Wallison, "the commission's majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions - that the crisis was caused by 'deregulation' or lax regulation, greed and recklessness on Wall Street, predatory lending in the mortgage market, unregulated derivatives, and a financial system addicted to excessive risk taking."

Wallison published his version of what caused the crisis in a 93-page dissent, which argues that the meltdown was largely a consequence of government housing policy that underwrote unsustainable economic activity. He draws heavily on the research of Fannie Mae's former chief credit officer, Edward Pinto, which found that federal housing agencies drastically underreported the number of high-risk mortgages on their books. According to Wallison and Pinto, there were about 28 million high-risk mortgages in the U.S. in 2008; roughly 70 percent of those mortgages were owned by government-sponosored enterprises such as Fannie Mae and Freddie Mac.

Wallison sat down with Reason Foundation's Anthony Randazzo in January to talk about the causes of the 2008 financial crisis, what to do about Fannie Mae and Freddie Mac, and why he's not guilty of trying to "exonerate" Wall Street banks.

This interview was excerpted from a much-longer conversation, a transcript of which can be found here, here, and here.

Produced, shot, and edited by Jim Epstein.

About 6 minutes.

Go to for downloadable versions and subscribe to Reason.tv's YouTube Channel to receive automatic updates when new material goes live.