Nocera Vs. Wallison

Perhaps the best response to last week's Republican "presponse" to the Financial Crisis Inquiry Commission comes from the New York Times' Joe Nocera, who focuses on commission member Peter Wallison:

The only problem with Mr. Wallison’s theory is that it’s not, as they say, reality-based. Anyone who has looked at the role of Fannie and Freddie will discover they spent most of the housing bubble avoiding subprime loans, because those loans didn’t meet their underwriting standards. (Indeed, for most of their existence, Fannie and Freddie didn’t so much meet their affordable housing goals as gamed them.)

What is most troubling is that the Republicans are going to try to create new policy based on Mr. Wallison’s analysis. ...Fannie and Freddie, they say (implausibly) in a recent position paper, “were the proximate cause of the financial crisis” and “at the forefront of a relentless push to drive down lending standards,” etc. etc.

The solutions they offered were nice-sounding but impractical — “Re-establish a housing financial market that has long-term stability in which private capital is the primary source of mortgage financing” — and utterly in denial about the fact that it’s the private market that has gone AWOL. Just as the market failed during the bubble, so it is now failing again.

I’m all for reforming Fannie and Freddie. Who isn’t? But at this stage of the game, you can’t reform the G.S.E.’s without reforming the private market too. That may not be where the Republicans’ theory of the case takes them. But it happens to be true.

Read the whole thing. It's a shame but perhaps not surprising that, of all the issues to divide the commissioners, they fractured around the one where they could have had the most sway: GSE reform wasn't part of last year's financial reform effort due to its unique and expensive challenges. A bipartisan assessment of the problems in the old model could have been a building block for legislators. Instead, the commission's Republicans sought to pre-empt their colleagues with this pamphlet, and squandered the FCIC's main chance at any immediate influence.

-- Tim Fernholz

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