SMACKDOWN: Peter Wallison Versus Joe Nocera On The Governments Role In The Housing Bubble

Over the weekend, Joe Nocera of the New York Times accused the primer issued by four Republican members of the Financial Crisis Inquiry Commission of attempting to explain the crisis with dogma.

The Republican minority, fearing their view would get short shrift, pre-emptively put forward a CliffsNotes version of their theory of the case. In other words, they responded to a report that hasn't even yet been written, much less read and voted on by the members, Nocera wrote:

Now Peter Wallison, one of those four Republican commissioners, has fired back in a blog post titled Joe Nocera's Hypocritical Attack. He begins with attacking the idea of a pre-response:

The primer that I and three of my Republican colleagues signed sought to outline the major issues that we thought the Commission should address. It was not a reply to or a dissent from the report of the Democratic majority, which is still a work in progress. It was issued on December 15 because that was the date on which, under the law that established the Commission, its report was supposed to be issued, and the primer was released in recognition of this statutory deadline. It is now being used by the left to attack us as partisans for dissenting from the Commission's report even before the report has been issued. Nocera's article is an example of such treatment.

The dispute gets really interesting when it gets specific and substantive, however. Nocera argues that the story line in which the government helped create the housing bubble is wrong because it wasn't the government that pushed Fannie Mae and Freddie Mac into subprime lending. It was the market.

Here's Nocera:

The Republican document issued earlier this week did little more than regurgitate this theory of the case. Subsidizing mortgages through the G.S.E.s was a particularly expedient way to increase the homeownership rate, they write at one point. At the same time, they tread lightly over the culpability of other nongovernmental culprits like the credit ratings agencies and Wall Street itself.

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.)

When Fannie and Freddie finally did get into the business, it was very late in the game. But the motivation wasn't pressure from the government; it was pressure from the marketplace. You see, the subprime companies and Wall Street had long used subprime loans as a way to do an end-run around Fannie and Freddie. By the mid-2000s, subprime underwriting and securitization had become so profitable and such a large part of the overall mortgage business that Fannie and Freddie felt they had no choice but to dive in. In other words, the G.S.E.s were reacting to the realities of the market, not to the government. They were worried about losing market share.

Both Nocera and Wallison agree that Wallison tried to warn him off this position. Wallison told Nocera that he had documents proving the markets done it line of thought is wrong.

Mr. Wallison said he had seen documents, not yet made public, as part of his work with the financial crisis commission that would prove that he's right and I'm wrong. Well, we'll see, Nocera writes.

Wallison is aghast:

Then, he describes the views in the primer as dogma by which he means opinions based on ideology rather than facts. But in our conversation as he was writing this article, he told me that his reporting has shown that Fannie Mae and Freddie Mac simply followed Wall Street into buying subprime and other risky loans. I told him this was wrong that as part of the Commission's work I have seen internal documents from Fannie and Freddie that show this particular mantra of the left to be a myth. For a reporter, that would have been a signal to hold his fire a warning that there were facts out there of which he was unaware. I was telling him he should wait and see what I might write in connection with the Commissions report. But he repeated his own dogma immediately thereafter. In buying all those subprime mortgages, he said, Fannie and Freddie were reacting to the realities of the market, not to the government.

Wallison concludes by more or less saying that Nocera is about to have to eat humble pie: Under these circumstances, I can only respond to Nocera with a riposte attributed to John Maynard Keynes: When the facts change, sir, I change my opinion. What do you do? Well, we'll see.

This looks it is going to be a very fun fight.

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