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Did the @AEI (American Enterprise Institute) predict the 2008 crash in 1999?

The following is from an interesting New York Times article, dated September 1999:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

You can read the full article here.

What makes Peter’s comments particularly interesting – and relevant – is his latest article in the New York Times – called The Bubble Is Back. In which he says:

“Today, the same forces are operating. The Federal Housing Administration is requiring down payments of just 3.5 percent. Fannie and Freddie are requiring a mere 5 percent. According to the American Enterprise Institute’s National Mortgage Risk Index data set for Oct. 2013, about half of those getting mortgages to buy homes — not to refinance — put 5 percent or less down.”

Policy makers can’t say they haven’t been warned.


4 Responses

  1. Further to this post, I remember reading about cracks appearing in the mortgaged backed securities market at least as early as December 2006 (see this article from The Economist http://www.economist.com/node/8424086) and again in March http://www.economist.com/node/8885853 and November 2007 http://www.economist.com/node/10167658. And it all had ominous echoes of September 1998 http://www.economist.com/node/166416.

    Also worth remembering that we had already seen a lot of malinvestment in the late 90s dot.com boom that hadn’t really been worked out of the system. The Greenspan put rushed to the ‘rescue’ when markets tanked in 2001, which only served to store up more trouble for later. As a result, such malinvestment continued after the crash, as this report about the state of the commercial property market in May 2003 makes clear: http://www.economist.com/node/1794945.


  2. I’ve since come across another post by Peter J Wallison of the American Enterprise Institute called “The True Story of the Financial Crash” from May 2011. You can read it in full here http://www.aei.org/publication/the-true-story-of-the-financial-crisis/#mbl. The particularly telling section is headed “Affordable Housing Goals and the Deterioration in Underwriting Standards” and explains how government intervention through two government owned mortgage underwriters distorted the whole market and led to the sub-prime crash.

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