More government, more problems. That was theme of Florida Sen. Marco Rubio's televised response to the State of the Union address last night. As evidence, Rubio offered up the lesson of the housing crisis, created, he said, "by reckless government policies."
But academics, independent commissions, regulators and others who have studied the crisis have come to a very different conclusion.
The federal government certainly deserves its share of blame for not moving to prevent the wild risk-taking that expanded the subprime mortgage bubble to Mall of America-sized proportions, they say. But to say the government was a "major cause," as Rubio said, simply isn't true. The real culprits, they say, were Wall Street and the mortgage industry, which generated huge profits by issuing, packaging and selling off bundles of home loans with little regard for their quality or the ability of borrowers to pay them back.
The Republican argument goes something like this: Fannie Mae and Freddie Mac, the government-chartered mortgage giants, bought risky mortgages in order to meet affordable housing goals. The implicit government guarantee on these loans -- a belief by the market that the government would not allow the mortgage giants to fail -- encouraged even more risk taking. The 2008 taxpayer bailout of Fannie and Freddie, which cost $180 billion, proves this point, they say.
There's no question that Fannie and Freddie lowered their standards and bought up bad loans. But the companies did not start making a big move into riskier mortgages until the mortgage boom was well under way. Even then, they were more cautious than the investment banks: just over 15 percent of borrowers with Fannie and Freddie-backed loans made in 2007 have been seriously delinquent, compared to nearly 42 percent of Wall Street-financed mortgages, according to the Federal Housing Finance Agency.
All told, the Center for Public Integrity reported in 2011, mortgages financed by Wall Street from 2001 to 2008 were 4½ times more likely to be seriously delinquent than mortgages backed by Fannie and Freddie.
Writing for the Washington Post's Wonkblog, Mike Konczal, a fellow with the Roosevelt Institute, noted that more than 84 percent of subprime mortgages in 2006 were issued by private lenders. Subprime mortgages, of course, were the most likely to later fail.
Konczal also noted that Fannie Mae and Freddie Mac actually lost market share from 2002 during 2005, as the Wall Street mortgage machine kicked into its highest gear. The companies' share of mortgage originations dropped to 30 percent to 50 percent. So rather than driving the mortgage crisis, Fannie and Freddie were trying to play catch up.
The most comprehensive study of the housing crisis, by the Financial Crisis Inquiry Commission, a bipartisan group appointed by President Obama to report on what had gone wrong, blamed "a combination of excessive borrowing, risky investments, and lack of transparency" and "dramatic failures of corporate governance and risk management at many systemically important financial institutions" for the crisis.
The problem wasn't too much government, the commission said. The problem was not enough effective government. "We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets," the commission wrote.