Hidden in Plain Sight

Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis—and Why It Could Happen Again by Peter J. Wallison, Encounter Books, 2016. 

Poor Credit Risks

The government effort to help people who were poor credit risks obtain home loans damages the economy. The financial crisis of 2008 was caused by the federal government’s attempts to pressure banks to give housing loans to poor people who had poor credit. It obviously was not to the banks’ advantage to lend money to people would probably not pay it back. They did it not out of greed, but because the Federal government pressured them to make bad loans. Nevertheless, because of widespread prejudices against the rich, against corporations and against capitalism, the news media spun the crises as the result of corporate greed. The author does not blame poor people for the crisis, but rather government do-gooders who pretend to help the poor. 

Mistaken Analyses

The author corrects errors made by other analysts of the 2008 financial crises. Other analysts have claimed that the Government-Sponsored Entities (GSEs), Fannie Mae and Freddie Mac, did not acquire large numbers of subprime loans, when in fact they did. Other analysts have claimed that the partial repeal of the Glass-Steagall Act was a cause of the 2008 financial crisis, but it wasn’t. Other analysts have claimed that credit default swaps (CDS) were a cause of the crisis, but they weren’t. Credit default swaps do not amplify risk, but only spreads it to more parties. Credit default swaps are not risky to counter parties. 

Lack of Data

The author also points out that: No one knew how many subprime mortgages were in the system. The Fannie Mae and Freddie Mac underreported the percentage of their holdings that were non-traditional mortgages. The decline of the price of housing backed by Fannie Mae and Freddie Mac caused the appraised value of neighboring homes to decline, even when the housing loans were private mortgage-backed securities. 

Government Pressure to do Wrong

Originating banks would not have made risky loans if there had not been demand from GSE's to buy them. The Department of Housing and Urban Development encouraged risky lending under both President Bill Clinton and President George W. Bush. While the Community Reinvestment Act became law in 1977, its damaging effects did not become substantial until it loan-application standards were lowered in 1995.

Moral Hazard

Rescuing Bear Stearns was a mistake. It created moral hazard, and the expectation that the federal government would rescue Lehman Brothers, which it subsequently did not. 

The Neighbor Effect

The decline of the price of housing backed by Fannie Mae and Freddie Mac caused the appraised value of neighboring homes to decline, even when the housing loans were private mortgage-backed securities.