GEORGE SANTAYANA is often quoted for the aphorism that “Those who cannot remember the past are condemned to repeat it.” Looking back on the financial crisis, we can see why the study of history is often so contentious and why revisionist histories are so easy to construct. There are always many factors that could have caused a historical event; the difficult task is to discern which, among a welter of possible causes, were the significant ones — the ones without which history would have been different.

Using this standard, I believe that the sine qua non of the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans — half of all mortgages in the United States — which were ready to default as soon as the massive 1997-2007 housing bubble began to deflate. If the U.S. government had not chosen this policy path — fostering the growth of a bubble of unprecedented size and an equally unprecedented number of weak and high-risk residential mortgages — the great financial crisis of 2008 would never have occurred.

It was the U.S. government’s housing policies — and nothing else — that were responsible for the 2008 financial crisis.

The inquiry has to begin with what everyone agrees was the trigger for the crisis — the so-called mortgage meltdown that occurred in 2007. That was the relatively sudden outbreak of delinquencies and defaults among mortgages, primarily in a few states — California, Arizona, Nevada, and Florida — but to a lesser degree everywhere in the country. No one disputes that the losses on these mortgages and the decline in housing values that resulted from the ensuing foreclosures weakened financial institutions in the U.S. and around the world and were the precipitating cause of the crisis.

This raised a significant question. The U.S. had experienced housing bubbles in the past. Since the Second World War, there had been two — beginning in 1979 and 1989 — but when these bubbles deflated they had triggered only local losses. Why was the deflation of the housing bubble in 2007 so destructive?

The Financial Crisis Inquiry Commission’s answer was that there were weaknesses in the financial system — failures of regulation and risk management, excessive leverage and risk-taking — that were responsible for the ensuing devastation. To establish this idea, the Commission had to show that these weaknesses were something new. It didn’t attempt to do this, although that was an essential logical step in establishing its point. And the Commission ignored a more obvious answer: the quality of the mortgages in the bubble. As I noted earlier — and as the Commission never acknowledged or disputed — by 2008, half all mortgages in the U.S. — 27 million — were subprime or otherwise risky loans. If the Commission had really been looking for the reasons that the collapsing bubble was so destructive, the poor quality of the mortgages in the bubble was a far more likely hypothesis than that there had been a previously undetected weakening in the way the U.S. financial system operated.

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