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Peter J. Wallison 469

never addresses the question. HUD’s role in pressing for a reduction in mortgage
underwriting standards escaped the FCIC’s attention entirely, the GSEs’ AH goals
are mentioned only in passing, CRA is defended, and neither HUD’s Best Practices
Initiative nor FHA’s activities are mentioned at all. No reason is advanced for the
accumulation of subprime loans in the bubble other than the idea—implicit in the
majority’s report—that it was profi table. In sum, the majority’s report is Hamlet
without the prince of Denmark.
Indeed, the Commission’s entire investigation seemed to be directed at
minimizing the role of NTMs and the role of government housing policy. In this
telling, the NTMs were a “trigger” for the fi nancial crisis, but once the collapse of the
bubble had occurred the “weaknesses and vulnerabilities” of the fi nancial system—
which had been there all along—caused the crisis. Th ese alleged defi ciencies
included a lack of adequate regulation of the so-called “shadow banking system”
and over-the-counter derivatives, the overly generous compensation arrangements
on Wall Street, and securitization (characterized as “the originate to distribute
model”). Coincidentally, all these purported weaknesses and vulnerabilities then
required more government regulation, although their baleful presence hadn’t been
noted until the unprecedented number of subprime and Alt-A loans, created largely
to comply with government housing policies, defaulted.

6. Conclusion

What is surprising about the many views of the causes of the fi nancial crisis
that have been published since the Lehman bankruptcy, including the Commission’s
own inquiry, is the juxtaposition of two facts: (i) a general agreement that the bubble
and the mortgage meltdown that followed its defl ation were the precipitating
causes—sometimes characterized as the “trigger”—of the fi nancial crisis, and (ii)
a seemingly studious eff ort to avoid examining how it came to be that mortgage
underwriting standards declined to the point that the bubble contained so many
NTMs that were ready to fail as soon as the bubble began to defl ate. Instead of
thinking through what would almost certainly happen when these assets virtually
disappeared from balance sheets, many observers—including the Commission
majority in their report—pivoted immediately to blame the “weaknesses and
vulnerabilities” of the free market or the fi nancial or regulatory system, without
considering whether any system could have survived such a blow.
One of the most striking examples of this approach was presented by Larry
Summers, the head of the White House economic council and one of the President’s
key advisers. In a private interview with a few of the members of the Commission
(I was not informed of the interview), Summers was asked whether the mortgage
meltdown was the cause of the fi nancial crisis. His response was that the fi nancial
crisis was like a forest fi re and the mortgage meltdown like a “cigarette butt” thrown
into a very dry forest. Was the cigarette butt, he asked, the cause of the forest
44
fi re, or was it the tinder dry condition of the forest? Th e Commission majority
adopted the idea that it was the tinder-dry forest. Th eir central argument is that the
mortgage meltdown as the bubble defl ated triggered the fi nancial crisis because of
the “vulnerabilities” inherent in the U.S. fi nancial system at the time—the absence

44 FCIC, Summers interview, p.77.