Key Takeaways:
Alan Greenspan's death has revived a debate over whether bad regulation or deregulation caused the 2008-09 financial crisis.
Former Federal Reserve Chairman Alan Greenspan's death has revived a debate over the 2008-09 financial crisis, with former lawmakers arguing that government housing mandates — not low interest rates or deregulation — caused the housing bubble.
"Without the excess demand from securitizers, subprime mortgage originations would have been far smaller and defaults far fewer," Greenspan said in congressional testimony after the crisis, according to an op-ed by former Sen. Phil Gramm and former Rep. Jeb Hensarling published in the Wall Street Journal on July 21.
From 2000 to 2007, inflation-adjusted mortgage rates averaged 3.4%, almost triple the 1.2% between 1971 and 1980 and roughly double the rate from 2010 to 2025, yet neither period produced a housing bubble, Gramm and Hensarling wrote. Community Reinvestment Act lending surged to $4.5 trillion from 1992 through 2007, up from $8.8 billion between the law's 1977 enactment and 1991, according to the National Community Reinvestment Coalition.
The debate matters because the narrative that deregulation caused the crisis was used as a pretext to pass the Dodd-Frank Act, a massive expansion of financial regulation, rather than reform of government housing policy, the authors argued. If the historical record shifts, it could influence how policymakers approach housing finance reform and the future of Fannie Mae and Freddie Mac.
The Regulation Record, Not Deregulation
Contrary to the popular narrative, financial regulation grew stricter for two decades before the crisis. Through the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the Federal Deposit Insurance Corporation Improvement Act of 1991, and the Sarbanes-Oxley Act of 2002, federal regulators gained expansive powers to impose risk-based capital standards, reporting requirements, and corporate governance rules. The Mercatus Center found that from 1970 until the housing bubble burst, regulatory restrictions increased 250% and the number of regulatory personnel grew about 77%.
The only law that could be called deregulatory was the Gramm-Leach-Bliley Act of 1999, which amended the Depression-era Glass-Steagall Act to allow banks, securities companies, and insurance companies to affiliate under financial-services holding companies. But Gramm-Leach-Bliley established the Federal Reserve as a new superregulator overseeing all such holding companies, and by any measure those holding companies held up better during the crisis, Gramm and Hensarling wrote.
The Role of Fannie Mae and Freddie Mac
At the precipice of the crisis, Fannie Mae and Freddie Mac, with their implicit government guarantee, either securitized or guaranteed roughly half of all U.S. mortgages. Effective 1993, they were required to make 30% of their mortgage purchases low- and moderate-income housing loans, a quota ratcheted to 56% by 2008, when both enterprises collapsed in what became the largest institutional bailout in U.S. history. A 2003 Fannie Mae memo stated that because of the affordable-housing goals Congress imposed, the company "did deals at risks and prices we would not have otherwise done."
Greenspan was the earliest and most consistent government official to warn about the threat from subprime mortgage securitization, according to a review of his pre-crisis statements. His critics, however, point to low mortgage rates during his tenure from 2000 to 2006 and his support for deregulation as contributing factors. The left is using his death "to peddle a false narrative yet again" about the crisis, Gramm and Hensarling wrote.
The last time a similar regulatory debate erupted was after the 2010 Dodd-Frank passage, when bank stocks fell roughly 20% over six months as compliance costs rose. A similar reassessment today could affect shares of large U.S. banks including JPMorgan Chase & Co., Bank of America Corp., and Citigroup Inc., which remain subject to enhanced prudential standards born from the crisis-era narrative.
This article is for informational purposes only and does not constitute investment advice.
