The Politically Incorrect View of What Made the Financial Crisis Systemic: Government Housing Policy

Patric Hendershott and Kevin Villani

Journal of Housing Research, 2012, vol. 21, issue 1, 15-48

Abstract: One narrative regarding the systemic financial system collapse is that numerous seemingly unrelated events occurred in un-or-under regulated markets, requiring widespread bailouts across the spectrum from mortgage borrowers to investors in money market funds. Markets become unbalanced but generally correct before crises become systemic. This did not occur with the most recent financial crisis due to the accumulation of past political reactions to such crises. Public enterprises had crowded out private enterprises, and public protection and the associated prudential regulation had trumped market discipline. Prudential regulation created moral hazard and public protection invited mission regulation, both of which undermined prudential regulation itself. This eventually led to systemic failure. Politicians are responsible for undermining market discipline, regulatory incompetence and mission-induced laxity.

Date: 2012
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DOI: 10.1080/10835547.2012.12092048

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