Caricature of how Republicans see the financial crisis

From Mr Peter J. Wallison.

Sir, Edward Luce’s description of the competing views in the US about both the financial crisis and a supposed “crisis of capitalism” was a caricature, particularly his discussion of the view he ascribed to the Republicans (“America’s three views on the crisis”, March 19).

Every Republican candidate for president has said, in the debates and on the campaign trail, that the financial crisis was caused by the US government’s housing policies. This view is widely accepted by the Republicans in Congress. This is not the deeply moralistic point for which Mr Luce was apparently striving when he wrote that the Republicans believe America is being “punished for gluttony”. The Republican view is really nothing more complex than blaming lunatic government housing policies between 1992 and 2007 for the financial crisis. These policies fostered the creation of 28m subprime and other risky mortgages – half of all US mortgages by 2008. Of these, 74 per cent were on the books of US government agencies, particularly Fannie Mae and Freddie Mac, showing where the demand for these mortgages came from. Thus, the Republican view is that there is no crisis of capitalism and future financial crises can be prevented by getting the government out of the housing finance business.

The contrary view, represented by the Obama administration, is that tougher and more comprehensive government regulation was needed to prevent another financial crisis. The underlying assumption of those who hold this opinion may well be that capitalism cannot function without pervasive government regulation, and this may qualify as assent to the “crisis of capitalism” narrative. But to call this view “restorationist”, as Mr Luce does, is also caricature, although in this case one that ignores rather than exaggerates its inconsistencies. In structuring and enacting the Dodd-Frank Act, the Obama administration has, by adding stultifying and costly regulation to every part of the US financial system, prevented the restoration of economic growth in the US.

Mr Luce is correct in one thing. The conflict between these views will be fought out in November, with the results of the restorationists’ policies very much on trial.

Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute, Washington, DC, US