How much did Fannie and Freddie cause the financial crisis?

Rortybomb summarizes some of the “not much” case (piling on here); see also Brad DeLong, Paul Krugman, David Min, and others.  He wonders what the non-spinners think and I will tell him what I think:

1. It is not denied that the mortgage agencies were guaranteeing about half of all U.S. mortgages right before the crisis  (Yet somehow they had not so much to do with the crisis?)  And the crisis was not just about subprime.  The mortgage market remains screwed up to this day, with no clear end in sight.

2. There is also the more ambitious claim — not necessarily true but not obviously dismissable either — that leverage would have been much, much lower in American real estate markets without the mortgage agencies.  It is hard to judge such counterfactuals, but arguably lenders would have demanded more money down and offered fewer 30-year fixed rate mortgages.

3. Arnold Kling has a good response to the delinquency chart which is circulating.

4. Following the crisis, banks recovered and paid back virtually all of their bridge/bailout.  The mortgage agencies remain hundreds of billions in the red.  And yet the agencies had not much to do with the crisis?

5. It is wrong to suggest that the agencies caused the crisis in the sense that I will cause myself to eat breakfast cereal this morning.  One can debate which weaker notion of cause might be appropriate, but I will just say that the mortgage agencies made the crisis much, much worse.

I don’t yet see that the counters to Wallison and Co. should budge me from this position.  I would prefer that they start by acknowledging (or challenging) #1 and #4 and then trying to talk their way back to what they see as the truth.  As it stands, I see a lot of “devalue and dismiss” being applied to the messengers, rather than focusing on what the agencies did or did not do in the broader scheme of things.  From my quiet sofa seat in Fairfax, VA, it ain’t a pretty picture.


Is there any data about how many 30-year mortgages how been paid off (worldwide, if possible?). From the perspective of someone who is young the 30-year timeframe not only seems huge, but also scary.

What about nations such as Japan where 100-year mortgages were an option once. Did they have similar companies?

I paid off mine at the 21 year mark (after doing one refi into a 15 year fixed from an original 30 ARM). That's of course an 'n' of '1'

Amen. For an owner, the purpose of a 30 year mortgage is so you CAN take as long as 30 years to pay it off. Ours has been paid off for some years.

It's not really comparable because of different tax effects. It's hard to even compare states because of varying income tax effects.

For instance, my wife and I both have fairly high incomes and we file jointly. Our total top marginal rate is usually going to be something around 40% (fed + state). So, if I can get a mortgage at 4% and get a return of even 3%, I come out ahead: 4% x .6 = 2.4% as my real post-tax interest cost. My best play appears to be to take out a 15 or 20 year loan for the better rate, and then refi every 5 to 10 years (depending on the refi cost, etc).

I don't know what the international standards are, but I think I've read we're a bit unusual.

1. GSEs were guaranteeing half of all U.S. mortgages for decades. Why suddenly did it all collapse in 2008?
2. The 2005 SEC waiver of leverage rules -- asked for and received by the 5 biggest iBanks (GS, MER, MS, LEH, BSC) -- allowed these underwriters to dramatically expand their ability to buy, securitize and sell mortgage backed securities. How is FNM/FRE responsible for that?
3. The GSEs were not allowed to guarantee non-conforming (Subprime and Alt A) mortgages, but they were losing so much market share to Wall Street, they petitioned for a waiver from OFHEO. Approved late in 2005, by the time they could own the junk, the top was already in. Showing up late to the party is nbot the same as being a primary cause.
4. After the GSEs became nationalized, they were no longer run as for profit entities. Indeed, they have become a back door bailout for banks to dump bad paper off their books.
(Incidentally, this AFTER THE FACT analysis to explain an a priori cause is the single most foolish thing I've read from you. Ever.)
5. How did the GSEs cause parallel housing booms and busts around the world? Why did these nations, without affordable housing policies, have similar RE boom bust cycles?

I could go on, but you are beating a dead horse. The link above goes into greater detail

Ritholtz > a back door bailout for banks to dump bad paper off their books

i've been reading this for years with not a single shred of evidence. can you give me a single concrete example of this?

what do you think Countrywide et al were doing?

Is there not some hair splitting here in the distinction between "caused" and "contributed to"? The sequence of events certainly had the private demand for bad loans before 2005 when Fannie and Freddie went to congress to allow them to lower standards, but they DID lower their standards. Once they did, layered on top of the belief that housing always increases in value was the guarantee now being extended to that entire class of loans. I don't know how we don't hold Fannie and Freddie responsible for their contributions in 2005 and later.

You state "Approved late in 2005, by the time they could own the junk..."

If they were late to the party, how did they end up with so much of the junk. It was after 2005 when things did get ridiculous. The GSEs did not start things, but they did throw 20 gallons of gas onto the bonfire. I can drink 5 beers without any issues. It's after the next 5 when I get in trouble.

My impression is that the GSE's were the last folks into what was a big pyramid scheme. As the bottom layer, they had gotten (almost) none of the benefit, and left holding all the bag.

I think Arnold Kling's POV is that the GSEs were forced into this by Congress -- at the least, they wouldn't have entered this market if they had the culture they did when he worked for one of them.


The definition of conforming is a loan that can be sold to the GSEs. Subprime, Alt-A were designations used in the industry with respect to credit scores and other attributes of the loans. Historically, these categories lined up so that subprime, alt-a was synonymous with non-conforming. After 2004, that just wasn't so. "Non-conforming" is just some commenters definition of subprime, and its an old stale, misinformed one.

The officers of the GSEs are likely facing civil fraud prosecution for misrepresenting the nature of their portfolio for just this reason.


Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks.
The vast majority of these MBS were rated AAA, because the rating agencies' models assumed that the losses that are incurred by subprime and Alt-A loans would be within the historical range for the number of high-risk loans known to be outstanding. But because of Fannie and Freddie's mislabeling, there were millions more high-risk loans outstanding. That meant default rates as well as the actual losses after foreclosure were going to be outside all prior experience.

- WSJ Dec 29, 2009

"... the 26 million subprime and Alt-A loans outstanding in 2008,.."

Typical WSJ "lump a dope." Aggregate similar items when only one item really matters and use the bogus item to inflate or deflate the total as necessary.

Here the much larger number of GSE Alt-A loans are aggregated with the smaller number of GSE subprime loans to pump up the outrage. Problem is that Alt-A loans were considered prime not subprime and the GSE's took them on because that was what they were set up to do - buy prime loans! Unfortunately the paperwork from the brokers was dubious at best but hey to Fannie and Freddie they were prime.


It remains that the GSEs are only the ones with hundreds of billions of unrequited losses. Most of the large banks have ended up costing the government nothing. Those banks that have failed managed to be paid out of the FDIC's account--provisioned by the banks themselves.

So, there is only one major party that was clearly playing loose: the GSEs.

Besides the fact that the banks are only in business because the GSEs have made a market for their worthless MBS portfolios they also have numerous sources of income not available to the GSEs. Fannie and Freddie are much more dependent on the mortgage market and that has hardly been a growth industry.

And as Ritholtz explains above: using an "AFTER THE FACT analysis to explain an a priori cause" is at best a dubious reasoning process.


Alt-A are not prime loans.

"The term “Alt-A” refers to a category of mortgages that based upon risk of default, are somewhere between subprime (i.e. the highest potential for default) and prime (i.e. loans given to the most qualified borrowers). "

Speaking of Barry Ritholtz, in 2009 he came to my iSteve blog to debate me on the proposition: “Diversity played a major role in the mortgage meltdown.”

You can read our debate here:

It’s in reverse chronological order, so start with the post at the bottom and read up.

Ritholtz has been peddling the same tired ideology as Krugman and DeLong via the same debate points for years.

Why can't Ritholtz address point 1 rather than respond with an illogical question? I suppose simply stating "the GSE's did not contribute substantially to the crisis because they've been the biggest players in the mortgage securitization market for a long time" would sound too stupid even for him. That's a rhetorical trick also used by conspiracy theorist -- when a point is too patently ridiculous to make outright, hint at it with some oblique questions.

Notice that actions by the GSE in 2005 were too late to play a major role in the crisis while the 2005 relaxation of leverage ratios by the SEC was.

What I find most amazing about the if-only-we-had-more-regulation storyline from Krugman, Ritholtz, et. al. is that *I* seem to remember the Bush presidency as a time of massive new regulations in the form of SarPox and "Spy on thy customer" and banking and housing finance have been highly regulated for as long as I can remember.

Apparently for Ritholz and Krugman the problem isn't that the system places unrealistic demands on regulators or that the regulators always tend to become politically corrupted (GSE's are exhibit A), but that we simply don't have enough. We just NEED. MORE. REGULATION.

Regulation is Ritholz's magic salve that heals all wounds and prevents all injures. Unfortunately this magic lotion apparently requires that the ideologically correct party win every presidential election, lest a lack of regulatory zeal is insufficiently strident and only pushes modest levels of new regulation. Also, the magic doesn't seem to work in Europe or to protect the other members of the G-7 from even worse fiscal situations and exposure to financial crises.


"Half" changes with respect to the denominator just like the other half does.


Barry is trying to make money. I think folks like that do better building minimal narrative around their beliefs. But if their narratives coincide with the short-term zeitgeist and this matches their time horizon, then it's probably fine...for making money.

I have no problem with Ritzholtz making money, but I do find his sanctimonious claim to be above ideology rather grating, especially when he tacks so hard to the left. I find people who have an obvious ideology and who claim otherwise more obnoxious than ideologues who at least admit where they are coming from.


Understand, I am NOT a defender of Fannie & Freddie -- we were critics of their accounting, their corruption, of the Fed guarantee -- that's why we were (very publicly) SHORT the stock before the collapse.

But data, not belief systems, is how we figure out what actually happened. Consider the numbers in this October 2008 article from David Goldstein and Kevin G. Hall and the accompanying chart of mortgage collapse: Private sector loans, not Fannie or Freddie, triggered crisis (McClatchy)

Any fair based read of facts makes it readily apparent what the underlying cause was. When the facts conflict your prior belief system, you can either accept them (and question those ISMs) or you can deny them and stay married to a wounded ideology.
Cognitive dissonance is a cruel reality of how our brains work!

Barry, read my #5!

I have to side with Barry on this one. There was so much money chasing high yields that whether or not GSE's bought these mortgages, someone else would have. The GSE move into this market really had a negligible impact. Anyone who was not willy nilly chasing yield was either short or absent the market altogether (I opted for the second choice since I'm a bit too conservative (financially speaking) to have engaged in the short; a choice in retrospect was unfortunate). Petro- and Asian-money would have (and did) sopped up all the mortgages they could buy since the major Wall Street bundlers were getting AAA ratings for garbage.

As an addendum, see: and you can see how the AAA asset backed security levels increased dramatically.

Doesn't this argument let any individual institution off the hook for causing the housing crisis?

Not entirely, as the reason for the large amounts of money chasing high yields can be laid at the feet of the Federal Reserve, which "prevented" a major recession in 2002 by lowering interest rates and increasing the money supply. Since the downstream recipients of the Fed's newly created money were shying away from the stock market (where they'd been taken in by the internet bubble recently), they sought another outlet for the money, which was the real estate market. Large flows of excess money into real estate bid up the markets, which were already doing well as building restrictions in the areas of major financial centers kept prices high and people who ended up cashing out of the internet bubble in time had been buying houses. The actual risks of these loans were obscured by the opaque structure of the newest generation of MBSs, and the political pressure placed on the largest banks to relax lending standards to poor people (particularly, but not exclusively, minorities), where there was little data on the repayment performance of these new borrowers. With so much money coming into the real estate market, and, for a while, returns so high, banks competed to shovel money out to barely-creditworthy borrowers, relaxing their documentation standards to near-zero, which invited massive fraud on the parts of borrowers and mortgage brokers.

There are many guilty parties in the sequence of events described above, but the prime mover is the Federal Reserve. An alternate history could be described in which the Fed did not expand the money supply and ease credit so much in response to the end of the internet bubble and the loss of value from 9/11, in which the recession of 2002/2003 was worse, but the housing bubble didn't occur, and the recession of 2008-11 was much milder.

Sure, we probably would have had some overbuilding anyway; the underlying problem was that we hadn't had a real recession in 17 years so less and less attention was being paid to what might happen in recessionary conditions.

But is really reasonable to say they had no effect given the size of the intervention? And how can argument that be squared with #4?

I'm with Tyler, not budging.

Tyler, you are comparing apples and F-16 fighter jets.

The Fed handed the Primary Dealers 2.2 trillion dollars between QE1 and QE2. That was the bailout. TARP was just a bridge loan until the ACTUAL bailout (again, QE1 and QE2), could be complicated and obfuscated enough that Joe 6-pack doesn't understand the nature of the TRUE bailout. Sort of a "watch my right hand with a pickle while I violate you with the Chrysler building with the left one" scheme.

Here is another example, Tyler. Find a friend and take $100 from his left pocket. Tell him you'll pay him back later. After a little while take $200 from his right pocket. Give him $100 back. Now tell your friend how reliable you are because you paid him back that $100 just like you said.

I nominate Unsympathetic to run for Congress. He definitely knows how it is done.

"Barry, read my #5!"

Were the mortgage agencies contrarian? Could they have been? Can regulators in a democracy ever be (past an election cycle or two)?

"made them much worse" in what respect? it might have made the crash in housing prices worse (if you think that they were partially responsible for the credit bubble) - this is debatable. but how did they make the actual crash worse? if the same loans had all been in the private sector (yes i know, cerebus paribus error), how would the coordination of the bailout been any easier - it would have been much messier. how would a deeper crash have been averted without government credit support? i haven't heard any convincing answers here.

... how did they make the actual crash worse?

I may have missed the point, but here's what I think the argument is.

If they hadn't stepped in, various people who had a lot of exposure would have noticed that they had too much exposure. They would have gotten worried, maybe in 2005, and tried to sell. The bust would have come earlier, and it would have been much much smaller, a mild, maybe slow bust, perhaps almost insignificant.

But when the GSEs got in, a whole lot of fools stopped worrying. They knew nothing would go bad soon, not for at least a couple of years. And when it did the government would have to bail out the GSEs and everybody else, so they thought there was absolutely no risk. So they bought and bought and bought and bought.

So it can be argued that the crisis was entirely the fault of GSEs. If they hadn't joined in, all the other fools would have stopped being fools and there would not have been a crisis. The only reason it became a big problem was that GSEs persuaded a whole lot of fools to keep being fools. Nobody else has any blame or responsibility.

They did take on too much risk and grew too large, carrying too much on their book, but they were more the victims than the cause and their bailout was the bailout of their lenders than a bailout of themselves. They should have acted counter cyclically underwriting less while the economy grew and more when it shrank and carried as little as possible. Fools wouldn't have not been fools, tons of private mortgage securities demonstrate that, but their size and number could have been reduced.

Barry, you keep missing the following point:

“Fannie also invests in bits of MBS that have been put together and sold by other mortgage companies like Countrywide Financial and Washington Mutual. It held a little more than $730 billion in mortgage-related securities on its balance sheet at the end of June.

In 2005, Fannie and Freddie purchased 35.3% of all subprime MBS, the publication estimated. The year before, the two purchased almost 44% of all subprime MBS sold.”

Unfortunately, it doesn’t discuss their share before that, but it’s clear that they had purchased 44% of all subprime MBS sold in 2004. In other words, they were arguably worse than the securitizers; they were the ultimate investors propping up demand for the subprime securities.

GSEs were the *ultimate investor* in a very large percentage of subprime. That's arguably worse than buying, guaranteeing and selling subprime, because they were actually increasing demand for the assets, which encouraged banks to lend with lower standards.

Enough with the "we have a monopoly on reality" meme.

That's all.

Wow! Excellent catch. So not only did the hold 50% of all mortgage backed securities, they also purchased over a third of the subprime issued.

Gee, I wonder if the cognitive dissonance will compel Ritholtz to chance his ideology.


This is a great point that never seems to come up. Fannie and Freddie bought the AAA notes backed by the pseudo-conforming mortgages from most subprime deals. And they bought them at lower yields than the other AAAs sold to private investors. That's subsidy.

They were also the intended exit for most sumprime loans, as the borrowers were expected to refinance into a lower rate gov't mortgage once they had repaired their credit scores through a clean pay history. Take away a cheap gov't exit and they would have required a higher coupon. Another subsidy.

In short, the gov't/fannie/freddie were so entangled in the mortgage market in every which direction that to absolve them from blame is ridiculous.

Oh, please. The McClatchy article is another left-wing hack job just like Ritholtz' refrain and it completely ignores the fact that subprime was only one component of an overall problem of lax mortgage lending standards that led to the crisis. Where is the response to Cowen's point 3, the Kling Article where we saw that the serious delinquency rates for the GSE loans is awful as well, even for conforming loans?

Where is the objective, non-ideological accounting of why the biggest players in mortgage securitization played no major role in the crisis? I can provide the opposite -- credential leftists and independents who recognize the role of Fannie and Freddie. Would Ritzholtz have us believe that conservative ideologues have infected the minds of Gretchen Morgenson and Joshua Rosner?

Here's my favorite quote from the McClatchy hack-job:

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.

Brilliant. Gloss over the Bush administration's actual clarion calls about Fannie and Freddie as well as it's 2003 efforts to fix the oversight of the GSE's (which failed when the effort was smeared as a heartless Republicans hurting poor people) AND throw in the race card to boot. In fact those "ideologues" at the AEI were making clarion calls about the loosening of lending standards at Fannie and Freddie back in 1999.

Ritholtz actually compromises efforts to reach common ground on the causes of the crisis because for all of his posturing about being objective, he sticks exclusively to rigid ideological talking points. So it's not enough for him to argue that the GSE's were not the sole cause of the crisis or that they weren't the primary crisis -- no from Ritholtz' account they had nothing to do with it.

Nope, in Ritholtz' tidy ideological bubble, Fannie and Freddie are just a couple of irrelevant, albeit corrupt, public-private partnerships that happened in 2008 to hold $5 trillion dollars worth (about half) of the nation's home mortgage debt and which just happened to lower lending standards in 1999.

I'd love to address the other side of the financial crisis -- the pull from government regulated entities that were required to purchase AAA securities and thus created the demand for these instruments or the biggest evildoers of all, the heavily regulated, government sponsored trio-poly of the rating agencies, but it's hard to get to these topic when we have true believers like Ritholtz trying to issue get-of-jail-free cards to the GSE's.


On 4., I think there may be a difference in the implicit government subsidies to the different institutions. In 2008, the Fed and Treasury gave major support to the banks and it's not clear that all of it was paid back. E.g., the100 cents on the dollar treatment of AIG's obligations to the big banks. Since then, Fed policy has provided major support to all the big banks via purchases of mortgage-backed securities, paying interest on reserves, and its interest rate policy. I am under the impression that support to Fannie and Freddie is more explicit, will support to the banks is implicit.

The mortgage market is clearly still in terrible shape, and Fannie and Freddie are absolutely crucial to the government's attempts to shore it up;. It's certainly possible that if the government weren't supporting Fannie and Freddie, the banks would be in a lot worse shape.

On causation (5.), clearly there are multiple causes. I doubt one can ever make a semi-precise judgment of in what proportion every party and factor is to blame. However evidence on what Fannie and Freddie did alone or on the mortgage market alone is insufficient to evaluate their role in the big picture. That said, I think it is quite possible to arrive at a consensus on the fact that Fannie and Freddie were ultimately very badly designed institutions that acted horribly.

I don't wish to sound too oily, but why, Mr Cowen, would a chap of your standing give a hoot about what Broad DeLarge has to say?

wtf ...

It's spelled "DeLing."

> 4. Following the crisis, banks recovered and paid back virtually all of their bridge/bailout. The mortgage agencies remain hundreds of billions in the red. And yet the agencies had not much to do with the crisis?

much of the "loss" at present is different accounting standards - though they may ultimately show a loss. they are at present highly over-reserved (and forced by the treasury to keep their reserves in non-interest-bearing instruments for punitive reasons). possibly their accounting is politically driven; we should see losses turn quickly to gains when *someone* needs to be re-elected. tyler you of all people should understand this - given that they are essentially government agencies their incentives are to signal very different things than the banks.

the other issue here is that the agencies have been prohibited from raising their fees and have supplied credit at below-market rates since being taken over. clearly this has kept them from making money! it has also supported housing price levels during the crisis, thereby supporting balance sheets in the economy at large. you may or may not think this is a good idea, but it's government policy after the crash, and not policy before the crash, that has determined this.

The notion of "moral hazard" seems conspicuously absent here: without the backing of F&F, banks would likely have been far less able/willing to underwrite so many mortgages based on optimistic assessment of property values to borrowers who were unable to repay.

A more significant question, though, is what would a "healthy" mortgage market look like? It's simple enough to say in the wake of a collapse that the market was thoroughly "screwed up" - but without a model or even a viable notion of a sustainable and functional market, the road back to wellness (and the safeguards to maintain it) remain unclear.

This is just hand-waving, and Fannie and Freddie were big and I don't like them and they lost money, therefore they must have made a major contribution to the crisis. You have to show how that 6.8% of bad loans they made caused the banks to collectively lose their minds and go insolvent and bring down the financial system (and if you believe they've recovered, even after all the free money they got, I have a bridge to sell you)

I don't like Fannie and Freddie that much either.

- Back in prehistoric times, you could make a case that there were a lot of small banks who knew their communities well and had a lot of good lending opportunities, but were capital-starved due to inefficient capital markets. Post-Glass-Steagall, there were no mega-banks with the kind of clout to create a standardized mortgage market. So there was a rationale for Fannie and Freddie. (I'm not saying it was a perfect solution, just that there may have been an actual market failure justifying a response)

- In the 1980s, computers and telecoms got cheap, mortgages got securitiized. Over 20 years the mortgage market became a national market dominated by a few big banks and automated underwriting. The original rationale for Fannie and Freddie no longer exists.

- The invention of securitization set off a tug-of-war between Wall Street and mortgage originators. The banks and S&Ls questioned why Wall Street was making a fortune securitizing, and started their own captive securitization operations. Wall Street responded by creating captive mortgage originators - the worst of the worst in underwriting standards, because they never had local real estate knowledge and an underwriting culture to begin with. And now moral hazard set in at the banks too, because they were no longer keeping their mortgages.

- 4 additional factors kicked in.
- The mathematical models were based on historical standards and default rates, and didn't recognize the new environment
- Risk-based capital standards put a premium on AAA
- Compliant bought-and-paid-for credit agencies allowed the creation of a bunch of bogus AAA securities for purpose of regulatory arbitrage, demand for those stoked increased lending to create them
- Greenspan dropped rates, destroying the yield curve net interest margin, and banks reached for yield, and started marketing products like option ARMs

The result was a big bubble and housing crash.

But that's still not sufficient to explain how that led to an epic failure of the entire financial system. Now you have to look at how banks and securities firms ended up with massive leverage and insufficient capital to withstand the crisis; and how they were allowed to create complex, opaque derivative interconnections that meant one failure would take down all the others. You have to look at their moral hazard and lack of oversight.

Finally, the open secret is that guys like Wallison are bought and paid for by people like Cliff Asness and Bruce Kovner. If their interest was served by the opposite point of view, that is what would be manufactured and spun by a massive PR machine. My advice to anyone who wants to sign on as a foot soldier in that effort, would be to either dig into the granular facts instead doing a bunch of hand-waving, or at least make sure they are properly compensated.


Your view is also the common-sense view of the crash from down here on Preston Farms. It seems clear that banks/funds were chasing returns which they thought were guaranteed through some magical mathematical process of financial rating agency alchemy (not to mention these guys also wanted those securities to feed the growth of the world's largest casino, the CDS Palace, for "hedging" purposes only *cough* gambling) created an extremely phony demand for mortgages. All enabled (created?) by Greenspan on rates (with a dash of purposeful regulatory misfeasance & malfeasance).

I am surprised that you fail to mention the book, "Reckless Endangerment". This crisis was years in the making.

Yay! If there is/was already plenty of lending, then we don't need them!

This is a tricky post. At first it looks like Tyler is going to debunk the arguments which say F&F were not the cause of the financial crisis, but then in #5 Tyler agrees that F&F were not the cause. He wants to have his cake and eat it, too. Which is not really surprising since Hennessey et al argue in their dissent to the financial commission report: "Fannie Mae and Freddie Mac did not by themselves cause the crisis, but they contributed significantly in a number of ways."

Those who argue that F&F were a major cause/contributor to the crisis like to do so because they see these companies as agents of the government. Therefore, blaming F&F is equivalent to blaming government interference in the market for the crash. But I think you have to ask yourself why F&F got so out of control. Was it because they were government agents or because they were private corporations? The corrupt heads of these companies were not compensated as if they were government bureaucrats. I would argue that it was the incentives of the private corporation that caused F&F's bad behavior and not the fact that it was guaranteed by the US government. After all what was the great difference between F&F and the other 'private profit/public loss' financial corporations?

Ha-Joon Chang argues in 23 Things They Don't Tell You About Capitalism that there are no free markets, that all markets are political. (I may be misinterpreting here. I don't have a copy of the book with me to check) And I think this argument about F&F proves his case. If economics had a solid empirical footing, then economists would not be divided along partisan lines which we clearly see here.

Your last paragraph - spot on. It is the constant framing of issues of governments vs markets that:

a) Makes no sense unless you want no limited liability laws, 100% free immigration, no taxes, no slave labour laws and probably loads of other hidden laws that I don't know about that make capitalism function well.
b) Gets us nowhere.

The whole 'government caused the crisis' argument is just economic exceptionalism (the economic sphere is completely different from others and can be separated out).

Say, for example the government opened or subsidised a wave of new nurseries for poor children. But there is a mistake – perhaps some information was leaked, a website was hacked or some such. In any case, some of the nurseries end up being run by paedophiles. Would you blame the government for opening the nurseries? Of course not; the paedophiles are to blame. Similarly, who cares if the government guaranteed deposits, if they encouraged home ownership, if they kept interest rates low. That is no excuse for widespread looting, rent seeking and fraud.

Similarly, who cares if the government guaranteed deposits, if they encouraged home ownership, if they kept interest rates low. That is no excuse for widespread looting, rent seeking and fraud.

It has been argued that if the government provides private businesses with opportunities for fraud, then private businesses have every reason and justification to take those opportunities.

After all, if they don't, somebody else will.

Defrauding government is natural, normal, and the American way. And it has been argued that the best way to prevent this is to do away with the government. If you personally get defrauded that's a sign that you did not do due diligence. Perhaps you might attempt private arbitration, and if your fraudster refuses to accept arbitration then that's something other customers might notice as part of their own due diligence.

I am not kidding. There really are people who argue this way.

It's not as if the government just provided an opportunity for fraud, it very explictly told the banks that they should lend more money to house buyers, especially the poor ones.

It didn't tell them to repackage those loans and bet against them whilst selling them to their clients, though.

That was the diffference between a billion dollar housing bubble and a trillion dollar catastrophe.

You see no difference between:
- the government setting rules about fraud and boundaries; and
- the government being the motivator and conduit of economic activity?

All markets are affected by the legal framework, and by natural and political boundaries. But here, USG was the source of the buying power, and directed it to certain groups.

Well, that's an empirical question that we are trying to answer here. Overall, it seems that Fannie/Freddie had to follow the market to keep their share rather than lead it, and by 2008 they had a low % of the offenders. They are also not among those who engaged in IB rentiering/defrauding, so I think it's hard to pin it on them.

It's very important to define what, exactly, is meant by "crisis." The government undeniably played a large role in the housing bubble and took hundreds of billions of losses through the GSE's. Politicians up for reelection also had little reason to want regulators to actually contain risks on bank balance sheets. While the bubble was going on, it wasn't just Lehman's CDO desk which was doing well. The bubble enriched many middle-class Americans as well. So if crisis is a massive loss in the mortgage market (securitized or otherwise, conforming or otherwise), then yes, the GSE's played a big part in it.

But if the crisis is defined as a bank run which pushed unemployment from 5% to 10%, I disagree strongly that the GSE's caused the Great Recession. We had massive mortgage losses in 2007-08, but we also had massive equity losses in 2001, massive Asian currency/debt losses in 1998 and massive junk bond and S&L losses around 1990. I do not remember any of these massive losses causing 10% unemployment.

As Delong argued in late-2008, the big issue resulting from Lehman's collapse was that the risk premium soared for nearly all assets. Except for assets with backing from the Treasury, all assets massively fell in price simultaneously. As Sumner has tried to say up, down, sideways for years now, this does not happen merely because we overleveraged and had a housing bubble. It happens when the Fed hits the zero-bound and the Fed does not engage in unorthodox open market operations to get around the zero-bound. That, and only* that, is what caused 10% unemployment and a massive drop in national income.

Every cause proposed other than the zero-bound, overleveraged Americans, business confidence, greedy bankers, Barney Frank and GSE's, whatever, is akin to blaming Jews and Witches for the Black Plague. The zero-bound is the only thing that actually makes sense to me and everything else is superstition we believe to reconcile the Great Recession with whatever political beliefs we had before.

* I will admit there is some structural unemployment, but it's quite small. If most unemployment is structural, why didn't unemployment soar in 2007 and most of 2008, when the housing market already tanked? In light of unemployment taking off in September of 2008, it only makes sense that most is cyclical.

Well, I think it is clear (and I don't think Tyler says otherwise) that the GSE's were not 'the' cause for the crisis. The problem is that Krugman, DeLong and all the rest of the politburo say that GSE's were not even an important factor in the crisis. Most of the times they use half-baked stats to make their argument but the underlining reason is that they actually like GSEs and think that anyone trying to blame them is really 'trying to blame the poor who took loans' as they say it.

in my non-economist opinion, just the fact that the GSEs existed is already a reason to keep them as part of the equation. There is no way banks could do what they did if the easy money from GSEs was not there to enable them. The share of the blame is debatable and I don't see how that could ever be defined fairly. Let's just agree that we need to get rid of GSEs and go from there (i wonder what Krugman would say to that).

What the ... you're in _Fairfax_ on a tenured professor's salary on a lazy Saturday morning and you're having _breakfast cereal_? Tyler Cowen, gourmand who leads me to all the best local restaurants, is having frickin' Froot Loops? Damn, I made waffles. You're welcome to one.

I know a master brewer, with national gold medals, who drinks Pabst on the weekends.
I guess the palette needs a reset every so often.

Well, he is a smart master brewer, and understands you don't drink your profit.

You write: "The mortgage market remains screwed up to this day . . . ." Using colorful colloquial language has the drawback of imprecision. It is far from clear what you mean by "screwed up." What, exactly, is wrong with the mortgage market (in your view)?

In today's mortgage market, where is the financing for new mortgages coming from? Pretty much none of it whatsoever is coming from the private sector, with no sign that this will change in the foreseeable future. Surely that qualifies as a "screwed up" market, if it's a market at all.

The biggest impact Fannie and Freddie had was when they first their reduced their underwriting standards in a misguided attempt to solve the then real problems of redlining, they changed the rules of the game.

That then encouraged others to get... greedy... and to start making loans they knew were not the best quality since they knew that Fannie and Freddie would buy them. The next step was to start using those new underwriting guidelines on ALL the loans they were making. Finally, after the money started gushing in - even those who had been reluctant to take part - felt they had to join in to stay competitive - and all hell broke lose.

So, IMHO, if Fannie and Freddie had not started buying loans that were not properly underwritten, this whole cycle might have been avoided.

There is some interesting "top down" analysis here, which is a valid point of departure, but misses the feedback dynamics that occurred in real time. Here's the look from the "bottom up", from someone who has been in the mortgage industry for 30 years and saw the changes occur as they happened.

Coming out of the S&L debacle through the early 2000's, FNMA and FHLMC standards were by and large reasonable and prudent, and given the size and scope of the institutions (not many portfolio lenders operated throughout the country then) their guidelines were the de-facto industry standards for residential first mortgage underwriting, especially fixed rate loans and "no negative" ARMS. Non FNMA first loans were by and large ARM loans held and serviced by the institutions granting them. Around 2002-2003, in the context if exploding real estate prices, non FNMA lenders became far more aggressive in the range of products offered, more competitive in their spread to FNMA product, and remarkably more lenient in their underwriting standards.

A kind of Gresham's Law process took place, whereby bad underwriting standards drove out good underwriting standards. By 2004-2005, it was impossible for lenders using traditional FNMA/FHLMC underwriting standards to broadly compete against lenders offering "no documentation-no down payment loans" in some form or another, especially in the purchase market that was driving real estate values. Realtors came to expect offers with no financing contingencies, accompanied by a pre-approval from a lender known for their easy approach to loan qualifying. In fact, given the limited experience of many newcomers to the industry at that time, buy 2005-2006 you had a whole generation of Realtors who simply had no experience of any other way to finance the purchase of a home.

My understanding is that FNMA/FHLMC's share of originations fell though out this time. So it's not surprising that they progressively loosened their own guidelines, since to do otherwise would have further reduced their market share, but in my experience they were always following the market, never in front of it.

Here's what I think is not being seen by the top down view. Once a system evolved whereby a critical mass of mortgage originations occurred using historically substandard underwriting rules, these substandard rules became the competitive environment in which every lender had to operate. Everything else followed from that.

I guess the question is, "Why does a Government Sponsored Enterprise need to fight for market share?" Fannie and Freddie should have refocused on their mandate instead of dropping their standards.

Because they were dual private/public entities, government-backed but for-profit. That's the real problem here, something that's being overlooked in the Wallison/AEI propaganda campaign.

Exactly. You can make an excellent case that the way their structure should never have been allowed to evolve in the way that it did, but that's not the argument here. The fact remains that a deliberate decision was made by the responsible regulatory agencies to allow loans to be made on a large scale using standards that any reasonable person could see were not sustainable. Once that happens, market incentives take over, and drive subsequent events. The rest is just details.

The GSEs were very large buyers of the AAA paper that was generated by the sub-prime securities. They needed those to meet their HUD low income housing goals. When those markets failed, the losses generated by those loans were what killed their their capital so quickly and drove them into government protection.

That's the right wing myth, but just for fun can you provide an objective source for that rather sweeping statement.

The debate as to "who caused the housing debacle" is interesting, and yet I am absolutely shocked by how narrow the knowledge base seems to be among finance and economics bloggers. To be explicit, the attempt to pin most of the blame on one institution strikes me as absurd. Yes, the Fed failed tremendously in allowing super leverage, by extending low interest rates, and by abdicating their duty to insure the stability of banks. Yes Congress bears a large blame for initiating and then incessantly raising the "affordable housing mandates" on the GSEs from 1992 onward. (Forget the CRA. It was the "affordable housing" percentage mandates on publicly-traded shareholder entities F/F, even as they pumped out huge dividends and share-trading profits, that made no sense whatever. When trading "Agency bonds" (in my long experience) there was a premium to be had over T's "because they are not full-faith-and-credit bonds." Comes the crises, the entire financial world (and most politicians) support the utter propaganda that somehow the GSEs are not merely federally chartered, but are the financial burden of the tax-payer, an absurd but successful swindle on tax-payers which continues. The bond-holders should have taken a haircut, and quickly, under the conservatorship. That would have put the FFandC premium where it bolonged, on T's. The frequent failure to identify F/F's role as purchasers of MBS, not merely the guarantor of individual loans, also astounds me. In conclusion there are a thousand or so politicians, regulators, and executives who bear almost all the responsibility for the magnitude of the eventual crisis. Did any institutions have the POWER to stop the bubble? The Fed and Congress did. It really is that simple. And that hopeless.

You are making two separate arguments, same as Tyler does. 1) There are serious flaws in the GSE structure that expose the taxpayer to excessive risk, and should be addressed; 2) they (and/or their affordable housing mandates) were a principal cause of the financial/mortgage (strong/weak) crisis.

I thoroughly agree with 1). But 2) doesn't hold up. GSE losses are principally on Alt-A loans and MBS, which actually made it harder to meet the affordable housing mandates, because they were primarily to higher income homeowners and thus increased the denominator of the affordable percentage marks the GSEs were supposed to meet.

The GSEs got hosed for the same reason Wall Street got hosed: short-termism, reflected in everyone's compensation structures, and a terribly flawed securitization machine. They were a little late to the game, but that's only because they had to work around FHFA, while the i-banks simply had to convince the hapless SEC's "Consolidated Supervised Entities" program that they had sufficient capital against their banking risk. So should we get rid of the GSEs? Yes, but not because their affordable housing goals drove risky lending.

I thought I made four arguments! As to the GSE's, their dumping of their anti-predatory lending rules in 2004 indeed increased their guaranteeing of risky loans and did help them meet their "affordable housing" guidelines. Yet, in the overall assessment of Fannie Mae's contribution to the debacle, many actions are key. As they lost business to the shady wall-street-backed lender-securitizer mills their shareholders pushed them into lowering their lending standards, which led to a dramatic increase in sub-prime ("prime opportunity"...) loans and MBS on their books. As for the "denominator" argument, the "affordable housing" guidelines function by market: Fannie Mae believed and reported that it was making very substantial guarantees on loans on properties that were "at or below the median housing price" in several huge markets, notably California and Florida. Above all, when Ginnie Mae was split out from Fannie Mae, the guarantees of Fannie Mae solvency legally were ended. We then entered a remarkable period of voodoo financial journalism, with talk of the "implicit" guarantees, despite the lack of any written or statutory support for this "implicit" bit. Do we have more huge "implicit" guarantees out there? Convenient. When the shareholders and executives built the big book of bad loans and MBS, suddenly Congress acted to put the tax-payer's cash in bond investors' hands. It should never have happened. The history of 1990's Fannie Mae political donations and "enemies list" hatchet jobs were the real creator of the implicit backing. Neither we nor our representatives ever provided a before-the-fact guarantee. The opposite occurred: Our representatives had ended the guarantee. A private corporation intentionally decided to lower their lending standards to "win back market share" and create larger bonuses? And we pay the bill? The corruption is absolutely staggering.

I think if Americans look outside their own borders (which many appear to have trouble doing) they will see that similar things occurred in countries without GSEs, the CRA and with tighter monetary policy. For me, that invalidates the general 'gummut did it' assertions more effectively that mountains of statistics.

Gee, wouldn't that also invalidate the general "lack of gummit regulations" assertions?

Obviously, there were a number of important factors including a global credit glut. Everyone all over the world was hungry for yield. That's the pull. The push in the U.S. came from a highly regulated serious of private-public partnerships and implicit guarantees that the GSE's and Citigroup would be bailed out.

So overall, while one could argue that the cheap capital would have found a bubble somewhere, that's a counter factual. The reality is that the global crisis originated from the U.S. housing bubble and that the rest of the world including the European banks were severely affected.

It's a complex causal chain. So while it's easy to identify contributing factors and even key links in the chain, assigning a single proximate cause is problematic.

What I see getting undeserved attention is the focus on derivatives. If a bank's (or GSE's) assets are mortgages at 80% LTV, then a 30% in values decline results in immediate and absolute insolvency. Spreading that risk around has good and bad effects, but the GSE's with their lax lending standards and moral hazard didn't need derivatives to create the unprecedented housing bubble and crash.


'Gee, wouldn’t that also invalidate the general “lack of gummit regulations” assertions? '

No. I forget to mention that the *actual* common theme between the worst affected countries was financial deregulation; similarly, the least affected ones were better regulated.

'So overall, while one could argue that the cheap capital would have found a bubble somewhere, that’s a counter factual. The reality is that the global crisis originated from the U.S. housing bubble and that the rest of the world including the European banks were severely affected.'

I disagree. Iceland fell first, and Northern Rock in the UK went under long before the crisis got going in the UK. Similarly, Ireland didn't fall until a while after the worst of the U.S. crisis. The U.S. was a big domino, but there were many, similar, domestic problems elsewhere.

'Obviously, there were a number of important factors including a global credit glut. Everyone all over the world was hungry for yield. That’s the pull. The push in the U.S. came from a highly regulated serious of private-public partnerships and implicit guarantees that the GSE’s and Citigroup would be bailed out.'

As I mention in one of my posts above, implicit guarantees are no excuse for rent seeking, looting and fraud. If the government wants to give home buyers guarantees, that's fine; they should also add laws to prevent these guarantees from being exploited. I can't see how anyone who disagrees with this general premise can support limited liability laws.

To me, it seems the 'push' came from predatory lending rather than GSEs - this is after reading Michael W. Hudson's 'The Monster', although I admit I haven't read 'All the Devils Are Here', which I believe makes the sort of public-private mixture case you do above.

'What I see getting undeserved attention is the focus on derivatives. If a bank’s (or GSE’s) assets are mortgages at 80% LTV, then a 30% in values decline results in immediate and absolute insolvency. Spreading that risk around has good and bad effects, but the GSE’s with their lax lending standards and moral hazard didn’t need derivatives to create the unprecedented housing bubble and crash.'

The focus on derivatives and IB is not at all undeserved. A single, completely unregulated hedge fund, Magnetar, drove between 35% and 60% of the demand for CDO bonds. Whether GSEs were engaged in risky lending or not, Magnetar's activites were fraudulent (or would have been if the banks hadn't lobbied against regulation) and made the crisis a hell of a lot worse than it would have been otherwise. Similarly, other key players (LB, AIG, GS) made the crisis much worse then the simple housing bubble that the GSEs may or may not have created.

I am confused that you claim derivatives 'spread risk around' - after 2008; it is clear that they concentrate it (unless you meant spread in a pervasive rather than diffusing manner).

'It’s a complex causal chain. So while it’s easy to identify contributing factors and even key links in the chain, assigning a single proximate cause is problematic.'

In this specific case, yes, but my general point is that unregulated finance/loose capital flows are simply a bad idea, and seem to be the common theme between crises.

As detailed in Alyssa Katz's 2009 book "Our House" and Gretchen Morgenson's 2011 book "Reckless Endangerment," James Johnson of Fannie Mae was, along with Angelo Mozilo of Countrywide, one of the earlier executives to figure out how playing the Diversity Card (we're fighting redlining, we're closing the racial gap in access to the American Dream, etc etc) could line their pockets.

In the 1990s, the Democrats loaded the gun of the mortgage meltdown, but it was George W. Bush who pulled the trigger.

From my review of Katz's "Our House:"

Looking back from 2009, Katz asks:

“How did Fannie Mae and Freddie Mac … turn into the world’s biggest funders of Wall Street-backed subprime mortgages? … It all started with the best of intentions, with … the activists who demanded bank loans for the poor and urban.”

Democrat Jim Johnson took over as CEO of Fannie Mae in 1991. He soon came up with a nice round number as a goal: one trillion dollars to lend by 2000 to ten million incremental homeowners. Katz writes:

“Jim Johnson only needed to point to the Atlanta Journal-Constitution’s [Pulitzer Prize-winning investigative series] The Color of Money to show that he was embarking on nothing less than a civil rights crusade. …”

Fannie Mae wanted to raise the homeownership rate to 75 percent, which meant, Katz notes, that “Consumers would have to borrow more and pay less up front.”

Johnson, whom Barack Obama had put in charge of vetting his Vice-Presidential candidates until it was revealed that he had snagged a cheap mortgage as a “Friend of Angelo” [Mozilo], quickly found a private partner:

“By 1993, he’d made a deal with [Mozilo’s] Countrywide to buy $2.5 billion in loans for lower-income and minority borrowers. Financially, these homebuyers would be a motley lot, with no money in the bank, other debt to deal with, and less than stable employment. … Fannie Mae targeted much of its advertising budget to Black Entertainment Television and made a sponsorship deal with Univision, the dominant Spanish-language TV network. … The advertising campaign explicitly targeted young families, new immigrants, and single parents.”

Katz points out the culture-changing role that Fannie Mae played:

“More than anything, Fannie Mae made working people comfortable with the idea of taking on vast debt as the price for participating in the American Dream. From 1989 to 2004, mortgage debt for low-income people increased by 46 percent, compared with just 15 percent for upper-middle-income and 5 percent for high-income.”

Johnson, to his credit, retained important limits on debt, such as 3 percent minimum down payments. But George W. Bush would go to war against down payments in 2002.

Meanwhile Johnson’s allies in the Clinton Administration decided to goose the homeownership rate to at least 67.5 percent. But who was left to lend to? Katz comments:

“The reality was that the consumers the [mortgage] industry had depended on … were spoken for. More than nine of every ten suburban middle-class white households owned their homes. If the industry were going to grow, it would have to tap new borrowers, and HUD’s research team concluded that those were going to be urban, black (only 43 percent were homeowners), Latino (41 percent), and people under age thirty-five (just 38 percent).”

So Clinton decided to enlist the real estate and financial industries in Fighting Racial Bias for Fun and Profit. Katz quotes him from a 1994 speech to the National Association Of Realtors Conference:

“‘I want to target new markets, underserved populations, tear down the barriers of discrimination wherever they are found,’ he proclaimed to cheers at the Realtors’ annual convention.”

Number 4.

Isn't the reason the other players were able to pay back the USG and "appear" profitable because the GSE's are making a market for the billions of dollars of dubious paper that they are carrying on their balance cheats? Without Fannie and Freddie propping up prices in the MBS market the banks would have to write down/off their MBS assets and many would be back at the USG trough trying to save their shareholders.


From my review of Morgenson's "Reckless Endangerment:"

Especially disastrous was the symbiotic relationship Fannie Mae's James E. Johnson cultivated with Countrywide’s Angelo Mozilo.

In 1995, Mozilo agreed with HUD secretary Henry Cisneros to make Community Reinvestment Act-like pledges to lend to minority communities. Mozilo became the leading private sector enthusiast for the Clinton Administration’s National Homeownership Initiative. In 1998, Morgenson and Rosner report,

“Jim Johnson had agreed to charge Mozilo’s company far lower guarantee fees than its rivals on mortgages Fannie Mae bought from the company and sold to investors. … Countrywide soon became the single biggest seller of loans to Fannie Mae. ... Countrywide supplied 26 percent of the loans purchased by Fannie in 2004 …”

Morgenson and Rosner argue: “More than any other mortgage lender, Countrywide was at heart a Fannie Mae clone”:

“Mozilo’s friendship with Johnson had given him a front-row seat for the Fannie Mae way—the deep political focus, the co-opting of regulators, the manipulation of public opinion, and extensive granting of favors to friends and potential foes.”

Morgenson deserve credit for repeatedly emphasizing the role that racial politics played in justifying the credit debacle. In contrast, we saw a couple of weeks ago that Peter Wallison’s dissent to the financial crash report to Congress avoided mentioning the M-word (“minority”), merely saying the quotas were aimed at “lower income” borrowers. To their credit, Morgenson and Rosner use far fewer PC euphemisms.

They also make clear that, while the system of mortgage backscratching perfected by Johnson was very good for racial organizers like ACORN and La Raza, it wasn’t good for the average black or Hispanic in the long run—or even in the short run.

The “diversity” rationale empowered boiler room operators like Countrywide to target, in the name of closing the racial gap, innumerate blacks and Hispanics with exploitative subprime loans. One former Countrywide broker told Morgenson that Countrywide barely broke even on loans in Santa Monica, a high IQ white community home to screenwriters and Hollywood agents. In contrast, at Countrywide’s Slauson office—in the ‘hood under the LAX flight path—brokers were expected to pile on points in the fine print because the borrowers seldom crunched the numbers themselves.

Was this predatory lending? Sure!

But, remember, it was also predatory borrowing, predatory brokering, predatory securitizing, and so forth. ...

But this brings me to a criticism of Reckless Endangerment. In Johnson’s defense, he was a more prudent crony capitalist than those who came after him in the Bush II years. Johnson maintained a certain level of cynicism that kept him from, say, pushing hard for ridiculous excesses such as zero down-payment mortgages.

Like Katz’s 2009 book, Reckless Endangerment focuses upon how Democrats like Johnson had slowly undermined the system in the 1990s.

But the Housing Bubble didn’t get supersized until after George W. Bush’s October 15, 2002 “White House Conference on Increasing Minority Homeownership”. There, the Republican President recklessly denounced down-payments as the foremost hurdle to closing the racial gap in homeownership.

That turning point has disappeared down the memory hole—Reckless Endangerment doesn’t mention it—perhaps because it doesn’t fit anybody’s narrative.

But, as I’ve pointed out repeatedly, it was the Democrats in the 1990s who loaded the gun, but, more than anybody else, it was George II who pulled the trigger.

Re: To their credit, Morgenson and Rosner use far fewer PC euphemisms.

If the problem was too many loan to low income borrowers, why wade into the swamp of US racial politics? Simply say "low income borrowers". There's no need to start specifying race unless the point is to scapegoat black people and Hispanics to allow the white middle class to feel blameless about its own follies.
My own opinion is that the role of speculation (mainly by middle class people) is routinely ignored or downplayed in these analyses. The data itself tends to obscure this aspect of the crisis due to the prevalence of so many "liar loans"-- not just people lieing about their income, but also lieing about their intentions. We have cases in our mortgage database where I work (a major Wall Ssteet firm) where the same individual was claiming to be an Owner/Occupant of six different properties and those properties were all classified as Owner Occupied, which they obviously were not.

"why wade into the swamp of US racial politics? Simply say “low income borrowers”. There’s no need to start specifying race unless the point is to scapegoat black people and Hispanics to allow the white middle class to feel blameless about its own follies."

Excuse me, but James Johnson of Fannie Mae, Henry Cisneros of HUD, Angelo Mozilo of Countrywide, Kerry Killinger of Washington Mutual, and George W. Bush of the 1600 Pennsylvania Avenue were all specifying race. They all argued that making it easier for people with dubious credit to get mortgages with lower and lower downpayments and fewer documents was a civil rights issue. They all played the race card in order to debauch traditional credit standards. Look it up.


I don't know what you're talking about with the middle class (*Flip this house!!!*) at all.

Television shows that focused on how to make lots of money gaming the housing market should have been a warning sign for everyone. Once middle class speculators are pulled into a market, you know it's about to pop.

Everyone here is missing the point. The point is that Tyler has been drifting too far towards the center for his paymasters at the Mercatus Center (i.e., the brothers Koch). This post and the one on the US's AAA rating yesterday are just gestures towards reestablishing the right wing street cred that keeps his funding secure.

Speaking of Barry Ritholtz, in 2009 he came to my iSteve blog to debate me on the proposition: "Diversity played a major role in the mortgage meltdown."

You can read our debate here:

It's in reverse chronological order, so start with the post at the bottom.

This should be put in giant caps:

"And the crisis was not just about subprime."


Anyone who suggests that is is is BULLSHITTING you.

In an earlier post "Sentences to scare you the most important blog post in the world today" you referenced a blog post that claims that sovereign debt is playing the same role as mortgage backed securities in a new AAA-bubble. It seems to me that there are major pressures out there for people with money to invest to put the money into "safe" assets and this is an important contributor to the modern type of financial crisis. And this is quite independent of anything that Frannie (the two of them) did. Of course there are other causes out there, but the proximity of your previous post to this post leads me to make this comment.

It seems clear to me that the Wallison crowd wants to single out Frannie as *the* cause for ideological reasons. But that sort of thinking obscures our understanding of a really complicated event.

Everyone here is missing the point. The point is that Tyler has been drifting too far towards the center for his paymasters at the Mercatus Center (i.e., the brothers Koch). This post and the one on the US’s AAA rating yesterday are just gestures towards reestablishing the right wing street cred that keeps his funding secure.

+1, Foster Boondoggle.

Tyler's intelligence out to allow him to realize that throwing out this nonfactual, hand-waving, unempirical water-cooler baloney in service of a highly disputed point should result in being plowed under and mocked.

There was a great presentation at the Milken Institute (I blogged it here - ) which made a key, but little-mentioned point. The stocks of Fannie & Freddie made up a bunch of the "A" class equity in a number of banks and other financial institutions. So when they imploded, along with the rest of the mortgage markets, they had a vastly greater impact because they wiped out the capital of a bunch of other banks and - voila - financial crisis.


In May 2007, I went to a talk given by the then chief economist of Fannie Mae entitled 'The Subprime Crisis: Mountain or Molehill'. They concluded 'It's no big deal'. The audience (credit scoring and lending experts) disagreed. Guess who was right?

That was just 2 months before everything crashed starting in July 2007.

Well into 2008 it was the consensus view that we were due for, at worst, a mild recession. It's still something of a mystery why the housing bust metastized so abruptly and villently into the rest of the economy.

To me it is beside the point, if Fannie and Freddie took part at all it proves that Government regulation is not the solution. The monetary system has feedback problems and that needs to be fixed. Anything that can happen will happen and in this case it looks like Governments tendency is to not stop the bubble but to partake. With many more voters being home owners than home buyers how is a politician to win by promising lower home values.
We need a monetary system with a fail safe so that money supply's tendency is not to collapse when a bubble bursts.

Or we could just stabilise M2 by banning/limiting loans to speculators, as both Keynes and Adam Smith suggested.

Peter Wallison??

…on November 3, 2010, the day after the mid-term congressional elections in which Republicans took control of the House, Republican Commissioner Peter Wallison emailed Republican Commissioner Douglas Holtz-Eakin: “It’s very important, I think, that what we say in our separate statements not undermine the ability of the new House GOP to modify or repeal Dodd-Frank.”

There's an impartial commissioner for you.

I don't see how anyone can even dispute #2. I mean, wasn't that the explicit purpose for their existence?

Also, Megan has linked the working papers by which they attempted to ease credit via securitization. They led, the market followed.

Tyler et al -

Can we throw out the two clearly pointless positions (GSEs had nothing to do with the crisis; GSEs were entirely responsible for the crisis) and realize that (1) the truth is as per usual somewhere in the middle (2) no analysis of the data can give us a decent answer to the question. The first point is so banal as to be uninteresting, although it does defuse the partisan flag waving. The second is the significant one and should really be given more attention.

There's simply no way to line up the data in such a way as to give a clear picture of the responsibility of the GSEs in the crisis. The right wing criticism is to a certain extent irrefutable: there's simply no way evaluate the mortgage markets or events leading up to 2007 without them, since they had both direct (i.e. balance sheet) and indirect effects. The second though is immeasurable in any formal way. How can we evaluate the events of post 2005 had GSEs not changed purchasing standards? Might the crisis have played out differently? The counterfactuals are endless and aren't readily analyzed by mathematical methods, since it's patently clear that GSEs were significant players in the market and altered other players. While the ceteris parabis assumption makes for interesting research papers it does not reflect reality particularly well, especially when applied to actors that significantly affect the market.

What both left and right wing theorists seem to be missing is the true "take home lesson" of the events: that mixed markets with poor incentives and regulatory capture are a powder keg. A market that was heavily regulated might not have seen the same excesses from executives seeking gratitious paychecks; a less regulated market might never have gotten so inflated without the aegis of the state. Further both parties have been entirely too quick to treat housing as a social issue rather than as an economic issue. The right for example under the guise of President Bush's "ownership society"; the left in the name of fighting red-lining to name one issue. Even today few seem willing to publicly accept what ought be privately obvious: that not everyone can or should own a house and increasing marginal ownership rates is extremely difficult and expensive. Instead of treating home ownership as a sacred asset, treating it as an investment like any other that carries risks and rewards is the necessary underpinnings of any future regulatory regime. If regulatory efforts were directed to ensuring basic fairness, protecting against fraud, and ensuring the marketplace ran smoothly, the system would likely be much more stable over time.

Instead the current mode of thinking is the aforementioned sacred trust. We've tried a short-term tax credit (ineffectual). Now it seems piecemeal efforts to prevent foreclosure, modify mortgages, and otherwise interfere with the functioning of the market are in order. How this serves any interest is beyond me. If we stopped treating housing as a sacred trust, it might be possible to adopt the prudent policies that might bring a (quicker) end to the Great Uncertainty that has followed the Little Depression. Chiefly, policy could be aimed at ensuring people are in a house proper for their wealth either by loan modification or by expedited foreclosure that on a large scale could hopefully send house prices tumbling. This seems odd to many, but the only way to restart building and mobility within the market is for their to be genuine gains to be realized. Currently, in many locals, house prices have fallen to an index level of 100. This is not indicative of a market that is going to offer appetizing returns to investors over the long run, as such it is not hard to see why capital has been slow to flow into the sector. The keys to allowing this process to happen with minimal fuss is (1) policies to alleviate genuine suffering caused by foreclosure (2) policies to prevent the downward adjustment to become self-reinforcing, triggering a cataclysm.

One way or another the headache from the debauchery of 2004-2007 has yet to be fully worked out. We are still not as rich as we think we are, writ large, but want to (naturally) pretend otherwise. However if we accept the general tenets of The Great Stagnation argument, it seems hard to argue that the best route is to hide the losses under the assumption that rapid future growth will paper over balance sheet holes. As such the question to ask really ought be: how to we return to normal markets in real estate as quickly as possible? Arguing who caused the crisis has very limited relevance for telling us how to fix it, unless partisans really think that the previous system of mixed free and unfree markets with horrific incentive alignment really is the best vision of the future.

You dance around the issue of "investment". As a capital asset, housing can only depreciate, and not increase in value without constant investment in the housing to more than offset depreciation.

Thus, housing is an investment that has a high operating cost, so the only way a house can be a profitable investment is from the rent earned, or imputed.

The taxes on the property are operating costs that can be deducted from the rent income. The mortgage interest can be deducted from the rent income. But then a double deduction is allowed by not taxing the rent income. So as an investment, it is a sweet deal.

Except the banking and real estate and conservative policy wonks have claimed that owning capital is the path to wealth because capital appreciates when it is real estate. If we applied the same logic to cars, we would say "cars gain 10% in value the moment you drive off the lot."

How about the Great Stagnation being triggered by the illogical premise that capital gains value and the tax policy should promote the idea that capitalism is based on capital assets like houses and patents and innovation appreciating in value over time, instead of depreciating.

Since there is no reply, eg, to this, I'd say Cowen is blowing smoke:

Case in point: To support his claim that the Community Reinvestment Act, which requires regulated banks and thrifts to provide credit nondiscriminatorily to low- and moderate-income borrowers, caused the origination of 2.24 million outstanding “high-risk” mortgages, Pinto includes many loans originated by lenders who were not even subject to CRA. In fact, most of the “high-risk” loans Pinto attributes to CRA were not eligible for CRA credit.
(David Min)

In 1994, the Clinton Administration threatened to extend the CRA to non-banks like Countrywide unless the non-banks started making pledges just like they would under the CRA. Angelo Mozilo of Countrywide flew to Washington and signed a deal with Clinton's HUD secretary Henry Cisneros and started making CRA-like pledges. He quickly came to believe his own press releases, put Cisneros on Countrywide's board, and started to make megalomaniacally large CRA pledges: $600 billion in early 2003, after Bush's White House Conference on Increasing Minority Homeownership, then a cool one trillion dollars on January 13, 2005, designating Cisneros as his consultant on handing this out to lower income and minority borrowers.

So, in order to avoid being forced to make CRA-like pledges, Mozilo made megalomaniacally large CRA pledges? Come on.

"It is hard to judge such counterfactuals, but arguably lenders would have demanded more money down and offered fewer 30-year fixed rate mortgages."

Well, the private non-government backed mortgages were all NOT 30-year fixed.

But the the method lenders used to get business was to require less and less and less capital in terms of money down AND income stream.

But offering loans that drastically increased the risk of default, the lenders took huge market share from the GSEs, including FHA which offered true low asset loans to low income home buyers who were not speculators.

The FHA lending fell for the borrowers who needed very low payments to buy the homes they needed for housing and would live in for long times. These loans eliminated all speculation. These loans eliminated refinance. In these loans, the lender takes all the capital gains on the property up to the accumulated subsidy.

Why wouldn't lenders offering loans at loan interest rates and low incomes to borrowers who wouldn't be able to afford the payments when the payments stepped up or the mortgage came due require all the subsidy be repaid out of property capital gain? Wouldn't a private lender require more capital security than the government?

But the private sector ran more of a welfare state system of loans to people who couldn't afford them on the gamble the welfare mortgages would turn these borrowers into non-welfare cases.

" Following the crisis, banks recovered and paid back virtually all of their bridge/bailout. The mortgage agencies remain hundreds of billions in the red."

The banks are not in the red only because the are not required to mark to mark.

The banks are allowed to keep securities at book value until they default. By stretching things out, hundreds of insolvent banks are kept solvent by policy in the hopes the bank profits on the rest of their business will exceed the losses on debt defaults that can no longer denied, debt that lost value as long as five years ago.

However, banks holding GSE secured debt have huge incentives to make an immediate claim with the GSE because that converts debt to cash which increases solvency.

The effect is to speed up recognizing losses on GSE debt, while delaying recognizing losses on private debt until that debt has actually lost all value. Debt secured by 20% when written is written down sooner than debt secured by 5% when written. Debt that is 10% underwater, GSE insured, is resolved faster than debt that is 50% underwater, private non-GSE.

If government takes control of the mortgage industry then who has gained power?

If government takes control of the student loan industry then who has gained power?

If government takes control of the health care industry then who has gained power?

All these posts stating that another post has completely, "missed the point" is missing the big picture themselves. The major tides have shifted. It's right there before your very eyes.

Maybe this has been said already (I don't have time to read all the comments), but I'm stunned that somebody as smart as Tyler would argue with a straight face that "banks recovered and paid back virtually all of their bridge/bailout. The mortgage agencies remain hundreds of billions in the red."

Fannie and Freddie were bailed out by taxpayers, and that cost was public and easily quantifiable. The banks were bailed out by a tax on savers (the Fed's ZIRP), which is not easily quantifiable (but no doubt larger than $200 bb) and still ongoing. If someone lowered the price of your raw material (interest rates) to zero, and you had access to an asset with guaranteed earnings (Treasuries), of course you would make money. We will never know the extent of their "red ink" because regulators made a deliberate effort to hide the losses (regulatory forbearance). Come on, Tyler, you're better than this!

Also, those of us who try to debunk the Wallison/Pinto position do not deny that the GSEs contributed to the crisis. Rather, we object to W/P's attempt to absolve the banks.

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