Is McCain right about Fannie and Freddie?
John McCain, after feinting in the direction of SEC Chairman Chris Cox, has decided that Fannie Mae and Freddie Mac are to blame for all our nation's ills. This would be convenient because Fannie in particular had a long and lucrative symbiotic relationship with the Democratic Party. But is it true?
Fannie and Freddie were freakish hybrids, private when it suited them (such as on payday) but quasi-public when that was more convenient. If Congress had been willing to give them a real regulator with real power, taxpayers might never have had to bail the companies out. And Fannie and Freddie played a central role in the misguided, decades-long effort by Washington to steer investment into housing (and thus, inevitably if inadvertently, away from more productive uses).
Buuuuuuut, when the mortgage markets began to go absolutely crazy in late 2003, Fannie and Freddie were barely in the picture. Here's a chart I've already run a couple of times (GSEs, short for government-sponsored enterprises, means Fannie, Freddie and Ginnie Mae):
Graphic by Feilding Cage/TIME.com
And here's the view of an actual industry expert, Tanta of Calculated Risk:
I think we can give Fannie and Freddie their due share of responsibility for the mess we're in, while acknowledging that they were nowhere near the biggest culprits in the recent credit bubble. They may finance most of the home loans in America, but most of the home loans in America aren't the problem; the problem is that very substantial slice of home loans that went outside the Fannie and Freddie box. ... [T]he immovable objects of the conforming loan limits and the charter limitation of taking only loans with a maximum LTV of 80% unless a well-capitalized mortgage insurer took the first loss position, plus all their other regulatory strictures, managed fairly well against the irresistible force of "innovation." If there has ever been an argument for serious regulation of the mortgage markets, the GSEs are it.
And finally, here's the verdict of a trio of real estate scholars who've been cited in this blog before:
[W]e find evidence that the changing credit regime that took place in late 2003, as the GSE's pulled back from the market for political, regulatory, and market-based reasons, is suggested to be a primary factor reducing the dominance of market fundamentals in affecting house price returns and creating the price-momentum conditions characteristic of a “bubble”.
So the Congressional crackdown on Fannie Mae and Freddie Mac (which came in the wake of accounting scandals and seemed well-deserved at the time) may have been a proximate cause of the housing bubble. And John McCain says he supported the crackdown. This whole thing is his fault!
No, I don't really believe that last part. But it does play up the absurdity of McCain's charge that it's all Fannie's and Freddie's fault.
-
1
thank you, Justin. That was short, sweet and documented.
-
2
If we do find someone or several someones to fault (and it probably won't be the politicians who do so), are we going to give them a stern lecture? I think it might be worthwhile to point out that in a less liberal society, those who are strongly suspected to be at fault in a debacle like this would be taken out and shot. I personally am against violence, but it would serve as a fine deterrent for the future.
-
3
yes...keeping up with the liberal bias McCain bashing theme here on swampland.
-
4
Your chart doesn't go back far enough.
Back when both Democrats and Republicans considered competence important in government, before they forgot the lessons learned in the 1920's about the dangers of unregulated capitalism gone amok, the FNMA worked fine, was well-controlled and well-monitored.
Then the agency was privatized, starting first in 1968, and then set totally loose from its public-interest moorings by the Friedmanite religious fanatics in the Nixon, Reagan and Bush administrations.
Once the greed-heads took it over, its fate was sealed.
-
5
I don't think the Friedmanites ever had much sway at Fannie. It was privatized in 1968 by LBJ to get it off the government's books. And it only grew into a really major force in housing with the collapse of the S&Ls in the 1980s.
But I would agree that Fannie and Freddie should either remain nationalized (or maybe run as utility companies) or busted up.
-
6
Yes, I know FNMA was taken off the books to help hide LBJ's Vietnam War debt, but solid oversight was maintained, even during the Nixon years, as Nixon still valued competence to some degree.
But the 1980's = the Reagan and Bush administrations. The S&L disaster was a result of the same deregulation as the current banking disaster, promoted and pursued by Friedmanites, and that culture eventually permeated FNMA.
It needs to be turned back into a strictly government agency, working strictly in the public interest, not in the interest of a select number of shareholders, and not paying outrageous salary and bonus packages to the technocrats hired to run it.
The same applies to to whatever RTC-like monster gets created for the current bailout. If it's going to buy any bank's bad debt, it needs to include in the purchase package all the bank's good debt, too.
It's time to stop the privatization of corporate profits while socializing corporate losses.
-
7
As much as I Hate to say it, there is something to be said for nationalization. It would remain on the government books and thus, in the public's view. Additionally, I suspect that rigorous oversight of the origination of mortgages will need to be maintained for the next 30 years or so. At least, I hope, so that I can retire without the anxiety that my parents must feel. My .02.
-
8
Re. the chart: How can any of these organizations net share be more than 100% or less than 0%? i.e. how can any one entity have more than 100% or less than 0% of something? Am I missing something here on this chart?
-
9
@pd: Yeah, yeah, that chart drives everybody a little crazy (including me). It represents net mortgage lending flows from the different financial sectors. So if one group is increasing its lending while others are getting out of mortgages as fast as they can, you get that weird thing where some are below 0% and others above 100%. I'd love to have a measure just of new mortgage lending, and I imagine it's out there in some not-readily-publicly-available form, so I need to do some digging to find it.
-
10
[...] was late in 2003 that subprime lending first truly exploded, and when Wall Street pushed aside Fannie and Freddie to become the main buyer of mortgage loans. It was in 2003 that house prices went from mere rising to outright climbing. It was around [...]
- TIME A wedding in the town named Al-Qaeda | http://su.pr/1O95Hk - 1 hour ago
- TIME See the top 10 political sequels | http://su.pr/8MTZv3 - 2 hours ago
- TIME The Sports Illustrated swimsuit issue is out today - check it out at http://www.si.com #siswim - 3 hours ago
Most Popular »
- Undercover Boss Is Phony and Manipulative. But Don't Hold That Against It.
- NH Poll: Dems Face A Thumpin'
- Paul Ryan Won't Run For Prez In 2012
- Today's Health Care Checkup - GOP Plans Under the Spotlight
- Love At First Byte: Your Nerdy Valentine's Day Guide
- CO Gov Poll: Hickenlooper +4
- In The Spotlight, Paul Ryan Faces A Purity Test
- OH Gov Poll: Kasich Maintains Lead
- Driver's licenses for the Internet, Part 2
- Jack Murtha, 77, Dies
- Asian Carp Battle: Foreign Fish Threaten Great Lakes
- Al-Qaeda, Yemen, Wedding: Unlucky Name, Celebration
- Tea-Party Convention: Lessons on Palin and the Movement
- Is the Bible Fact or Fiction? Archaeology's Discoveries
- Venezuela: Chavez Protests at Ball Game Over Electricity
- Spain's Troubled Economy: Fears Over Euro Zone Outlook
- Who Were the First Americans?
- Why China Needs The U.S. -- And Vice Versa
- Marja: Operation Moshtarak Tests Obama's Afghan War Plan
- 'Black Hearts': On Green, Iraq's 'Triangle of Death'
Quotes of the Day »
RSS