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No, Fannie and Freddie did not cause the housing crisis

Paul Krugman puts up four charts that, together, eviscerate the claim that the housing crisis was somehow the product of government policy meant to extend home loans to low-income borrowers. It's a good post to bookmark and simply forward along when friends, family and talk-show hosts trot this one out.

By Ezra Klein  |  June 3, 2010; 12:28 PM ET
Categories:  Housing Crisis  
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I think we all remember when Bwaney Fwank said" Fannie and Freddie are rock solid and don't need anymore regulating". How about Franklin Raines and his $90 Millon he raped from these government institutions? Oh, that's right, he's one of Obummer's pals.

Posted by: elcigaro1 | June 3, 2010 12:48 PM | Report abuse

So how did Fannie and Freddie lose so much money? Wasn't it from buying large amounts of bad mortgages?

Posted by: ElmerStoup | June 3, 2010 12:58 PM | Report abuse

Raghuram Rajan's column is a little like an instructor at a Medical School extolling the virtues of the "bodily humours" frame-work in understanding the operation of the human body, or perhaps that of a phrenologist explaining the operation of the human brain on the basis of the deep understandings gained through his understanding of an out-moded framework.

However, I'd wager that he can create a fine mathematical model. Unfortunately, it's likely to be a model with limited real-world application. Nevertheless, I imagine he still draws a pretty nice salary.

Posted by: JPRS | June 3, 2010 1:00 PM | Report abuse


"So how did Fannie and Freddie lose so much money? Wasn't it from buying large amounts of bad mortgages?"

In answer to #2: Yes.

However, Fannie and Freddie were not the only player in sub-prime nor were they the largest player in the mortgage market at the peak of the housing bubble.

Krugman's information lays out the case well in the post that Ezra links to.

"Non-agency" in the charts that he provides equals "a loan underwritten by private lenders unaffiliated with Fannie and Freddie".

The massive housing bubble coincides with the entrance of secondary lenders like Countrywide into the mortgage market in the 2000s. Those lenders were not issuing loans based on federal standards -- they were basically packaging products that investment banks were able to market to private investors (which in turn provided more financing for more cruddy mortgage products to be sold to unsophisticated or willfully blind borrowers via the secondary lenders).

There's a related issue here too connected to the derivatives market. Derivatives attached to mortgage securities amplified the down-side effect of the mortgage bubble. The derivative market involved with mortgage securities was almost entirely unregulated in the 2000s.

If we just were dealing with the failure of agency RMBS's the collapse of the housing bubble would have been fairly mild and easily contained. The entrance of the new secondary lenders also had the effect of diminishing F&F's own lending standards in order to retain market share.

Posted by: JPRS | June 3, 2010 1:13 PM | Report abuse

Well, if Paul Krugman said it then it must be true.

Krugman is first and foremost a progressive loyalist who shrouds his rantings in econo-speak in a thinly-vailed attempt to appear quasi-intellectual.

This is the same 'economist' who solely blames Greenspan, Phil Gramm, and Republicans in general for the banking collapse, frequently pointing to the Gramm-Leach-Bliley bill (that overturned parts of Glass Steagall) as his 'proof' that the GOP alone was responsible for the financial collapse 10 years later.

This in spite of the fact that the bill was championed by Robert Reich, voted FOR by 67% of Democrats in Congress, and signed by Bill Clinton. Yes, it's all the Republicans fault, isn't Mr. Krugman? I'm sure he has no political angle in trying to deflect blame from Fannie and Freddie.

How in the world can anyone take Krugman seriously? He clearly wants to absolve Fannie/Freddie of blame because people might come to believe the truth about what government takeovers of the private sector can lead to (i.e., failure).

+ Fannie/Freddie ignored all economic rules for pricing risk/return in financial products, because they could. They knew they had taxpayers standing behind them to clean up their mess, so they didn't have to worry about failure.
+Fannie/Freddie provided perverse incentive to (yes, similarly greedy) private banks to do likewise when they bundled and sold high-risk mortgages to....guess who, Fannie Freddie. Banks knew that Fannie/Freddie would buy their crappy product, with little if any due-diligence as to the credit risk of said product.
+ And, Fannie/Freddie effectively controlled more than half of the housing loan market.

Yet Krugman wants to spin stats into giving Fannie/Freddie a free pass?

I normally don't resort to name-calling, but when I saw Ezra reference these charts by Krugman as 'proof' of Fannie/Freddie's innocence in our economic situation, I thought "what an idiot". Krugman, I mean. Not Ezra. Well, maybe both.

Posted by: dbw1 | June 3, 2010 1:15 PM | Report abuse

As a follow up to JPRS (good post!), yes, Fannie and Freddie lost money making bad home loans. Since they're chartered entities that exist only to purchase mortgage and provide liquidity to lenders, it would be hard to lose money doing something else.

But that's the trouble - any entity which made money extending home loans is going to lose money when housing and property undergoes a huge bubble. Current mortgages go deliquent, new issuance dries up, and homes decline in value across the board.

So it's not enough to say, "Fannie and Freddie lost money." You have to show how their loss is the cause, not result, of a massive overhang in housing. People haven't done that.

Posted by: strawman | June 3, 2010 1:19 PM | Report abuse

"...the entrance of the new secondary lenders also had the effect of diminishing F&F's own lending standards in order to retain market share."

I think you, perhaps unknowingly, provided Exhibit A as to why the government should go back to it's role of policing and regulating markets, and not trying to create government-run or taxpayer-subsidized entities to participate in the markets.

Which brings us to health care...

Posted by: dbw1 | June 3, 2010 1:22 PM | Report abuse

@dbw1 - Perverse incentive? Liquidity maybe, and if you want to reduce liquidity for the home loan market, then I'm all for it. But the fact is that Fannie and Freddie purchased conforming loans, which are still less likely to enter into deliquency and default than subprime mortgages.

Yes, Fannie and Freddie "effectively control" a huge part of the mortgage market - but you ignore the fact that their share was declining during the worst runup of the housing bubble. If they're a causuative factor behind the bubble, that correlation should be positive. It's hard to see how a GSE driven bubble would increase in pace even as their market share dropped like a stone.

As for the rest - well, I agree that the general structure of GSEs is crap, and that our fixation with home ownership in this country is archaic and backward. But that and the bubble do not conflate.

Posted by: strawman | June 3, 2010 1:26 PM | Report abuse

JPRS said: "The entrance of the new secondary lenders also had the effect of diminishing F&F's own lending standards in order to retain market share."

If two of the largest players in the securitization market, e.g., Fannie and Freddie, lowered their underwriting standards, shouldn't they take at least partial responsibility for the housing crisis?

Posted by: ElmerStoup | June 3, 2010 1:28 PM | Report abuse

What Krugman put up is exactly correct. But he did not include various reports made by economists inside the Fed and outside the government on the impact of CRA on the loan granted to low income neighborhood by stating the benefits of the CRA was forcing banks to serve in areas they would have not set up unless they wanted to merge or buy other financial institutions.

Fannie Mae and Freddie Mac were late entrance in to the sub-prime mortgage because, by the time they got involved, many of the loans were given to people with questionable credit scores because many of the financial institutions were lowering it at the behest of Wall Street hence the securitization. As a matter of fact Chase Wealth Management unit issued a report on the sub-prime mess by showing in a chart of the impact of securitization on the overall level of loan production in comparison to the banks. In that chart, the banks' lending activities were essentially flat before and after the housing bubble while the securitization inflated and dropped dramatically in the same time frame.

Barney Frank has tried to introduce legislations that would have reformed Fannie Mae with Mike Oxley which they were able to pass it but the Senate never took up the issue because of threats veto by Bush in 2005. Eventually Congress passed a version that Bush signed on July 30, 2008 which was too late to stop the rolling train wreak coming two months later.

Part of the problem comes from politicians promising the moon to help people get mortgage regardless whether they have the ability to repay it or not and the loan brokers pushing people into mortgage they know they can not afford it which involves stating "phantom" income to qualify for a mortgage amount just to make money.

Posted by: beeker25 | June 3, 2010 1:28 PM | Report abuse

I'm not sure those charts eviscerate the assertion that Fannie Mae and Freddie Mac, in addition to revisions to the Fair Housing Act, helped to provide incentives to the creation of the subprime bubble. Lending guidelines (and the softening thereof), implicit guarantees to purchase bad loans, etc., may have all had a role.

In any case, those charts essentially illustrate that the vast percentage of mortgage debt was not held directly by the government, which I don't think is what people are asserting.

Additionally, there is a difference between low-income housing and houses people simply cannot afford. Much of the sub-prime market was for housing well above the "low-income" level, and for people who made better than poverty wages.

That being said, the cause may be more difficult to identify that the cure: require higher down payments, and make anything other than fixed-interest mortgages illegal. Or make it impossible for people to qualify for adjustable-mortgage loans unless they have the wealth to pay the mortgage, should interest rates quadruple. That way, you're not saying they can't get ARMs, only that they have to be in a financial position to cover the loan, should interest rates unexpectedly rise.

Loans that mysteriously double two years down the road, because banks can book mythical profits based on balloon payments, should probably just be outlawed. Those benefit nobody.

Posted by: Kevin_Willis | June 3, 2010 1:30 PM | Report abuse

Strawman: F&F did more than "lose money." They're bankrupt and we taxpayers are bailing them out.

If F&F had prudent underwriting standards, they would have survived and would not have encouraged risky behavior by banks who knew F&F would buy their garbage loans.

Posted by: ElmerStoup | June 3, 2010 1:35 PM | Report abuse

@ dbw1: This is the same 'economist' who solely blames Greenspan, Phil Gramm, and Republicans in general for the banking collapse.

Well bush, greenspan and the republicans were in charge for the entire time the housing bubble was growing and when it crashed. It was regulators appointed by bush that turned a blind eye to the subprime mortgage fraud that banks foisted on naive customers (including getting people that were eligible for prime mortgages but were pushed into subprimes by mortgage brokers). It was the bush budgets that massively underfunded the SEC and other regulatory agencies to make them even more ineffective. The bubble inflated and burst under the Bushies and their "the market will regulate itself" theory that created the financial crisis.

This in spite of the fact that the bill was championed by Robert Reich

Such statements are all the better for a little proof. Reich was out of the cabinet in Clinton's second term. It was not only repealing glass steagel, but the midnight addition by Grahamm to exempt derivatives from regulation that really allowed the AIG fiasco to happen.

I am sure that a much higher % of republicans voted for this measure. They did control the congress after all.

Posted by: srw3 | June 3, 2010 1:39 PM | Report abuse

I also like to include Robert Schiller's book called Irrational Exuberant which was published in 2005 that he called for the banks to tightened credit standards in order to head off the potential housing bubble sparked by speculations.

Posted by: beeker25 | June 3, 2010 1:41 PM | Report abuse

Loans that mysteriously double two years down the road, because banks can book mythical profits based on balloon payments, should probably just be outlawed.

Posted by: Kevin_Willis
That requires modification to the Parity Act of 1982 after all it was in response to the interest rate that was set by former Chairman Volcker that impacted fixed rate mortgage market and allowed finance companies or banks to offer exotic mortgages such as ARM, balloon payment along with unlimited interest and the law also limited the state regulatory agencies' ability to protect consumers in their respective states by having the banks regulated by the federal agencies to preempt state laws.

Posted by: beeker25 | June 3, 2010 1:49 PM | Report abuse

"I am sure that a much higher % of republicans voted for this measure. They did control the congress after all."

Depends what you mean by "percentage". Generally speaking, if you have a congress of (using round numbers) 300 Republicans and 100 Democrats, 50 Democrats voting for something would be 50% of Democrats, while 100 Republicans voting for something would only be 34% of Republicans, approximately.

So it does not follow that the majority party would vote for anything in higher percentages than the minority party, automatically, though it may in fact be the case. It just requires more of them numerically. In this case 67% of Democrats voted for Gramm–Leach–Bliley in the house, while 92% of Republicans voted for it. So, a much larger percentage of Republicans did vote for it . . . but it does not naturally follow that that would automatically be the case, just because Republicans were in the majority.

In the Senate, 100% of Republicans voted for the bill (their version), while only one Democrat did. Which, in hindsight, seems to argue that we need more Democrats in the Senate. But it also suggests that the "archaic" and "unrepresentative" senate was actually much closer to doing the right thing than the House, in retrospect.

Posted by: Kevin_Willis | June 3, 2010 2:19 PM | Report abuse

@kevin)willis: For the record 98% of republicans voted for GLB.

Posted by: srw3 | June 3, 2010 2:52 PM | Report abuse

It wasn't just government policy to get low income people into homes. That certainly had an effect (if a policy contributed to higher housing demand, then it almost certainly had an effect in pushing the bubble). In any case, ex-post this was clearly a bad policy. Lots of those low income families we had intended to help aren't doing so well - it's clear they would have been better off renting. Government involvement probably had a negative effect in that it reduced caveat emptor. I know someone who got blown up by a rate reset who nonetheless spent hours years later researching which HDTV was best for him. It doesn't take a finance degree to understand the risks of an ARM with a teaser rate if you spend a few hours researching it (or asking a friend/family member who is more knowledgable).

A lot of the damage probably was an indirect result of restrictive land use policies at the local level, which when combined with cheap credit were potent catalysts for a local bubble. The housing bubble wasn't national - in many cities prices appreciated by a few percentage points per year, perhaps even less than you'd expect given low interest rates. Anyway, higher home prices should lead to higher supply. Where supply was restricted, prices shot higher, which enticed investors/speculators into the market driving prices higher still, provided credit was still flowing.

Take a city like Charlotte, NC. The Case-Shiller index was at 100 on 1/1/00, and peaked at 135.88 on 8/31/07. That's a 4-5% CAGR, and probably a bit low given how low interest rates got. Lower interest rates and higher demand largely translated into a larger quantity of housing produced. Look at San Diego, CA, and you'll see that house prices rose from 100 on 1/1/00 to 251.76 on 3/31/06 - far faster than in Charlotte.

More here.

As for lending to low income families, there is more to it than a cursory look provided by Krugman would suggest. Why was subprime so profitable? A good look at that and another major problem (a history of bailing out creditors) here:

Posted by: justin84 | June 3, 2010 3:12 PM | Report abuse

Kurgman's explanation is like saying even though an adult rented a house for a teenage party, purchased all of the alcohol, and was there in the house until 2am is noway responsible because the house burned down at 4am. Everyone knows what time the house burned down and it was clearly at four and here look at my chart, I was at home sleeping so how could I be responsible, I left at 2am?

When people complain about Fannie and Freddie it is short hand for government involvement, which also includes the low interest rates. The housing bubble was largely fueled by option ARMs and practically none of the loans could have been made if rates weren't held so low. Government policy has a very large roll in the crash and no fancy chart can change that.

Posted by: talbothouse35 | June 3, 2010 3:19 PM | Report abuse


Sure. If you're assigning responsibility F&F probably get a nice 5 to 10 percent share of the blame. They were definitely a factor, but not the driving force, nor the worst offender.

The question raises an interesting counter-factual question that we can only surmise, but not really know definitely: If the crisis just involved Fannie and Freddie, would there have been a major housing crisis?

It's pretty clear that we would not have had a global crisis. F&F may have been buying some subprime loan, but they weren't securitizing those loans and passing the trash to investors (part of the reason that they've had such significant losses). The investment banks were able to create crap at an even faster rate in part because they were able to pass the trash as soon as they created it.


There are a number of lessons that you can draw. Of course one might be that we should never have privatized Fannie and Freddie in the first place back in 1968. How many major national housing bubbles did we have in the 30 or so years since its creation in the 1930s?

Why is it that we only had major national housing bubbles after we allowed PRIVATE actors to play an even larger share in the market starting in the 1980s with the S&L crisis?

Why is it that we had a major national housing bubble prior to Fannie's creation (as well as a major financial crisis)?

As far as the data goes, a person can say that Fannie and Freddie were contributing factors in so far as they were a major player in the housing market.

But the evidence doesn't support the claim that they were the PRIMARY CAUSE. That understanding may be the foundation of an ideology that ignores evidence, but it's not a theory supported by the evidence.

Posted by: JPRS | June 3, 2010 3:20 PM | Report abuse

Let's also remember that mortgage defaults were valued under 1.5 Trillion, and that if that was the totality of the problem, then TARP could have been used to mop up the worthless assets. It turned out to be not that simple. TARP couldn't be effective because much of the problem was not hard assets (legitimate mortgages) but rather speculative paper (derivatives, credit default swaps and other exotic instruments) bought on leverage. So instead of a nasty 1.5 Trillion mortgage problem, it was really more like 9 Trillion derivative problem that couldn't be paid off and couldn't be unwound.

Posted by: Edoc | June 3, 2010 3:42 PM | Report abuse


5-10%? Really?

how much responsibility do you give the FED and its holding down of interest rates so that people can buy mortgages they really can't afford.

I know we all want to kill the bankers and that's fun and all (assuming you're not a banker) but seriously when do WE deserve some blame?

Posted by: visionbrkr | June 3, 2010 4:24 PM | Report abuse


The Fed probably gets another 10-15 percent share of the blame.

I'd attribute most of the blame towards its regulatory failures rather than its rate policy (e.g. the discount rate only indirectly impacts mortgage rates; mortgage rates, as I understand them, are directly impacted by the sale of mortgage securities themselves. The Fed only started this direct intervention in 4Q2008 to the end of 1Q2010 post-bubble.)

It would probably be most accurate to say that there was no single cause of the crisis, but rather multiple causes (e.g. I'd point to things like the repeal of Glass-Steagall, which transformed the RMBS market and directly contributed to a deterioration in lending standards; the Commodity Futures and Modernization Act, which created an environment where a $1 loss could be amplified almost infinitely; and late in the game the SEC's modification of its Net Capital Rules for the Big Banks, which allowed a two-fold expansion in the private debts carried on the books of the Bigs).

To the extent that people elected politicians in office who gutted the regs, I'd say they have some responsibility.

However, the repeal of Glass-Steagall and the change to the Commodity Futures Modernization Act were driven by the financial sector for the benefit of the financial sector -- it wasn't the result of a popular referendum.

Kevin Willis touched on this earlier, but lending standards and the offering of only simple mortgage products are the "great fundamental" to the extent that there is one in creating long-term price stability in the housing market.

If highly qualified buyers are getting 30 year fixed mortgages, with 3.5 to 10 percent down, low interest rates in and of themselves are not a problem. It's a different story when you're talking about high risk borrowers with adjustable rate mortgages and zero equity.

Posted by: JPRS | June 3, 2010 5:10 PM | Report abuse

Any defense of F&F that does not mention the "American Dream Commitment" - the brainchild of Franklin Raines and liberal Washington - fails to analyze the issue properly and is more or less an ideological argument, not an intellectual one.

A $2 trillion subprime bet in the name of social engineering. Started in 2000, and ended around 2005, just about the time (hey, surprise!) the housing bubble burst.

The housing bubble didn't start inflating in 2004, as Krugman suggests - the long term correlation between income growth and housing inflation broke down around 1997 or so. Blame Greenspan for getting the ball rolling. Blame Fannie and Fred for creating the subprime mess by agreeing to buy (for their own balance sheet - not to securitize) whatever garbage loan was originated by their partners Countrywide, Doral, etc. Blame Congress for letting F&F become the largest mortgage hedge fund on the Street.

The sad thing is Franklin Raines presided over an accounting scandal that Enron would envy. But, hey, he skates scot-free because he is a liberal, he followed orders from liberal politicians, and he will name names. It is unfortunate that the single most important factor in explaining who gets the blame for the crisis is which party controls Congress.

If the GOP takes over Congress, Franklin Raines, Angelo Mozillo and co should be interrogated over their role in the crisis. I am sure it will be an eye-opener.

Posted by: sold2u | June 3, 2010 5:50 PM | Report abuse


A few problems with your conspiracy theory:

1. F&F's total assets are less than $1 trillion currently (total guarantees are $5 trill, but that includes mortgages that were underwritten and securitized years before the 2000s bubble expansion).

2. Less than 17 percent of the firms holdings are in sub-prime.

3. F&F did not securitize and repackage their subprime holdings.

e.g. You're looking at 17 percent of $900 billion.

That total does not equal $2 trillion.

4. NYC investment banks were underwriting the overwhelming majority of Countrywide's loans (Angelo Mozillo's company) -- not F&F. Goldman didn't give a flying bleep about any sort of "American Dream Commitment" -- they were getting fees from private investors for packaging mortgage securities which had "safe" ratings from the rating agencies, which they in turn pumped back into secondary lenders who paid commissions to brokers who sold non-conforming loans in place of fixed rate conforming loans, which were in turn packaged as mortgage securities by said investment banks to private investors with a AAA rating slapped on 'em. Rinse. Wash. Repeat.

No federal incentive needed.

Most people who study the mortgage industry look at lending data as a basis for drawing conclusions about the industry; not on the basis of press releases about a firms aspirational goals.

F&F may have expressed aspirational goals about extending $2 trillion to minority borrowers in the early 2000s, but they didn't come close to achieving those goals.

Posted by: JPRS | June 3, 2010 6:34 PM | Report abuse


Read the last annual report we have (with audited financials) from FNM (2003). They bought something like 579BB for their own balance sheet. Not surprisingly, the term "subprime" does not exist in the entire 10K.

But, lots of stuff about the American Dream Commitment does, and even Angelo Mozillo is featured prominently (though we don't get to see his fake and bake tan very well). The whole intro is about social engineering.

Check it out:

I don't subscribe to a conspiracy theory - I don't think Fannie and Fred wanted to crush the US real estate market, or crush Wall Street, or anything like that. I think they believed their own buying wasn't affecting the price of real estate and that they were doing the right thing, not inflating a bubble. But that's the whole point - whenever social engineering and financial markets mix, bad things happen. And I blame Bush as much as Clinton - it isn't partisan. Politicians love a good bull market as much as anyone. Problem is, they never thing their actions are what is causing it.

Posted by: sold2u | June 3, 2010 7:30 PM | Report abuse

Making Fannie & Freddie the root and branch of the financial crisis has become the preferred narrative trope of the right wing. Soon it will become an article of faith and no facts will be sufficient to dissuade them from the Truth they have constructed.

Posted by: dollarwatcher | June 3, 2010 8:08 PM | Report abuse


that is what is so annoying. determining the cause of the financial crisis should be a nonpartisan exercise. Of course goldman had some culpability, But so did FNM and FRE. And it isn't just 5-10%. But, as long as one side of the aisle has the investigative power, it will be an ideological battle.

And, FWIW, I used to love reading Krugman. Unfortunately, he ceased being an economist interested in following the facts wherever they may lead, and became an ideologue (probably because the NYT pays better than Princeton). But, he is no longer a neutral arbiter and I take everything he writes with a grain of salt. It is a shame, because I used to like his stuff a lot.

Posted by: sold2u | June 3, 2010 8:52 PM | Report abuse


The 2010 10K for FNMA does detail subprime holdings (see page 112, 115, 116, etc).

Social engineering and “do-gooderism” weren’t what was happening in the 2000s.

The simple explanation is that the short-term incentives made people very greedy and reckless.

Mortgage brokers weren't issuing loans 103 financing with no income verification because the “government” made them do it. They were issuing loans because they got fees from their bosses (guys like Mozilo) for issuing the loans. Every time someone had to refinance the loan they got more fees!

So the secondary lenders created a new kind of mortgage that would involve continual refinancing. Many borrowers weren’t wise to the scam. Some didn’t care, because they could use cheap money to speculate in the market on their own. The lenders didn’t care, because securitization allowed them to pass the trash to someone else. The challenge was getting someone else to bite.

This is where the investment banks came in (e.g Goldman, Morgan Stanley, etc, etc). The investment banks were able to get the credit rating agencies to slap a high rating on the securities in part because they found a really, really complicated way to package the product. The packaging was so complex that no one could figure out what the contents were (in some cases because their own incentives rewarded doing a lot of deals over doing just a few high quality deals). Once they sold the mortgage products, they’d then take the money and pump it back into the secondary lenders.

The lenders kept lowering their standards, because the investment banks kept finding buyers for their mortgage securities. Part of this ties into the issue of the derivative market, but that’s another story unto itself.

In terms of apportioning blame, the easy answer is to look at who profited the most from the entire sordid exercise. FNMA was a factor, but they'd been since the 1930s. The CRA dated back to the late 1970s. What was different this go-around were things like derivative contracts, and the entrance of the investment banks into the mortgage underwriting business.

Posted by: JPRS | June 3, 2010 10:18 PM | Report abuse

"No, Fannie and Freddie did not cause the housing crisis."

Mr. Klein: I'd say that a review of the comments above show that Fannie and Freddie were indeed at least part of the problem. Even commenters friendly to you concede this.

Speaking as an over-the-hill federal employee, I suspect you have a hard time acknowledging this. Your reaction to most problems is yet another top-down government "solution" which costs a boatload of money and umpteen new pages of federal laws and regulations.

When is it going to dawn on you that government interventions usually have unintended negative consequences?? A little more modesty and less certainty in your policy recommendations would be appreciated.

Posted by: ElmerStoup | June 4, 2010 10:30 AM | Report abuse

One always has to watch for Krugman's misdirections. He's big on selecting time frames that validate his points while leaving out the factors that don't.

One thing he fails to mention in his current propaganda piece is that a ton of the mortgages that went sour were *issued* three to five years before the collapse began, right when Fannie and Freddie were hitting their peak involvement. Those ARMs, ya know? People were able to make their low interest payments until the rates kicked over.

Krugman's charts don't really show what happened, and are therefore irrelevant to his contention.

But, as one of Klein's compatriots, the little commie Yglesias, said once, "I find the endless array of complaints people pretend to have with Krugman's work fascinating. Krugman is an effective and high-profile advocate for progressive politics." Which isn't to say "a competent and honest economist."

And here's a bonus quote (and further commentary on Krugman's charts): "What would Klein do without a Krugman to tell him what to say?" at

Posted by: msoja | June 4, 2010 7:46 PM | Report abuse


Ezra's point holds.

Government policy meant to extend home loans to low-income borrowers was not the cause of the crisis.

FNMA high risk portfolio does not equal "global financial crisis". It was not the primary cause of the crisis.

The largest share of blame can be directly traced back to de-regulatory actions advanced by private sector interests and put into law by Congress.

Those goals did not encompass the desire to expand "low-income" home ownership any more than a sleazy used car dealership's pitch to sell cars to high risk buyers is a result of a government requirement to expand car ownership.

Sleazy used car dealers target high credit risks, because they've found ways to make money off the financing and resale of lemons. They're not in business to provide reliable cars to poor people -- and there is no government policy that rewards them for doing so.


The numbers don't support your position. The overwhelming majority of loans still held by FNMA are long-term fixed rate mortgages (e.g. 30 and 15 year fixed rate mortgages). Adjustable rate mortgages account for less than one-seventh of FNMA's holdings (a grand total of $34 billion, which is a small share of the $10 trillion dollar mortgage market).

Reference, page 12:

The overwhelming majority of ARMs were issued by secondary lenders, underwritten and securitized by investment banks, and sold off to private investors. GSE's had almost no involvement in the creation of those mortgages.

Posted by: JPRS | June 5, 2010 12:34 AM | Report abuse

JPRS, ARMs were just one factor, of course, which I offered as being illustrative of the point.

And you're not going back far enough in your other arguments. The government was instrumental in pressuring (or colluding) with entities like Countrywide and eroding lending standards, etc.

The campaign gained further traction with the election of Bill Clinton, whose housing secretary, Henry Cisneros, declared that he would expand homeownership among lower- and lower-middle-income renters. His strategy: pushing for no-down-payment loans; expanding the size of mortgages that the government would insure against losses; and using the CRA and other lending laws to direct more private money into low-income programs. Shortly after Cisneros announced his plan, Fannie Mae and Freddie Mac agreed to begin buying loans under new, looser guidelines. Freddie Mac, for instance, started approving low-income buyers with bad credit histories or none at all, so long as they were current on rent and utilities payments. Freddie Mac also said that it would begin counting income from seasonal jobs and public assistance toward its income minimum, despite the FHA disaster of the sixties.

To meet their goals, the two mortgage giants enlisted large lenders—including nonbanks, which weren’t covered by the CRA—into the effort. Freddie Mac began an “alternative qualifying” program with the Sears Mortgage Corporation that let a borrower qualify for a loan with a monthly payment as high as 50 percent of his income, at a time when most private mortgage companies wouldn’t exceed 33 percent. The program also allowed borrowers with bad credit to get mortgages if they took credit-counseling classes administered by Acorn and other nonprofits. Subsequent research would show that such classes have little impact on default rates.

Pressuring nonbank lenders to make more loans to poor minorities didn’t stop with Sears. If it didn’t happen, Clinton officials warned, they’d seek to extend CRA regulations to all mortgage makers. In Congress, Representative Maxine Waters called financial firms not covered by the CRA “among the most egregious redliners.” To rebuff the criticism, the Mortgage Bankers Association (MBA) shocked the financial world by signing a 1994 agreement with the Department of Housing and Urban Development (HUD), pledging to increase lending to minorities and join in new efforts to rewrite lending standards. The first MBA member to sign up: Countrywide Financial, the mortgage firm that would be at the core of the subprime meltdown.
//end cite

Posted by: msoja | June 5, 2010 3:03 PM | Report abuse

Hey, but, you know, look on the bright side. At least the government hasn't *compounded* its errors with further meddling, uncontrolled spending, and rampant incompetence. Right?

Posted by: msoja | June 5, 2010 3:25 PM | Report abuse


The problem is that the facts not only don't support your position, they actually undermine your argument.

e.g. ARMs account for $2.5 trillion of the total $10 trillion residential home loan market. FNMA was involved in less than one tenth of the ARMs created during the 2000s (they also tended to be higher quality in most cases because of FNMA's lending standards).

e.g. there are no laws that require anyone to create an ARM over a fixed-rate mortgage. The reason that lenders pushed people into one over the other were entirely due to in-house incentives, not ones imposed on the outside by the government.

e.g. I don't get the sense that you really understand the difference between conforming and non-conforming loans -- this is pretty basic and absolutely essential if you're going to start drawing semi-informed conclusions about the operation mortgage market.

e.g. you don't seem to understand the difference between bank and non-bank lenders -- and the regulations impacting these business. This is also pretty essential.

The Fed did a good job addressing the CRA myth head on a couple months ago.

As far as the role of government goes, from the late 1930s until the early 1980s we had recessions, but no housing bubble on par with what we experienced in the late 1980s and 2000s. During that period we had extremely intrusive government regs which made banking boring, the financial sector stable, and it did so without throwing a monkey wrench into overall growth.

Posted by: JPRS | June 5, 2010 7:28 PM | Report abuse


The Manhattan Institute article is disjointed to say the least and pretty short on evidence and context.

e.g. Why would Rep. Carolyn Maloney representing one of the highest income districts in the U.S. oppose FDIC capital requirements on subprime loans?

Her constituents weren't recipients of those loans. Considering the number of investment bankers in her district, their businesses certainly benefited from low-capital requirements.

The opposition to the cap requirements wasn't done for the benefit of low-income home-owners. It was done for the benefit of the Big Banks securitizing those loans.

The Hebert Hoover "Own Your Own Home" initiative was driven by lending institutions -- it wasn't done with an eye towards protecting the interests of borrowers. The Commerce Secretary tends to represent the really big monied interests -- not low-income borrowers.

As far as the singing the virtues of "conventional mortgages" goes -- who underwrites the overwhelming majority of those loans in the U.S.?

Once again, the argument is just strange.

If you've studied the mortgage data and understand the incentives, it should become pretty clear that lenders weren't going after low-income borrowers because of any government initiative. In the 2000s they found a way to make a lot of money packaging high-risk loans to private investors thanks to something damn close to collusion on the part of private ratings agencies.

Given the Manhattan Institutes ties to Oligarchs though, I'm not surprised that the author would attempt to deflect blame onto some "do-gooder" government initiative. The facts on the other side of the debate -- the housing data itself in context -- pretty much underscore the absurdity of the author's claims.

It's hilarious too that he'd advocate weaker local housing regs -- which are largely geared towards increasing safety and quality -- as a basis for lowering cost. This is a little like saying we should reduce regs on food safety in order to lower the cost of food. The example of China's milk scandal should highlight some of the trade-offs involved with those kind of priorities.

Understandably for someone at the Manhattan Institute, the lives and safety of ordinary Americans should be negotiable if the trade-off limits the earnings of the oligarchs who under-write the M.I.'s "objective" research.

Posted by: JPRS | June 5, 2010 8:20 PM | Report abuse

Let's look at the government's own report, where Krug gets his graphs.

"Key to this shift to capital markets‐based funding of mortgage lending were Fannie Mae and Freddie Mac, the government sponsored enterprises (GSEs), which were created by the federal government to develop the secondary mortgage market."

Not to mention, Fannie and Freddie were the two leading holders of these MBS!!

Table 3: Top GSE, Bank, and Thrift Holders of NonAgency
MBS as of 2007.
1. Freddie Mac†
2. Fannie Mae†
3. Citigroup Inc.
4. ING Bank
5. Bank of New York Mellon Corp.

Posted by: staticvars | June 7, 2010 1:51 PM | Report abuse

Raghu Rajan's response "eviscerates" Krugman's strawman.

Posted by: staticvars | June 8, 2010 10:19 AM | Report abuse

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