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Contending with Paul Krugman, part II

As Fannie Mae and Freddie Mac sink deeper into taxpayer-funded torpor, The New York Times’ Paul Krugman is once again riding to their defense. The two mortgage giants may be hoovering up public money to cover their massive losses now, Krugman argues, but at least they’re not responsible for causing the crisis in the first place. In fact, he finds it “deeply depressing” that, in a recent Financial Times op-ed, Raguram Rajan of the University of Chicago implicitly blamed Fan-Fred and the congressional backers who directed it to subsidize affordable housing. Rajan is just parroting conservative myth, Krugman asserts, one “that’s been refuted over and over again.”

Krugman produces data to show that a) Fannie and Freddie did not start securitizing large quantities of subprime and other exotic loans until 2007 or so, by which time private-label securitizers had already sowed the seeds of disaster and b) that Fannie and Freddie’s subprime business post-dated the years of fastest housing-price appreciation.

But the history is slightly more complicated than Krugman suggests. It’s true, as he says, that Fan-Fred did not securitize much subprime directly in the early years of the bubble and lost market share to the private labels. They did, however, buy hundreds of billions of dollars worth of private-label subprime mortgage-backed securities for their own portfolios. These purchases, which began in earnest back in 2003, ultimately totaled more than $313 billion between the two entities. By the end of 2007, about a third of Freddie Mac’s portfolio, and a tenth of Fannie Mae’s, consisted of these MBS, which now account for a disproportionate share of their massive losses.

So even if Fan-Fred did not create the subprime boom, they did, in fact, help fuel it. They just did so at a higher rung on the securitization ladder, so to speak. The motives were not only to make more money for their shareholders (and management), but also to meet congressionally mandated goals for their affordable housing mission -- consistent with Rajan’s depiction of a “tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing.”

What is the point of trying to absolve Fan-Fred in the first place? To the extent that Krugman is merely trying to show that the real culprits are to be found elsewhere -- on Wall Street -- then I suppose this is a worthy exercise in some academic sense. But apportioning blame for the Great Panic of 2008 is a bit like trying to figure out “the” cause of World War I. If ever there was an overdetermined historical event, this was it. There’s more than enough blame to go around; everyone should be held accountable.

Krugman says he is trying to counter the pernicious conservative myth that, as he puts it, “those libruls in Congress caused the bubble.” And, no doubt, Republicans bash Fan-Fred in part because, politically, they need a financial whipping boy. But my concern is that Krugman’s combative defense of the two firms will encourage an equally dangerous myth: that there was nothing much wrong with Fan-Fred, and that they can be resurrected with a few cosmetic reforms once the crisis passes.

Krugman’s blog is called “Conscience of a Liberal.” I can understand why a liberal would want the government to support housing opportunity for low-income people. But I cannot understand why a conscientious liberal would support Fan-Fred. What is “progressive” about a couple of megacorporations populated by highly-paid executives who enriched their shareholders and themselves by exploiting a boatload of special government breaks -- from an implicit federal debt guarantee to exemption from state and local taxation? When anyone proposed tighter regulation, such as raising their capital requirements, limiting their product line or anything else, pretty much, Fannie and Freddie mobilized an immense and widely feared Washington lobbying operation, greased with campaign cash.

A recent Government Accountability Office report found only “limited evidence” that Fan-Fred had materially benefited disadvantaged groups. Meanwhile, the GAO concluded, their “structures (for-profit corporations with government sponsorship) undermined market discipline and provided them with incentives to engage in potentially profitable business practices that were risky and not necessarily supportive of their public missions.”

No, Fannie and Freddie, or their congressional enablers, did not “cause” our current predicament. But they were definitely part of the problem. Over many years, they directly and indirectly encouraged over-investment in single-family housing; and their activities during the bubble contributed to making the bust, when it came, both bigger and more costly to taxpayers than it might have otherwise been.

That’s all Rajan was saying. “The key then to understanding the recent crisis,” he wrote, “is to see why markets offered inordinate rewards for poor and risky decisions. Irrational exuberance played a part, but perhaps more important were the political forces distorting the markets.” Indeed, few sectors of the U.S. economy have “benefited” from more government intervention than housing: Fannie and Freddie; the Federal Home Loan Bank Boards; the Federal Housing Administration; the Veterans Administration; Rural Housing loan guarantees; a raft of rental assistance plans in the Department of Housing and Urban Development; public housing; mortgage revenue bonds; the low-income housing tax credit; the mortgage interest deduction; favorable treatment of capital gains for home sales; Community Development Block Grants – and more.

No doubt there have been benefits from this massive investment, including a high rate of homeownership. And yet the costs are pretty impressive, too. Today, the U.S. housing “market” – if that’s the right word for it -- is struggling its way out of a crisis deeper and more intractable than any since the Great Depression, back before government got so heavily involved. There’s a lesson in there somewhere.

Click here for my last post taking issue with Krugman.

By Charles Lane  | June 10, 2010; 1:15 PM ET
Categories:  Lane  | Tags:  Charles Lane  
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It's amazing how much Krugman has to forget or ignore to have the opinions he has today.

Posted by: BradG | June 10, 2010 1:29 PM | Report abuse

It's easy for the idle wealthy chattering class to blame the economic crash on subsidized housing for the poor but no one who works for a living is buying it.

Posted by: downahatch | June 10, 2010 1:56 PM | Report abuse

Every right-wing talk radio program tries to lay the entire blame for the housing bust at the feet of Fannie & Freddie, and, by extention, the Community Reinvestment Act and those pesky minorities. Every single one. Krugman is just trying to spread a little truth to counteract their myth-making.

Of course, Fannie and Freddie are still a massive problem, but you cannot let lies go unheeded because the public will start to believe them and that leads to bad (worse) policy.

Posted by: hoos3014 | June 10, 2010 2:03 PM | Report abuse

Blaming poor folks for accepting "junk" mortgages is the height of hypocrisy. While the current financial crisis is looking for scapegoats, these quasi-public "socialist" investment managers like Fannie & Freddie might be victims of predator lenders.

Let's face it: Wall Street manipulated markets. Now under a more watchful SEC, they will do anything to mitigate their ethical lapses.

Posted by: rmorris391 | June 10, 2010 2:16 PM | Report abuse

Well, Charles, your critique of Paul Krugman's argument actually contains the very seeds that show why Krugman's right, at least in the sense that liberals in Congress pushing for helping low-income homebuyers did not push Fannie/Freddie in such a way as to cause the Great Recession.

As you freely admit, Fannie/Freddie did not start securitizing subprime mortgages until 2007. THAT action would be in response to people who wanted to help low-income homebuyers (incidentally, Bush also wanted such people to be able to buy homes, too). Your counter that fact by stating that Fannie/Freddie did, however, buy securities based on subprime mortgages early on, but you also admit that they did that to help their own bottom line.

In other words, the purchases of the securities was in response to pressure from their shareholders -- i.e. members of the investor class who happen to be predominately REPUBLICANS -- and not in response to pressure from liberals in Congress and the Bush administration.

So, Charles, your very facts actually argue that Krugman is right about not blaming liberals in Congress for pressuring Fannie/Freddie in this direction. If I'm wrong, please explain how.

Posted by: rlalumiere | June 10, 2010 2:19 PM | Report abuse

Another highly misleading piece of conservative propaganda. I really doubt that Krugman believes there's a single cause of this depression (as the author insinuates).

From the very beginning, conservatives seized on blaming the liberal policies (FFM and congress), which is of course entirely consistent with their "black is white" logic and constant attack mode. Krugman is one of the very few who has tried to fight against these lies.

Posted by: dougd1 | June 10, 2010 2:22 PM | Report abuse

Refresh my memory, Charles Lane; when did you get your PhD and Nobel Prize in economics? I think I missed it.

Posted by: ifmud | June 10, 2010 2:27 PM | Report abuse

The Krugman link that Prof. Lane refers to, has this lone sentence - "During those same years, Fannie and Freddie were sidelined by Congressional pressure, and saw a sharp drop in their share of securitization, while securitization by private players surged:"

Krugman might have defended FannieMae and FreddieMac elsewhere, but not in that innocuous sentence.

What exactly are the credentials of Charles Lane that he attempts to refute the economics professor?

Lane says - "To the extent that Krugman is merely trying to show that the real culprits are to be found elsewhere -- on Wall Street -- then I suppose this is a worthy exercise in some academic sense."

Have you read "The Big Short", Charles? Have you understood it? Go back, read it, and write another column.

Posted by: ashrink | June 10, 2010 2:27 PM | Report abuse

Refresh my memory, Charles Lane; when did you get your PhD and Nobel Prize in economics? I think I missed it.

Posted by: ifmud | June 10, 2010 2:27 PM | Report abuse

You can't "contend" with Krugman any more than a little league team can "contend" with the Yankees. He's out of your league.

Your surrogate, Raguram Rajan, is also out of his league. Freshwater economists, like him, whose support of "free markets" and antipathy to government intervention, is based on faith rather than reason, provided the "intellectual" cover for the economic manipulation and de-regulation that caused both the recent recession and the Great Depression. It was that faith, which failed to yield in the face of evidence and history, that encouraged Wall Street and its subsidiaries to create the predatory sub-prime instruments that triggered the economic collapse, not the Fair Housing Act that Rajan and the rest of the conservative media, such as the Wall Street Post, keep trying to blame.

American's common-sense philosophy, Mark Twain said, "History does not repeat itself, but it does rhyme." Unlike you and Rajan, Krugman understands that. Unregulated private risk-taking, and the lack of government regulation, caused both economic disasters. Focusing on the minor role of the FHA, Fannie and Freddie only seeks to divert attention from the real culprits, and the real solutions.

Posted by: mcstowy | June 10, 2010 2:30 PM | Report abuse

If you're going to write a piece to 'Contend with Paul Krugman', I would suggest that your piece actually have the intellectual heft to do so.

Or at least, you know, have a point. It makes it so much more interesting to the reader.

This is weak, and does not 'contend' with Dr Krugman on any level.

Posted by: JkR- | June 10, 2010 2:32 PM | Report abuse

Right on, JkR. Lane is pretty light.

Besides, he concedes the argument, and admits that Krugman's analysis is correct.

His rebuttal? "Who cares?", essentially, you might as well study the murder of Duke Ferdinand.

Well, Charles, if you want to prevent this crisis from occurring again--and it will, unless we take action--then it might be useful to at least take a stab at understanding things, hm? You know, if you've got a few hours in the afternoon to spare between soaps, just as a mental exercise...

Posted by: whizbang9a | June 10, 2010 2:39 PM | Report abuse

What is your point in contending with Krugman? You say yourself that Freddie and Fannie didn't cause the crisis. You know full well that Fox and friends are claiming that they did, claiming that the problem, as always, is those lazy poor people.

Posted by: Glassyeyed | June 10, 2010 2:49 PM | Report abuse

Well, trying to show that the culprits behind the 2007-8 financial crash were on Wall Street is a worthy exercise in more than an academic sense.

It is precisely because Congressional Republicans want to protect the lucrative source of campaign cash that is Wall Street and the major banks that they have directed so much criticism at the GREs. Lane presumes a degree of good faith on the part of Freddie Mac/Freddie Mae critics that is only occasionally present, something Krugman is right to point out.

There may be a case for some level of federal support for homeownership. This support got out of hand during the last twenty years, though; if it is unsound to blame GREs for Wall Street's sins, those sins shouldn't blind us to government's overcommitment to the mortgage market.
What's a pity about this situation is that the academic critique of GREs' role in the housing market is essentially correct. Government's role in supporting mortgage lending did help drive up asset values; the GREs did discourage private competition, and as time went by began to operate more and more like the reckless larger banks. They even played a role in distorting the regulatory system that oversaw mortgage lenders; since no one in Congress wanted to cross Fannie and Freddie by exercising genuine oversight, there was little pressure to question private lenders' practices either.

Posted by: jbritt3 | June 10, 2010 2:54 PM | Report abuse

"But I cannot understand why a conscientious liberal would support Fan-Fred"

in his blog post "Fannie, Freddie, and full faith", krugman gives his lukewarm support to the institutions-- whether you think they helped bring down the housing market or not, they have a crucial role to play in shoring up a devastated economy by providing loans that otherwise would not be provided. this ties into his frequent usage of the "lower bound argument"-- when the fed can't reduce interest rates any further they must take unconventional methods to increase lending and therefore economic activity.
if you wish to contend with krugman, you must confront this-- it shapes his whole view of the crisis. merely questioning his liberalism is pretty weak.
and by the way, the GAO report you quoted suggested a few ways to fix fan/fred, but the most convincing was to bring them closer to the federal government in order to reign in any wrongdoing (remove the profit motive) and provide the capacity to deal with financial crises. that's just my view, of course.

Posted by: cruver | June 10, 2010 3:02 PM | Report abuse

It is important to note that though Fannie and Freddie purchased over $313 billion in Wall Street issued AAA rated subprime PLS, the total issuance from the Street was over $3 TRILLION according to Inside Mortgage Finance. Rajan and Lane have not included this data in their blogs. Is is important since it provides context to consider who and what was driving the subprime market. The bigger issue is the Wall Street issuers and the degree that investors (including Fan and Freddie) were mislead.

Posted by: berk86 | June 10, 2010 3:04 PM | Report abuse


Really? I mean come on now there is more than sufficient blame here. Does Frannie & Freddie execs deserve some - absolutely and if one is astute enough to read (your column or Krugman's) they know it. But blame is NOT equally shared and you gloss over &/or ignore WHY Frannie & Freddie behaved as they did - STUPID POLITICIANS that insisted that each perform like private institutions OR STUPID & WEAK POLITICIANS that caved into Frannie & Freddie execs (that wanted private firm like pay) & other STUPID POLITICIANS demanding what I stated above. Everyone understands. You can also blame anyone that bought a home in the last 15 years(?) that did so with taking on a non-conventional mortgage (anything besides a fixed rate with 20% down or 10% with a FHA/VA loan), jumbo, ARM, no money down, interest only types. Heck, I still shake my head over sitting down during closing on our 2nd home in 2006 and both agents being amazed that we bought a house (in a better location) for the exact same amount we sold our first house for. They were amazed we didn't take any of the equity out to pay for something (consumer debt, etc) - we had none. They shook their head that our "new" house was in fact smaller (1000 to 1100 sq ft) than our old one (1500 to 1700 sq ft). They even asked why not an ARM? - I mean why? Plenty of blame all around.

Posted by: notamullethead | June 10, 2010 3:22 PM | Report abuse

Krugman is an imposter. He is a loudmouth nothing who got a big prize for bashing Bush which is what the Nobel Norwegians like to reward.

Posted by: hz9604 | June 10, 2010 3:26 PM | Report abuse

Let's see, one of these two gents is a neo-con hack moron, the other is a Nobel laureate in Economics. Hmmm...which to believe?

Posted by: waveskiboy | June 10, 2010 3:30 PM | Report abuse

i thought the dummies bought more than 313 billion of the sub-prime. who acquired the rest of the TWO TRILLION PLUS?, and where is it hidden? fnm/fre cause the problem acquiring 0.3T, sounds strange when wall street acquired and packaged 1.7T, most of which is still sitting in their back room books. talk about the 1.7T, and either you get a Nobel, or you get to talk to that Citibank whistle blower woman about a real job.

Posted by: thegerald | June 10, 2010 3:46 PM | Report abuse

The majority of commenters show their ignorance of the issue. The CRA program destoyed many of the minorities t claimed to be helping. Everybody made money but the taxpayer bailing them out and the construction workers who are out on the streets for years to come because of over building. Do these commenters realize how many poor or lower middle class have lost everything because of the charades from Fannie and Freddie? They didn't just securitize them in 2007, they bought into them in the height of the bubble for personal gain and bonuses. I will believe we are on the trail of the cause of the bailout when I see the top people from these GSEs in jail. Krugman has no credibility on this matter. There are dirty hands all over. The banks, the building industry, the realtors all contributed millions to the politicians to keep the money flowing. The banks needed the GSE's to get rid of the glut of mortgages they held before the collapse. The execs at Fannie and Freddie needed book profits for their bonus. Ask how much Rahm Emanuel, Jamie Gorlick, and Franklin Raines walked out with. These people were political appointees, not mortgage people. If yu cared about the lower class, you would be screaming for an investigation of these entities and their ties to politicians. This transends party and goes to the core of ripping off the inder served.

Posted by: Lloyd6 | June 10, 2010 3:55 PM | Report abuse

Lane writes
"These purchases, which began in earnest back in 2003, ultimately totaled more than $313 billion between the two entities."

Perhaps Mr Lane could explain how a mere $313 billion of purchases by freddie & fannie took out the global economy.


Posted by: bsimon1 | June 10, 2010 4:00 PM | Report abuse

Fannie and Freddie didn't cause the problem- Mr. Lane that is exactly what your neo-con friends have been saying for months-government is bad-Wall street is good. In essence, you agree with Mr. Krugman.

Posted by: BBear1 | June 10, 2010 4:02 PM | Report abuse

The New York Times’ Paul Krugman is once again riding to their defense....

..."their" being the Barney Frank democrats who have a paper (and video) trail of causing the housing bubble and its crash.

Of course Krugman is being a liberal....who you can tell is lying whenever they begin any form of communication.

Posted by: georgedixon | June 10, 2010 4:19 PM | Report abuse

Fannie and Freddie were corrupt to the gills EARLY on. At one time, these GSEs were responsible for ensuring that mortgages were sound and then passed those mortgages onto the secondary mortgage market. What happened there?

The classic youtube in 2004 or 2005 shows the Black Caucus grilling (literally accusing him of racism and corruption) regulator Armando Falcone who was reporting the gross corruption of Franklin Raines and others.

BTW, Rahm Emanuel's records at Freddie Mac have been set aside by Obama and not available via FOIA. What does that tell you?

Posted by: hz9604 | June 10, 2010 4:37 PM | Report abuse

Sorry, sharp shooting Paul Krugman is not debating Paul Krugman. Mr. Lane you must a skipped Rhetoric 101. Tedious I know when the choice is study or beer.

Posted by: Reesh | June 10, 2010 4:38 PM | Report abuse

First, I thought the whole point of the way Fannie and Freddie were set up originally was precisely so they would NOT be yet more fed. tax-sucking gov't entities - that they would be for-profit (isn't that the conservative "magic spell?" - if you're a for-profit, you'll have all those wonderful motivations to make money and that will make EVERYTHING alright?) but with gov't backing to allow for making mortgage financing that would not be AS profitable (i.e., loaning to lower-income buyers) as regular mortgages, where you can gouge the living bejeezus out of homebuyers because they're all either unionized autoworkers/teachers or second-cousin Rockefellers.

Plesae say if I've got that wrong (the Fannie-Freddie part, not the gouging), because I thought the whole point was that it was going to be a "compromise" (remember, back then, when conservatives and liberals yammered themselves hoarse at each other and then struck a deal and called it a day). Apparently, somewhere along the line, that "truce" has devolved into just another big, fat club with which to beat liberals (and it is crap like this which feeds a lot of the anger on the left).

Second, the "poster child" was Detroit and the dirty little practice was called "red-lining" (sort of the residential real estate equivalent of "when does an Afro-American turn into an n....? when he leaves the room"). And the n-word is in there precisely because, at least, back then, EVERYONE knew that's exactly what it was about. Fannie and Freddie were supposed to be there so there would be at least one source of mortgages that didn't require whole pallets of red Sharpies in order to do business.

Apparently, now, THAT ugly little piece of American history has gone the way of the outhouse, too, and "big govenment interference in peoples' lives" is a now a comprehensive enough mantra to question even The Civil Rights Act (with "Roe v. Wade" in the on-deck circle).

YOU don't want your tax money going to subsidize some lazy low-life owning a shotgun shack? Fine. Let 'em rent, and don't subsidize that either, and no rent control - that's all the way past socialism and into communist territory.

Well, I have the economic analysis for all this: Mark Shields called it on Uncle Ronnie - the poor had too much money and the rich didn't have enough. And now, the middle class has gotten a similar shafting, only a huge pluraity of that class is way too ignorant to figure out who took the elevator.

Posted by: | June 10, 2010 4:44 PM | Report abuse

If you want to assign blame then blame Greenspan. If he had done his job properly the subprime debacle would never have occurred. The Fed's explicit responsibility is to assure the stability of the financial system and plenty of Fed experts raised alarms (look at Ned Gramlich's book on the subject). Greenspan refused to take ANY action not because he lacked the power but because he was ideologicially opposed to regulation (remember he WAS one of Ayn Rand's toyboys many years ago).

Posted by: ianstuart | June 10, 2010 4:57 PM | Report abuse

Way to go Ianstuart - everyone who knows anything about this fiasco agrees with you. All this nonsense came up in front of the Fed in 1998. And as you said Greenspan refused to move on it because he believed in big profits for these companies.

Two loans were set up the first starting at 0% rising to a 9.95% and then a second loan that started at 9.95 went 19.95 then 29.95 and topped out at 39.95% - money for everyone and half the people didn't even realize they were signing for a second loan.

Posted by: agapn9 | June 10, 2010 5:14 PM | Report abuse

The fraction of blame for Fannie & Freddie can be calculated as:

Losses by Fannie/Freddie (~175 billion)
Losses by Fannie/Freddie + Bank + Govt Losses

And Figure 4 from Krugman's blog
shows the story: The portion of "Government Sponsored Enterprise Securitized" in the residential mortgage market almost hit 50%

Krugman is smart, and I agree with him many times, but he is doing political coverage on this issue.

Posted by: AndrewDover | June 10, 2010 5:20 PM | Report abuse

There may be enough blame to go around, and Fannie and Freddie certainly need reform.

But that is not what this argument is about.

Rajan is saying something more than Lane's formulation. He said, "...why markets offered inordinate rewards for poor and risky decisions. Irrational exuberance played a part, but perhaps more important were the political forces distorting the markets.”"

According to Rajan, markets are not the problem, government is. The prescription that follows is to have less government interference with the markets.

According to Krugman, markets on their own can cause boom-bust cycles of bubble and depression, and need regulation to protect the public good.

Lane is in the end incoherent. Ok, maybe Fannie and Freddie didn't make the problem, but they helped. Ok, everyone is to blame but Fannie and Freddie are more to blame. Ok, Krugman isn't wrong but he is, really.

A give you Exhibit A: A Mind in the Grip of and Ideology in Conflict with the Facts

Posted by: j3hess | June 10, 2010 5:26 PM | Report abuse

Anyone who thinks the Crash of 2008 was anything but a "Minority Mortgage Meltdown" is smoking dope.

Encouraging & rewarding Wall Street for giving mortgages to people who had no possibility of every paying them back for the sake of raising minority homeownership was the cause.

Period. End of Story.

The blame link goes through both political parties. When it comes to buying votes with taxpayer money, bipartisanship rules.

Posted by: pmendez | June 10, 2010 5:29 PM | Report abuse

It's surprising that Mr. Lane, presumably a capitalist, would take issue with "Fan-Fred's" purchases of "investment-grade" (at least, according to the ratings services)securities to enhance its bottom line and enrich its shareholders. Perhaps it's the "for-profit, government sponsored" aspect that he finds troubling. Fair enough, so do I. However, though its funding operations were undertaken without proper discipline or risk analysis, the overarching Fan-Fred mandate to assist in creating affordable home-ownership for millions of Americans was, and is, a socially worthwhile endeavor.
The same cannot be said of those bastions of capitalism, the Wall Street banks, who, by virtue of being "too big to fail" took on a similar structure, i.e., for-profit, government supported, created "securities" out of thin air and proceeded to "rig the game" so that their profits and obscene bonuses remained private while the risks, and loses, fell to the taxpayer---all the while bringing the world economy to the brink!
Nice work, if you can get it!

Posted by: bluejay31 | June 10, 2010 5:30 PM | Report abuse

The subprime mortgage market accounts for $1.5 trillion out of the $10 trillion domestic mortgage market.

Fannie and Freddie's Alt-A and supbrime holdings are $313 billion out of $1.5 trillion, or about 20 percent of the total subprime market.

Assuming that every single Alt-A and subprime mortgage in FNMA's holdings went bust, we would not have a global financial crisis.

You don't get to global economic crisis without taking into account the 2000 Commodity Futures Modernization Act, Gramm-Leach-Bliley in 1999 (repeal of remnants of Glass-Steagall), combined with Bush's SEC's decision to change Net Capital rules in 2004 for the big investment banks.

If we were just dealing with a 2 percent hole in GDP due to the FNMA "bubble" we would be back in Savings & Loan territory -- not a global recession.

It's disingenuous as well to suggest that Krugman's piece was an endorsement of the FNMA low-income mortgage program.

Krugman says absolutely nothing about the merits of the program, because it is unrelated to the cause of the financial crisis.

The cause of the financial crisis was not due any government policy designed to expand home ownership.

The cause of the financial crisis stems from rule changes that large financial purchased from legislators which weakened federal oversight, increased conflicts and perverse incentives within financial markets, and which in turn made the private actors extremely wealthy over a very short-time frame.

Posted by: JPRS | June 10, 2010 5:39 PM | Report abuse


Have you heard of something called "leverage"?

Fannie Mae was leveraged 78:1 at one point.

Much of Wall Street was the same.

So, when those Minority Mortgages went bust, they took everything down.

And the insane leverage was what made these Minority Mortgage Securities profitable, which is what the RepublicRats and DemoPublicans wanted, since they needed to get as many po' people into houses as they could to buy their votes.

Federal "oversight" would not have helped, because Wall Street was doing exactly what Washington wanted it to do!

Posted by: pmendez | June 10, 2010 5:50 PM | Report abuse

What's the real difference between the Krugmans or Geithners of today, and the Wolfowitzs of yesterday?

Posted by: Iconoblaster | June 10, 2010 5:58 PM | Report abuse

This article merely points out what I have contended for 30 years - liberals simply ingest, digest, and regurgitate information in a very different form than the facts would suggest. They see events with a set of filters that bears little resemblance to reality. In Mr, Klugman's case, he has a way of smug condesenion calculated to shame one into suspending their logic and intelligence. Thanks for putting truth to stupidity.

Posted by: IQ168 | June 10, 2010 6:19 PM | Report abuse


When I mention the SEC's change to Net-Capital rules in 2004 what do you think that refers too?

What do you think a net-to-capital ratio deals with?

1. What made the mortgages profitable for mortgage brokers were the FEES attached to the sale of the loans, not the leverage. Same story with the ratings agencies. The investment banks made a killing thanks to leverage and their ability to mask leverage. However, the investment banks were no more interested in expanding home ownership than sleazy used car dealers are interested in expanding car ownership.

2. There was no federal policy encouraging a mortgage broker to extend 107 percent financing on a no-document 1 year interest only Option ARM to an unqualified borrower. Those loans were wholly a creation of private market swindlers who knew the loan would blow up and require financing. It didn't matter who they sold the loan too -- it just mattered that they could could find a borrower who would attach his or her name to the loan.

As far as who was leading whom, the big money was made on Wall Street, not in DC.

Politicians in DC were complicit to the extent that they sold legislation for campaign donations (The GOP is a wholly-owned subsidiary of the big financial firms with only a handful of exceptions; perhaps one-third of the Democratic caucus has been bought-off).

Very few politicians actually cashed out in as audacious a manner as Phil Gramm (Robert Rubin counts, although he wasn't an elected official). Most of the big money was made by the big financial firms.

On balance politicians turned a blind eye because it didn't pay to ask too many questions. The changes to regulation in then 1980s, 1990s, and 2000s were being driven by industry, not politicians. Politicians were simply the conduit.

Posted by: JPRS | June 10, 2010 7:34 PM | Report abuse


So what's your evidence for the claim that GSE low-income home-ownership programs caused the crisis?

The mortgage data is available. The rules governing the industry are available. You clearly haven't spent time studying either.

So what's the basis for your claim?

Posted by: JPRS | June 10, 2010 7:39 PM | Report abuse

I don't and won't defend Fan-Fred, their bosses, or their actions. Generally they failed both to provide greater opportunity for home ownership and to operate a modest and low-key business. They were definitely caught up in the "get rich, very rich right now" craze. But I do take issue with your conclusions about "why markets offered inordinate rewards for poor and risky decisions." You place most of the blame for that on "political forces distorting the markets." That's based on a misunderstanding of markets. Markets are technologies, devices for actors with varying, often conflicting interests to resolve their conflicts via a price. Market is a way to trade-off interests through the medium of price. Are politics and government excluded as players from markets? No. There is no reason they should be. These are actors in every other part of life, so why should they not be part of markets. Yes, these two actors distort the markets, in the hopes of meeting their interests, but then so do the other actors involved in markets. Thus both yours and Raguram Rajan's comments miss the mark by wrongly assuming these are out of place in markets. This might sound fine in terms of the narrow markets envisioned by neo-liberals and followers of Mises, Friedman, Hayek, etc. But it's obvious none of these folks got out much to see actual markets in action. If they had they too would criticize what you've written. Morale: you need to get out more.

Posted by: kenzimmerman | June 10, 2010 8:03 PM | Report abuse

A liberal defending Fannie Mae? Here's why:

From on Fannie Mae's campaign funding - here's the top five recipients:

Top Recipients of Fannie Mae and Freddie Mac
Campaign Contributions, 1989-2008

Name Office Party/State Total

1. Dodd, Christopher J
S D-CT $133,900

2. Kerry, John
S D-MA $111,000

3. Obama, Barack
S D-IL $105,849

4. Clinton, Hillary
S D-NY $75,550

5. Kanjorski, Paul E
H D-PA $65,500

You don't suppose the money sent directly to these Democrats have anything to do with their support, do you?

Funny that each one of these Dems just happened to vote to increase funding for Fannie Mae right after getting their checks...

Posted by: jefrix | June 10, 2010 11:08 PM | Report abuse

From Jim Lindgren in 2008:
"Now comes Paul Gigot recounting just how thuggish their behavior was. The Fannie Mae officials at the time made millions in unearned profits from phony accounting to maximize their bonuses while trying to intimidate –- and when that didn’t work, to destroy — any politician who dared to stand up to their corruption."

Paul Gigot writes:

The Fannie Mae Gang

...Fan and Fred also couldn't prosper for as long as they have without the support of the political left, both in Congress and the intellectual class. This includes Mr. Frank and Sen. Chuck Schumer (D., N.Y.) on Capitol Hill, as well as Mr. Krugman and the Washington Post's Steven Pearlstein in the press. Their claim is that the companies are essential for homeownership.

Yet as studies have shown, about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie's left-wing defenders are underwriters of crony capitalism, not affordable housing.

Now get this - just yesterday in this very paper - the Washington Post...

Armando Falcon, ex-regulator for Fannie Mae, Freddie Mac, to advise trade group
By Sonja Ryst
Washington Post Staff Writer
Wednesday, June 9, 2010

Armando Falcon Jr., who once was the top government regulator for troubled mortgage giants Fannie Mae and Freddie Mac, has accepted a position as senior policy adviser at the American Securitization Forum, a trade group representing firms that invest in mortgages and other securities.

The group's members include market giants such as Goldman Sachs and the investment management firm Pimco...

During Falcon's tenure, both Fannie and Freddie were hit with accounting scandals and had to restate years worth of earnings, pay hundreds of millions of dollars in fines and remove several top executives.

"Armando has an incredible depth of experience," said Tom Deutsch, the ASF's executive director.
Hahahahahahahaha! Oh, my sides hurt...and my head...and my wallet...

Posted by: jefrix | June 10, 2010 11:18 PM | Report abuse

This short video explains all you need to know about Fannie Mae's problems in a nutshell:!

Posted by: jefrix | June 10, 2010 11:34 PM | Report abuse


And GOP donations . . .

Kit Bond (R-MO) -- $55K
Spencer Baucus (R-AL) -- $55K
Richard Shelby (R-AL) -- $55K
Roy Blount (R-MO) -- $38K
Deborah Price (R-OH) -- $35K

etc, etc.

Like most big donors, FNMA spread its money around to curry favor and buy protection. The donations to presidential candidates skew the numbers a bit. Given that the big donations came after the major FNMA audit and hearings in 2003-2005.

Big picture: If you look at the mortgage data; if you have some understanding of the securities market; if you can simply do division, multiplication and subtraction . . . FNMA and low-income lending does not equal global financial crisis.

It equals something that's much closer to the Savings and Loan bailout, which is at least one order of magnitude smaller than the current crisis.

On the topic of political donations -- from 1996 to 2006 when it fixed rules and regs governing the industry was a 65-35 split in favor of the GOP.

e.g. roughly $100 MILLION to GOP to $55 MILLION to the Dems. This does not include spending through independent advocacy campaigns.

Posted by: JPRS | June 10, 2010 11:57 PM | Report abuse

Might as well include insurance industry lobbying since major players in the industry in the late 1990s were trying to obliterate financial restrictions imposed by Glass-Steagall (e.g. financial firms like Citi were getting into the insurance market, and insurers like AIG were getting into the financial market).

1996 to 2010:

$98 million to Dems; $178 million to GOP.

So between the financial sector and insurance we get:

$278 million to buy GOP votes;
$153 million to buy Dem votes.

Last time I checked the GOP didn't control two-thirds of the House and Senate. Even in 2008 when the Dem control was 60-40 you see giving by the big industries at something closer to a 50-50 split.

Ergo, the GOP is a wholly-owned subsidiary of the Financial Sector. The Financial Sector owns a substantial minority stake in the Democratic party.

Posted by: JPRS | June 11, 2010 12:19 AM | Report abuse

As a principle of portfolio management, if Fannie and Freddie securitize half the mortgage market, it would have been virtually impossible for them to NOT have exposure to a good chunk of the bad mortgages written during the bubble.

Compared to the very long list of other participants who profited while creating the mess (speculative home investors, mortgage brokers, realtors, appraisers, title companies, real estate attornies, banks, local and state governments (taxes and permit fees), derivatives market makers and traders, contractors, homebuilder suppliers like HD/Lowes (list goes on...) I'd probably put Fannie and Freddie at the bottom of the list of who I'd blame.

The true top of this list are all the foolish home buyers. If you signed a mortgage you couldn't afford, on a home that was over priced and the single largest purchase you'll ever make, you deserve to lose money. If you paid $100k more for a house that was flipped with $10k in paint and minor repairs, yes, you were an idiot and you deserve to lose. If you "had to have" that McMansion that was twice the size of your parents' house and bigger than you needed, yes, you were an idiot and you deserve to lose. If you borrowed 125% of your home value without a steady job, yes...

Congratulations, now you get to rent for the next 7 years AND pay higher taxes for the bailout.

And from people like myself who didn't buy into the bubble and now get to own that house much, much cheaper than you did before you lost it - Thank you. Please be nice tenants.

Posted by: getmecharles | June 16, 2010 10:42 AM | Report abuse

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