Fannie & Freddie: Chasing Profits, Market Share

Joe Nocera cuts right to the heart of the “Blame Fannie and Freddie” argument in today’s NYT. It is an article well worth your time to read.

He looks a the CATO/AEI narrative — that the government forced the GSEs (and the banks through the CRA) to make ill advised loans to people who could not afford them. This, goes the the claim in the economic fantasy leagues, was the prime cause of the credit crisis and economic collapse.

Except there is no data that supports this argument, and enormous evidence that demolishes it.

Nocera sums up nicely the role of the GSEs:

“Indeed, conservatives tend to view the affordable housing goals imposed on Fannie and Freddie as the central reason for the credit crisis. “In order to increase homeownership, Fannie and Freddie were required to decrease their standards,” said Peter Wallison, a fellow at the American Enterprise Institute and perhaps the country’s leading critic of the G.S.E.’s. “We made a big mistake in trying to force housing onto a population that couldn’t afford housing.”

But, to my mind, that view is only half-right. Yes, people got loans who had no hope of paying them back, and that was insane. But Fannie and Freddie’s affordable housing goals — which the G.S.E.’s easily gamed — were not the main reason. Rather, it was the rise of the subprime lenders — and their ability to get even their worst loans securitized by Wall Street —that was the main culprit. Fannie and Freddie lowered their standards mostly because they were losing market share to the subprime originators.”  (emphasis added)

That is precisely correct. The GSEs were chasing profits and market share. Fannie (and Freddie) were just another crappy bank, no different than Citi or Goldman or Bank of America or Lehman or Countrywide or Merrill or Bear Stearns.

Blaming the government for what are obviously private sector motives is a blatant attempt to exonerate the guilty. I find that intolerable . . .


Wake-Up Time for a Dream
NYT, June 7, 2010

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