It's so much easier when there's a scapegoat, someone to blame. In the current economic meltdown, many conservatives are pointing their fingers at Fannie Mae and Freddie Mac. After all, the trouble is the mass of subprime mortgages provided to folks who were unprepared or unwilling to assume them. Now, for that argument to work, it's best that one not know anything about how mortgages are offered and packaged. Fannie Mae and Freddie Mac are way down at the end of the line, far far removed from the shady misdeeds that brought us to this point.
Thomas Frank has an article in today's Wall Street Journal blasting the purveyors of that meme and argues the Republicans who push it so hard are just trying to shirk some of the blame for the economic crisis.
When
some free-market scheme blows up, one needs only find an institution of
government in close proximity to the wreckage and commence accusing.
Thus we hear from some on the right that the disaster on Wall Street
was the handiwork not of those with unbridled pecuniary motives but of
Fannie Mae and Freddie Mac, which were government-sponsored enterprises
and therefore partially exempt from market discipline and of
theoretical necessity the sole culprits.
I
asked Bill Black, a professor of economics and law at the University of
Missouri-Kansas City and an authority on the Savings and Loan debacle
of the 1980s, what he thought of the latest blame offensive. He pointed
out that, for all their failings, Fannie and Freddie didn't originate
any of the bad loans -- that disastrous piece of work was done by
purely private, largely unregulated companies, which did it for the
usual bubble-logic reason: to make a quick buck.
Most of the mistakes for which we are paying now, Mr. Black told me,
were actually made "by four entities that under conservative economic
theory should have exercised effective market discipline -- the
appraisers, the originators of the mortgages, the rating agencies, and
the investment banking firms that packaged the subprime mortgage-backed
securities." Instead of "disciplining" the markets, these private
actors "served as the four horsemen of the financial apocalypse, aiding
the accounting fraud and inflating the housing bubble." It is they, Mr.
Black says, who "turned a crisis into a catastrophe."
Now, to be fair, not all conservatives are blaming Freddie Mac and Fannie Mae. Some are blaming the folks who took out loans (gotta blame someone, after all)! Frank has some data on this as well:
There is no way to measure the number of people who took out mortgages they knew they couldn't afford, of course, but for what it's worth, a 2007 report by the Mortgage Bankers Association reports that the FBI estimates "80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders." That means the lenders, not the borrowers.
Now, conservatives can argue Fannie, Freddie, irresponsible lenders, Chris Dodd, Barney Frank, et al, but at the end of the day It's all about regulation which, as a matter of principle, they reject. This is a hard lesson we're learning, but we damn well better learn it.
To keep up with Wall Street expectations, Fannie Mae held onto more mortgages and mortgage-backed securities for investment purposes. The same practice nearly drove the company into bankruptcy in the early 1980s. Once again it was spared in 2008.
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Posted by: Jason | October 01, 2008 at 06:21 PM