Prof. Christopher Peterson on Fannie, Freddie: "Suckers"

Professor Christopher Peterson has a new article out entitled: "Fannie Mae, Freddie Mac, and the Home Foreclosure Crisis." Here is the abstract:

Following the Great Depression, the federal government was the primary architect of the secondary residential mortgage market. The foremost pillars of this federal involvement were the twin government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. In the public debate over the struggling American financial system, opponents of federal involvement in housing finance have persisted in asserting that Fannie Mae and Freddie Mac caused the home foreclosure crisis. This symposium essay attempts to provide a brief rebuttal to this surprisingly persistent oversimplification. It begins with historical context necessary for understanding the debate over the GSEs’ responsibility. Next it explains the development of the private, sub-prime home mortgage market, recounts the radical change in the GSEs’ investment and underwriting policies in the mid-2000s, and traces the events leading to the collapse and nationalization of the two companies. Although the GSEs began to engage in unacceptably risky investment decisions, the two companies were only one part of a larger more complex commercial and regulatory pattern that also included monetary policy, regulatory dereliction, judicial passivity, ill-advised borrowing, and reckless (or dishonest) brokering, appraising, lending, servicing, and securitizing by private financial services companies.

I found this quote compelling: "As soon as the GSEs abandoned direct monitoring, the profit-seekers (including the credit rating agencies) the GSEs relied on arranged to sell them garbage and harvest massive bonuses, commissions, and fees in the process. Like so many others, Fannie and Freddie's core failing was this: they were suckers."

So why the continued fury on the right regarding Fannie and Freddie? Here is Professor Peterson's take:

Although government minimalists hope to use the subprime crisis as evidence of President Reagan's mantra that 'government is not the solution to our problem; government is the
problem,' any fair appraisal of events demonstrates otherwise. It was the absence of a legislative response to shape and facilitate the rapidly emerging patterns of housing financial commerce. It was a sleeping judiciary that neglected to lay down a relevant common law in the absence of legislation. It was captive federal banking regulators that interpreted their 'consumer protection' obligations to mean protecting banks from consumers. It was the erosion of deposit insurance as a useful tool in preserving bank solvency. It was massive speculation in derivatives. It was media and scholarly academies that did not find a way to tell the stories and marshal the arguments to show what was about to happen. And, it was an indulgent, indifferent American public that that let itself be misled. Fannie Mae and Freddie Mac-part of the problem, rather than the solution-were but one factor in much larger and more genuinely disappointing picture of letdown.

In other words, the propaganda regarding Fannie and Freddie is simply "outdated demagoguery."

This is the most careful and balanced assessment I have seen on this issue. It fully recognizes that Fannie and Freddie both invested in much subprime product (under the bipartisan direction of two administrations) and guaranteed trillions of mortgages. Yet, in the end Fannie and Freddie were bit players compared to the long litany of causes. More to come on the long litany. . . .