Alan Greenspan’s new book
Brad DeLong reviews Alan Greenspan’s new book:
Alan Greenspan: The Map and the Territory: Risk, Human Nature, and the Future of Forecasting:
The true size of the American subprime problem was hidden for years by the defective bookkeeping of the GSEs…. Not until the summer of 2007 did the full magnitude of the subprime problem begin to become apparent…. Had Fannie and Freddie not existed, a housing bubble could still have taken hold. But had such a bubble developed, it is likely that in and of itself, it would not have wreaked such devastation in late 2008…. Even given the excess[ive MBS holdings] of the GSEs, had the share of financial assets funded by equity been significantly higher in September 2008, arguably the deflation of asset prices would not have fostered a default contagion, if at all, much beyond that of the dot-com boom…”
Lifted from comments on Delong’s post from reader Bloix:
Dean Baker has written about this for several years now:
The beating up on Fannie Mae as the main culprit in this story is similarly short on logic. Fannie Mae and Freddiie Mac lost market share at an incredibly rapid pace in the peak bubble years precisely because they were not buying the worst of the junk. That was going to the private investment banks…
See also Paul Krugman:
During the peak of the housing bubble, Fannie and Freddie basically stopped providing net lending for home purchases, while private securitizers rushed in. Yes, very late in the game FF increased their share of subprime financing, as they tried to play catchup; but that’s really off point. The real question is, who was financing the bubble — and it wasn’t GSEs.
And Mark Thoma, in a lengthy post from 201, complete with quotes and charts:
The explosion of ReFiat low interest rates in the 2000s housing bubble and the entry of BigF into the mortgage market increased demand for mortgages. If Mortgage originators did not like Freddie’s term, willing private investors were eager buyers who did not pursue oversight of loan originators. The emergence of a private mortgage market allowed loan originators to “create their own rules” and bypass oversight by Freddie. Originators could market liar loans and other fraud to overeager BigF rubes who failed to provide oversight.
This all happened on the watch of GWBush whose regulators notoriously posed with chainsaws. Under the original law 1992, the executive was supposed to have oversight of Freddie. In the 2000s, there was no bigger cheerleader for “Homeownership at any cost” than GWBush. The failure was the failure to issue new lending standards and lending transparency to protect investors and home buyers as the old regime of control by Freddie failed due to private sector entry into the market. BigF applied the risk of old loan originator standards to the market without due diligence of the changed character of the market and the lack of oversight.
Greenspan did nothing to improve lending regulations. Instead he complained that monetary policy was helpless to address the problem. The reluctance to use any tool but monetary policy has been the biggest failure of economic policy in the 21st century.
Robert Weiler comments:
The point is that their market share in the mid-ninties is irrelevant to the bust because virtually all of the securities created by Fannie and Freddie up the mid 2000’s were conforming loans. 2 things can be equally true; Fannie and Freddie did do extensive lobbying, did cook the books, and were corrupt. They were also laregly irrelevant to the boom and bust. My personal preference would be to end all securitization of mortgages. A bank makes a loan, they should have to hold it. That would end 75% of the probl;em. Breaking up the banks and actually regulating them would fix most of the rest. I’m not convinced that the resulting ‘inefficiency’ raises rates all that much. The fact is that you’ve got trillions of dollars in CDO’s trading hands in what is essentially a zero sum game
Brad is exactly right. Fannie and Freddie were losing tons of market share when the worst of the loans were originated. Both the GSE’s tried to break in on the subprime market with ‘Alt-A’ loans, but there were never as many of those originated as would have caused the crisis. It is true that the GSE’s cooked the books and lobbied hard, but their lobbying was only a result of losing market share.
Why do I know? Because I was at a major bank at the time writing the code to let us do things like originate loans to illegal aliens and mobsters (aka ITEN and SISA/NINJNA loans).