June 30, 2011

St. Freddie and St. Fannie

Brad DeLong and other commentators seem to have an unnecessary need to prove that Fannie and Freddie's hands were clean with respect to the credit crisis.  The Republican narrative about the mortgage crisis originating with government forcing lenders to loan to unqualified minorities is indeed a bunch of nonsense; the volume of those programs never amounted to anything and subprime borrowers had no particular racial skew.  However, Freddie and Fannie played a significant role in the mortgage crisis because they enabled the market bubble to grow so big.

Fannie and Freddie are $5 trillion dollars worth of the mortgage market.  Their "implicit government guarantee" allowed them to operate at 200:1 leverage ratios, which blew up when not only their subprime portfolio did, but also when their conforming mortgages delinquency skyrocketed.  Fannie and Freddie bought hundreds of billions  worth of subprime and Alt-A-backed securities, which made them a big part of the market for Wall Street to sell their CDO sausages to.

Now, to their credit, the GSEs never touched the most egregious loans like no-docs, "liar loans", and the like that raged at the top of the bubble.  That stuff was the true toxic waste.  But the fact is, the GSEs are in conservatorship right now, pushing losses of tens of billions of dollars a quarter onto the taxpayer, because they took on too much risk with too little capital buffers.  That is what caused this crisis, and Fannie and Freddie definitely contributed to the problem.


  1. Don't be silly.

    Freddie and Fannie were bad actors--like the S&Ls of the late 1980s. But the bad actions of the S&Ls of the late 1980s did not bring down the entire economy: the federal government guaranteed their losses, and the panic stopped, and there was no deep recession.

    If Freddie and Fannie had been the only or even the major bad actors in the 2000s, we would not have 9.1% unemployment right now. We would have--as we do--a bill to the taxpayers that will probably amount to $300 billion when all is done, but the economy would be burbling along at its normal 5% unemployment or so.

    Brad DeLong

  2. I'm not going to quibble about how "major" the contributions of Fannie and Freddie were, other than to reiterate that they (by design) pumped $5T of subsidized liquidity into the mortgage market, including at least $800B into subprime and Alt-A, using the implied government guarantee to take risks that the market and regulators would otherwise have punished them for.

    There is an in-between conclusion here that neither exclusively blames nor exonerates the GSE's role in the lingering "balance sheet recession".


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