if someone without a life-preserver who is struggling in the water grabs someone who is wearing one, and in the process takes them both down, that doesn't mean that the life-preserver failed to do its job.
What he means by this metaphor is that the unregulated Wall Street firms created the housing boom and bust that brought down Fannie and Freddie. The implication is that the GSE's and their regulators were innocent victims.
That's one narrative. Thoma offers it in contrast to Tyler Cowen's narrative, in which government regulation does not work as well in real time as it does in hindsight.
the great risk to the profitability of Fannie Mae and Freddie Mac was not the movement of interest rates or defaults by borrowers, the concerns of a normal financial institution. Fannie Mae's risk was political, the concern that the government would end its special status.
So the companies increasingly used their windfall for a massive campaign to protect that status.
It's a long story, but well worth reading in its entirety.
I would agree with Thoma that unregulated firms led the way in lending to marginal homebuyers. But note the irony there. Supposedly, we need Freddie Mac and Fannie Mae to expand home ownership, but private firms were the ones pushing the margins.
In fact, if Freddie and Fannie had been willing to take a pass on high-risk lending, they would not be in trouble today. But their shareholders thought they needed to keep growing, regardless. And their friends in Congress thought they needed to do their part to help the "under-served" segment of the housing market. I recall friends of mine who were still at Freddie Mac and who were unhappy with the plunge into the subprime sector grumbling about the "over-served" market.
I stand by my briefing paper for Cato, written before the GSE's were put into conservatorship but which appeared the day after.