Arnold Kling  

Alternative History

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The Congressional committee at which I appeared the other day got a lot of documents from Freddie Mac and Fannie Mae, many of which they leaked. The Wall Street Journal writes,


One Fannie Mae document from March 2005 notes dryly, "Although we invest almost exclusively in AAA-rated securities, there is a concern that the rating agencies may not be properly assessing the risk in these securities." But they bought them anyway...

In the alternative history, the CEO of Freddie or Fannie speaks out in early 2005 to an investor conference and calls baloney sandwich on the rating agencies. The CEO exposes the flaws in the ratings and calls them to the attention of the Fed and the FDIC. These warnings cause the private-label subprime securities market to contract. The housing bubble pops in 2005, and Freddie Mac and Fannie Mae have stayed out of the subprime market. There is a mild downturn in housing, and the worst of the private subprime mortgage lenders go out of business, but overall the financial consequences are mild.

I think that the CEO's at Freddie and Fannie were in a better position than anyone else to stop the madness. But if your idea of a housing system is to build up two firms with enormous power and count on them to exercise that power judiciously, then you might want to rethink your model.

Incidentally, I think that the WSJ may have been overly pessimistic in suggesting that the Democrats were there to whitewash Freddie and Fannie. Perhaps I was misled by what I saw, but it seemed to me that the Democrats were genuinely angry at the CEO's of Freddie and Fannie, and that this anger translated into serious doubts about the private-public status of those organizations.


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COMMENTS (7 to date)
Dan Weber writes:
There is a mild downturn in housing, and the worst of the private subprime mortgage lenders go out of business, but overall the financial consequences are mild.
And everyone blames the CEO of Freddie or Fannie for causing the (relatively minor) economic mess, totally unaware of the true disaster they have saved us from. They are dragged before Congress and ordered to testify.

Sorry if this sounds too cynical, but it's a familiar topic in computer security.

Jim Gannon writes:

Dan, you beat me to it...

[congressional committee member asks:]
So Mr. CEO, you thought it was a good idea to cause a housing bubble and destabilize housing prices. Honest American taxpayers have lost their homes because of your irresponsible behavior!

RMiller writes:

You say that Democrats have "serious doubts about the private-public status of those organizations." So which word do they want to remove from the hypenated "private-public"? My bet it is the word "private" that makes them "genuinely angry".

Carter Russell writes:

Or...the CEO is belittled for claiming the sky is falling when anyone with half a brain knows everything is fine. What makes the CEO think he knows more than the rating agencies? It's even hinted that the CEO may be a communist or a secret Muslim. The CEO slinks off and hopes everyone forgets all about his warning. Just as everyone quickly forgot about Alan Greenspan's "irrational exuberance."

And we wind up exactly where we are.

Steve Sailer writes:

President Bush spent 2002-2004 saying things like (to quote Bush's 10/15/2002 speech at his own White House Conference on Minority Home Ownership):

"Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That's a homeownership gap. It's a -- it's a gap that we've got to work together to close for the good of our country, for the sake of a more hopeful future. We've got to work to knock down the barriers that have created a homeownership gap.

"I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families. (Applause.) ...

"To open up the doors of homeownership there are some barriers, and I want to talk about four that need to be overcome. First, down payments. A lot of folks can't make a down payment. They may be qualified. They may desire to buy a home, but they don't have the money to make a down payment. I think if you were to talk to a lot of families that are desirous to have a home, they would tell you that the down payment is the hurdle that they can't cross. And one way to address that is to have the federal government participate. ...

"Freddie Mae -- Fannie Mae and Freddie Mac -- I see the heads who are here; I want to thank you all for coming -- (laughter) -- have committed to provide more money for lenders. They've committed to help meet the shortage of capital available for minority home buyers. "

Jacob Oost writes:

Rock on Steve. Doesn't matter whether the person saying it has an 'R', a 'D', or an 'I' after their name, it's stupid for the government to use interventions on the market to increase ownership of a particular good.

Let people decide for themselves, based on their own finances and wants and needs, whether owning a home is a good thing or a bad thing for them.

Carter Russell writes:

Steve, I'm amazed at how little press Bush's past statements about housing get. Not just the ones you mention regarding minority homeowners, but homeowners in general. He was forever talking up the percent of Americans who "own their own homes." It was the one stat he could point to and brag, and he did it nonstop.

The end result, though, was to make people who did not have their own houses feel like losers. Another log on the fire of the housing bubble.

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