When I asked Bill Clinton last night what he would've done differently as president to help prevent today's financial crisis, he said he would have pushed harder late in his second term to reign in Fannie Mae and Freddie Mac. But, via Mark Thoma, here's a Washington Post article that explains how the Clinton administration was partly responsible for the mortgage giant's out-of-control growth in the first place:
The Clinton administration wanted to expand the share of Americans who owned homes, which had stagnated below 65 percent throughout the 1980s. Encouraging the growth of the two companies was a key part of that plan.
"We began to stress homeownership as an explicit goal for this period of American history," said Henry Cisneros, then Secretary of Housing and Urban Development. "Fannie and Freddie became part of that equation."
The result was a period of unrestrained growth for the companies. They had pioneered the business of selling bundled mortgage loans to investors and now, as demand from investors soared, so did their profits.
By the time Treasury Secretary Lawrence Summers warned that Fannie and Freddie needed to be brought under control, it was too late. The lenders had become so politically powerful that they successfully resisted reform efforts, aided by politicians of both parties who wanted to share the credit for growing home ownership rates. Ironically, we now know that renting can actually be very smart for both family and national economics. That's a message, though, that's been lost in the kerfuffle of the past few weeks.
--Dana Goldstein
