×
Republicans have decided to blame Fannie Mae and Freddie Mac for the financial crisis. They've decided to do this for two reasons. First, Fannie and Freddie gave more money to Democrats, though as we're finding out, they also gave a lot to Republicans. Two, Fannie and Freddie were theoretically connected to the government (though only in the sense that people expected the government wouldn't let them fail), and so their culpability turns this around on the government. What they haven't decided to do is blame Fannie and Freddie because Fannie and Freddie are actually to blame. Mark Thoma explains:
Fannie and Freddie did not cause the crisis, they were a consequence of it.How do we know this?Fannie and Freddie became fairly large players in the subprime market, and they got that way by following the rest of the market down in lowering lending standards, etc. But they did not lead it down. Their actions came in response to a significant loss of market share, and it is this loss of market share that motivated them to take on more subprime loans.We need to understand why the overall market - the part outside of Fannie and Freddie's domain - was able to lower lending standards (and increase their risk exposure in other ways as well), and how regulation which had worked up to that point failed to keep Fannie and Freddie from dutifully responding to the market pressures on behalf of shareholders by duplicating the strategy themselves, but again, they were followers, not leaders.In other words, Fannie and Freddie were private institutions with shareholders they were responsible to. The lending market changed, shifting away from the fairly safe mortgages they tended to buy. They lost market share. This is where government regulation or oversight should have intervened and kept them from changing their business strategy and buy low-quality loans to increase market share. It did not. In an attempt to recapture market share, they shot aggressively down the same path as everyone else. But they did not start everyone else down that path. They followed. For a much more technical explanation, see Calculated Risk, who concludes, "I think we can give Fannie and Freddie their due share of responsibility for the mess we're in, while acknowledging that they were nowhere near the biggest culprits in the recent credit bubble. They may finance most of the home loans in America, but most of the home loans in America aren't the problem; the problem is that very substantial slice of home loans that went outside the Fannie and Freddie box." And Richard Green has a relevant graph.
