The Post ran a piece today about Congress failed to follow through on several warnings about potential problems with Fannie Mae and Freddie Mac. Former Bush administration National Economics Council Director Al Hubbard took Senator Chris Dodd and Representative Barney Frank to task for the same thing in a column on Friday. (Sorry to be slow here – I had a short vacation.) Both items really miss the point. Yes, Congress was out to lunch on Fannie and Freddie. But the problem was not Fannie and Freddie, the problem was the housing bubble. Fannie and Freddie did help promote the bubble. With their implicit guarantee of government backing (now implicit), they helped to funnel trillions of dollars of capital into financing mortgages on over-valued real estate. But, what is the counter-factual? Suppose we had reined in Fannie and Freddie a decade ago. Would there have been no bubble? That seems unlikely. In fact, the private issuers of mortgage backed securities (MBS) were far less responsible than Fannie and Freddie. That is why they have almost all shut down, no one will but their issues anymore. So, if we had followed the advice of those who wanted to rein in Fannie and Freddie (all of whom missed the housing bubble), we might have seen somewhat less capital flow into the housing sector, but the money that did flow in would have been even more poorly regulated than what we saw at Fannie and Freddie. Who knows, the volume of bad debt may even have been enough to sink Citigroup and some of the other big actors in private issue MBS. And remember, the taxpayer is on the hook here also. When IndyMac went down, it pulled billions from the Federal Deposit Insurance Corporation. When the FDIC needs to be recapitalized (yes, it will), it will be taxpayers who foot the bill. Bear Stearns’s collapse put the Fed (and therefore the taxpayers) on the hook for $29 billion. In other words, the question wasn’t whether taxpayers would pay a price for a bailout when the housing bubble collapsed; the only question was which pocket it would come out of. By all means we should point fingers at the key members of Congress who protected Fannie and Freddie, but everyone who helped to foster the housing bubble (or failed to act to contain it deserves a share of the blame. This group certainly includes everyone in the Bush Ownership Society crew.
--Dean Baker
