The Washington Post argues that Larry Summers is just the person to fix Fannie and Freddie because he has such a clear understanding of what went wrong. This one should bring cries of horror from everyone. Contrary to what the Post asserts (attributing the same view to Larry Summers), Fannie and Freddie did not go down because they were quasi public institutions protected from effective regulation. They went down because, like their counterparts in fully private institutions, their management was either too dumb to recognize the housing bubble, or sufficiently greedy that they were prepared to let companies go bankrupt so that they could earn high fees and bonuses until the bubble burst (with million of homeowners being nailed in the fallout). Fannie and Freddie's private sector competition, Bear Stearns, Merrill Lynch, Citigroup etc. did no better in avoiding junk mortgages than Fannie and Freddie. In fact, they dove in earlier and farther, creating a market environment in which Fannie and Freddie had jump into the muck to preserve their market share. Fannie and Freddie were big boys, and all they do is buy mortgages, so there is absolutely no excuse for their incredibly bad judgment. But arguing that they had some special protection because of their quasi public status -- as though they would not have delved deep into the junk if they had been completely private -- is one of the most ridiculous claims ever to appear in a Washington Post editorial.
--Dean Baker
