We Are All GSEs Now

Somebody must have made this point before but I haven't seen it so here goes. The question is: how far do we blame the goverrnment for the mortgage meltdown and ensuing general debacle. The Republican mantra is some variant on “Jimmy Carter did it”--home loans to poor people, plus the implicit guarantee to Fannie and Freddie, underwritten on our behalf by Barney Frank and Tom Dodd.

True? Well, not as true as the wingnut asserts. I've read the much-cited weekender by David Goldstein and Kevin G. Hall at McClatchy (link). The McClatchy headliner has no doubts: “Private sector loans, not Fannie or Freddie, triggered crisis.” I think this headline, like most, is over-simple. I take it at face value that (as Goldstein/Hall say) 84 percent of the subprimes in 2006y were issued by private lending institutions, and that only one of the top 25 subprime lenders in 2006 was directly subject to the Community Reinvestment Act. Still, I don't think the analysis connects all the dots. E.g., “private lending institutions”--okay, but how much of this private lending was underwritten by Fannie/Freddie, or strongarmed through some other channel. At the end of the day, I suspect that we will find that Goldstein/Hall are in essence right, but that there were a lot of people pushing for more risky lending, at that Republicans and Democrats both left fingerprints on the murder weapon.

But there is another issue. Much is made of the fact that Fannie/Freddie were able to haywire because of asymmetric risk—the implicit government guarantee. Very likely, but isn't it fair to say now, in retrospect that the entire banking system operated under an implicit guarantee? Granted, there are some bodies in the ditch here—I'm glad I'm not a shareholder in Lehman—and there will be more. But some shareholdings and a lot of debt will walk away with cash vastly in excess of their fair market value (the Chinese apparently have no imagination when it comes to 40 cents on the dollar).

So apparently there a lot of people who didn't have any incentive to worry about bank solvency because they knew that on way or another, in the end they would be paid. This isn't an argument that the friends of Fannie and Freddie were without blame. It is an argument that spotlighting Fannie and Freddie is view matters too narrowly—in large part, to look through ideological blinders.

We all love markets. Okay, I love markets. But a market that is systematically, in principle and as a matter of necessity, asymmetric—that's not a market, that is a license to steal. At the end of the day (boy, I hope we never get there) we'll have to find a way to defang the of the GSEs and “the banks” alike.