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George Will and Gretchen Morgenson's Claims That Fannie and Freddie Caused the Financial Crisis: For the Virtual Green Room

Rebutted by Dean Baker:

It really is incredible to see such a concerted effort to rewrite history in front of our faces. There is not much ambiguity in the story of the housing bubble. The private financial sector went nuts. They made a fortune issuing bad and often fraudulent loans which they could quickly resell in the secondary market. The big actors in the junk market were the private issuers like Goldman Sachs, Citigroup, and Lehman Brothers. However, George Will and Co. are determined to blame this disaster on government "compassion" for low-income families. The facts that Will musters to make this case are so obviously off-base that this sort of column would not appear in a serious newspaper. But, Will writes for the Washington Post....

Here's what Moody's had to say about Freddie Mac in their December 2006 assessment:

Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume -- up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective. (p 6).”

This puts things about as clearly as they possibly could be. Moody's was concerned that Freddie (the same applied to Fannie) was losing market share to the private issuers because they were not big actors in "adjustable-rate loans and other hybrid products [i.e. junk]." However, they were cheered by the fact that Freddie was moving in this direction. In other words, the private issuers were very clearly the big actors and Fannie and Freddie were jumping in as a business decision to preserve market share. In other words, it was profit, not government compassion that drove this bubble.

Just to be clear, Fannie and Freddie were horrible actors in this story. I criticized them throughout this period and raised the possibility of these two mortgage giants being sunk by the bubble as early as 2002. Housing is all they do, how could they have totally missed the largest housing bubble in the history of the world?

Rebuttals to talking-points misinformation that I want to have at the forefront of my brain--for when I am surprised, as I will be, by an unexpected question from an unexpected direction while talking to reporters, phone callers, passers-by, radio interviewers, cable TV interviewers, etc....