Monday, September 29, 2008

Frank's Fingerprints Are All Over Financial Fiasco

Barney Frank: "The private sector got us into this mess. The government has to get us out of it."

Jeff Jacoby in yesterday's Boston Globe:

While the mortgage crisis convulsing Wall Street has its share of private-sector culprits, they weren't the ones who "got us into this mess." Barney Frank's talking points notwithstanding, mortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so - or else.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods." Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

HT: Cafe Hayek


At 9/29/2008 9:53 AM, Anonymous Anonymous said...

Of course, there is always a 30 year lag between new laws and when they impact market behavior.

We all know that.

At 9/29/2008 11:32 AM, Anonymous Anonymous said...

Fair enough anon 9:53

But, was Frank part of the problem or part of the solution?

The ants find the sugar. Always.

The part about all this is that I don't see any reform to stop what actually got us here.

Where is the "accountability"?

At 9/29/2008 12:02 PM, Anonymous Anonymous said...

According to Dean Baker of The American Prospect:

Fannie and Freddie got into subprime junk and helped fuel the housing bubble, but they were trailing the irrational exuberance of the private sector. They lost market share in the years 2002-2007, as the volume of private issue mortgage backed securities exploded.

In short, while Fannie and Freddie were completely irresponsible in their lending practices, the claim that they were responsible for the financial disaster is absurd on its face -- kind of like the claim that the earth is flat. Free market conservatives know that the claim that Fannie and Freddie were responsible is ridiculous.

Anyone know what data would support or refute this claim?

At 9/29/2008 12:27 PM, Anonymous Anonymous said...

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

- From Krugman

At 9/29/2008 12:33 PM, Anonymous Anonymous said...

Mark Thoma has an article titled "It Wasn't Fannie and Freddie":

So, overall, perhaps the implicit asset guarantee did distort markets, but those distortions did not start with Fannie and Freddie, and they did not substantially worsen when Fannie and Freddie took over where the S&Ls left off. And even if there was some distortion, it's hard to find any linkage between the onset of the financial crisis and changes in the net socialization of risk through Fannie and Freddie.

At 9/29/2008 12:49 PM, Anonymous Anonymous said...

I may be wrong on this, but didn't the bail out start with saving Frannie Mae and Freddie Mac? Wasn't the imminent collapse of these institutions what started all this in the first place? The private sector may have dominated the market, but the private sector wasn't the first to fold either.

At 9/29/2008 1:01 PM, Blogger bobble said...


this is from an article titled "Time to Reform Fannie Mae and Freddie Mac" published in 2005 by the right leaning Heritage Foundation:

"Despite its claims to the contrary, Fannie Mae’s basic operating procedures do not target any partic­ular type of buyer/borrower. Indeed, evidence from the federal government indicates that Fannie Mae and Freddie Mac are in fact neglecting first-time homebuyers in comparison to the entire private conventional mortgage market. Between 1999 and 2003, 9.0 percent of the conventional conforming loans (the type the GSEs are authorized to buy) made by the private mortgage market were to first-time minority homebuyers. By contrast, only 4.7 percent of Fannie Mae loans and 3.5 percent of Freddie Mac loans over the same period were to first-time minority homebuyers. "

heritage article

as usual, you have made bold assertions not backed up by any credible data.

fannie and freddie were not major players in subprime lending

At 9/29/2008 1:18 PM, Anonymous Anonymous said...

I have a question about how the primary mortgage market may have played a part in the current crisis...

If the standards for lending were rewritten by Congress in 1992, what would have protected banks from being subject to discrimination lawsuits if they had declined credit to those who would have been ineligible for credit under the older standards?

I guess, boiling it down, did banks really have a choice in lending or not lending to people who were, for all intents and purposes, credit risks?

If they didn't, it seems like the secondary market was doomed to fail.

Thanks for the help.

At 9/29/2008 1:24 PM, Anonymous Anonymous said...

Fannie & Freddie seem unlikely culprits.

Although I can understand why conservatives would want to point the finger in their direction.

As this Fed chart indicates:

The loan performance on Fannie's book of business is substantially better than the overall mortgage market. And starting in 2002, Fannie Freddie (pink line) lost market share to ABS (light blue line)

At 9/29/2008 1:30 PM, Anonymous Anonymous said...

But here's the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that's because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn't do any subprime lending, because they can't: the definition of a subprime loan is precisely a loan that doesn't meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

At 9/29/2008 1:33 PM, Anonymous Anonymous said...

Econobrowser takes a position that falls more in the middle on Fannie & Freddie:

I very much agree with Krugman that the most egregious problems were not caused by anything Fannie or Freddie themselves did. But I disagree that their actions played no role in causing the underlying problem we face today.

At 9/29/2008 2:22 PM, Anonymous Anonymous said...

Looks like there's plenty of blame to go around.

It might make feel good to bash Barney Frank, Fan/Fred, investment bankers or George W Bush but are we any closer to figuring a way out of this mess?

Maybe we should be considering at the lessons from Resolution Trust.

At 9/29/2008 2:33 PM, Anonymous Anonymous said...

CRA is not the place to put all or even most of your blame. I know its scary, but the biggest chunk of blame goes to the FREE MARKET INSTITUTIONS for never understanding the risks of the PRIVATE instruments they were trading and assuming that real-estate would always increase in value.

At 9/29/2008 2:33 PM, Blogger juandos said...

Regardless of the leftist propaganda rags like the New York Times with its track record of lying or the Prospect with its track record of having a very tenuous grip on reality the real problem was and still is the Democrats and their socialist/neo-commie ways: 2004: Dems Fight Regulations on Fannie, Freddie During Illegal Bookkeeping Hearing

The Financial Mess: How We Got Here

Burning Down The House: What Caused Our Economic Crisis?

At 9/29/2008 3:14 PM, Anonymous Anonymous said...

When baptists meet bootleggers

I realize that this discussion like many subjects is largely shaped by our ideological orientation. Perhaps, it is time to look beyond such constraints.

I believe that we can all agree that the problem is highly complex and its outcome critical to the U.S. economy.

At 9/29/2008 4:23 PM, Blogger Marko said...

When banks make bad loans, and as a result they are inadequately capitalized, they should fail. Right?

If they are inadequately capitalized merely because of new book keeping rules, then maybe we should change the book keeping rules. Right?

So, it seems to me we should let them fail, or change the rules so they don't have to mark to market. Isn't that what we would want in a free market? Its funny that the democrats are all for bailing out the rich guys, and the conservative republicans are for letting them fail, or letting them buy insurance. I thought the demoncraps were supposed to be against big corporations? Lol.

At 9/29/2008 6:07 PM, Anonymous Anonymous said...

Saying that The American Prospect or The New York Times are just liberal rags and therefore we can ignore their positions is a weak argument. How about taking the Dean Baker quote presented by one of the earlier posters today. Even if it is true that Fannie and Freddie lost market share in the years 2002-2007, as the volume of MBS increased, that does not make the case that they were not responsible for the current mess. Even with a declining market share, their massive overall share was large enough during this period that they could be pointed to as being largely responsible for our problems, especially if it is true that they were promoting homeownership among unqualified potential homeowners and thereby distorting the market.

At 9/29/2008 6:18 PM, Anonymous Anonymous said...

Krugman's argument that Fannie and Freddie "largely faded from the scene" seems to be contradicted by the chart posted earlier. It shows Fannie & Freddie holding a significant enough portion of assets to clearly contradict Krugman's claim.

At 9/29/2008 6:21 PM, Anonymous Anonymous said...

Two posters have made the same point about Fannie & Freddie losing market share during 2002-207.

So what?

Their market share was still HUGE!

Let's hear another argument.

At 9/29/2008 6:32 PM, Anonymous Anonymous said...

the claim that they were responsible for the financial disaster is absurd on its face -- kind of like the claim that the earth is flat

Well, if they actually encouraged risky mortgage lending to boost homeownership during a housing bubble, the claim doesn't sound so absurd, does it?


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