The Securities and Exchange Commission has charged the CEOs of Fannie Mae and Freddie Mac with civil fraud. Oh my, what will their defenders say now?
There’s been an effort among liberals to deny that Fannie Mae and Freddie Mac had anything to do with the mortgage crisis. I find this effort hard to understand except as a desperate effort to deny that a government-sponsored enterprise with a good social purpose could actually do wrong. So Krugman, for example, or the folks at Rortybomb. That these enterprises effectively created the secondary-mortgage market and that Fannie began the mortgage-backed security business in the 1980s, without which the crisis could not have occurred, weren’t relevant. And great effort went into denying that Fannie and Freddie held enough high-risk mortgages to have played a role in the crisis, despite the fact that in 2006 Fannie and Freddie bought 15% of all loans originating with less than a 5% down payment, and in 2007 bought 23% of such loans (see here). Is it conceivable that if two wholly private mortgage firms held almost a quarter of such loans when the market collapsed that they wouldn’t be the target of liberals’ condemnation?
But now we find, assuming the SEC’s claims are accurate, that Fannie and Freddie not only owned large amounts of bad debt, but that they were lying about it. Reportedly, Fannie’s 2007 report claimed $4.8 billion in subprime loans (0.2% of its total loans), while it actually had $43 billion in subprimes, 11% of its total debt ownership. Freddie reported $2-$6 billion in subprime mortgages in 2006 while actually carrying about $140 billion, and by 2008 over $240 billion. If these were private firms, how vocal would the liberal condemnation (rightly) be?
This is not an argument that the government is solely responsible for the mortgage crisis. As I’ve written elsewhere, I think a disparate set of government policies interacted in unexpected ways to inadvertently create a situation that stimulated the housing bubble, so it bears underlying responsibility. But private actors in the secondary mortgage market were foolishly buying mortgage-backed securities that were deeply opaque, whose real value and risk was not just unknown, but unknowable. So “the market,” or more specifically, private actors, don’t get off the hook here.
But on what possible logical basis can anyone assume that “public actors” operating in the same business were going to be fundamentally different? Anti-market liberals (a subset of liberals) like the government for the same reason that liberals and conservatives distrust it–government actors normally have different incentives than private actors, because the profit motive is not present. (The more sophisticated approach is to recognize that whether that absence is good or bad depends on what type of activity is being considered.) But the inescapable truth is that Fannie and Freddie had a profit motive in this case, but combined with the certainty that they would be bailed out by public funds if their finances went south. The irony is that this combination is exactly what liberals hate when it exists in the private market–the privatization of benefits and socialization of costs. The mystery is why would anyone believe believe that the veneer of “publicness” for Fannie and Freddie was sufficient to fundamentally change those organizations’ behavior?