Comment: Remember, Fannie and Freddie

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Remember, Fannie and Freddie

Remember, Fannie and Freddie were private corporations. Chartered by the government, but privately owned. There was actually no legal guarantee by the US to back loans purchased by those private corporations.

People say that the government bailed out Fannie and Freddie because they had been government chartered, but I think the fact that both companies had so many loans (30+% of subprime mortgage loans IIRC) was much more compelling.

For a comparison, what if 30% of America's water consumption came from a single reservoir operated by XYZ. One day, there is a huge disaster and billions in damages happen to the reservoir. The only option is to give money to XYZ to fix the reservoir. Maybe we should let XYZ fail, and let the market correct itself. But the fact that 30% of the water comes from XYZ; how much is the government's fault, and much of it is just the market?

Yes, the government did bail out those bad loans. But without the goverment, those loans still would have been made. Before everything crashed, those fraudsters were making a ton of money. Fannie and Freddie attracted business by guaranteeing loans in exchange for a fee...the lure of their guarantee, however fradulent (remember, no legal federal guarantee), attracted a lot of business, and F&F shareholders and executives raked in the profit short-term. When the bubble burst, those guys were already rich.

"If there were no central bank doling out credit on the cheap, nor a federal govt butting its nose into the economy telling the bankers who they would have to loan money to or creating a garbage hopper to dump all the bad loans in via Fannie/Freddie the bankers would have never even MADE the loans"

For sure, the government setting the interest rates to lower than what the market demanded contributed to bad decision making. However, the federal government told no one that they had to make loans. They did things like prevent discriminatory lending, regulate interest rates, etc. For example, the feds would say that if you make a loan to a minority, it can't be more than X rate. The banks still have the choice of making the loan or not, and they made the loans (still at terribly high interest rates).

And the ironic thing is, Bill Clinton and Jimmy Carter enacted a lot of regulation that allowed banks to make loans unfettered. Before, home loaning was much lower, because federal regulations reigned in the risk banks could take. Whether it was separating commercial and financial banks, mandating the banks have more thorough credit checks, putting more onus on banks to inform the consumer, or limiting predatory lending practices, all these things stimulated more home buying at the cost of the future.

A lot of acts that removed the cumbersome regulatory practices on the financial industry was a severe cause of the crisis, without question.

Look at things like the CFMA of 2000 to see how government regulation has been stripped away.

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