The Curious Case Of The Government-Sponsored ‘Free Market’
December 10, 2008 1 Comment
Yesterday this hilarious story showed up on Bloomberg in which Fannie/Freddie’s ex-CEOs blame Congress for not regulating them enough and not preventing them from taking risks. “You should have stopped us from doing the stupid things we did!”, they are saying. Remind me not to ever try that defense.
Two things about the article though.
1. They blame the crisis in part on, as the article puts it, “housing officials for encouraging the mortgage-finance company and its competitor Freddie Mac to expand into riskier loans with limited oversight.” This (if you believe them, and one must acknowledge the self-serving nature of whatever they say) actually buttresses the conservative line about the financial crisis. The debate on this has actually swung, from conservatives (somewhat defensively) suggesting that Fannie/Freddie were pushed to make bad loans by lefties in the government, to lefties fighting back (somewhat defensively) by trying to pull out numbers suggesting that stuff like CRA couldn’t have caused the crisis. This article pushes the pendulum back to the conservative view.
2. And as for numbers, further into the article we learn that in ’06-07, Freddie purchased 13 percent of all subprime & Alt-A bonds created, and Fannie purchased 5 percent. That’s 18 percent together: government ‘sponsored enterprises’ (read: the government) purchased 18 percent of all the newly securitized subprime & Alt-A debt in those years. This may not seem like a lot and indeed lefties may actually point to these numbers to try to argue against the it-was-the-socialists meme (“look! only 18 percent! the free market purchased the other 82 percent!”)
But I think that would be a misreading. 18 percent of a type of debt being bought up by the government – with implicit government guarantee against bankruptcy/default, or so everyone assumed – is HUGE in my opinion. The government doesn’t have to buy up 90+ percent of something to distort the market in that thing. If the other market actors in the secondary market know that the government is out there, buying the stuff at such-and-such prices, they’ll be more willing to just buy from each other, and the prices will be highly influenced by the perceived prices the government will pay.
And as we know, the government (Fannie/Freddie) was under pressure to ‘promote affordable housing’.
All of these items are just circumstantial bits but to me they are beginning to paint a pretty consistent picture. Whatever you think and whoever you blame, at the very least it should be clear that this market was, and is, very far from a ‘free market’.