An erroneous report here, an erroneous report there and, before you know it, government, not the One Percent, caused the Great Recession.

I think you are wrong to defend of Fannie and Freddie. Maybe they didn't cause the bubble, as the Republicans charge. But they they certainly helped bail out the banks, after they profited from the bubble. And Fannie and Freddie continue to do so, just like every other government institution.
The main point should be to expose the real role of government in this crisis.

Get the government out of the housing market and "let it hit the bottom" as Mitt said.

Of course we will all be living in tents like OWS, but camping is fun! With no jobs, we will have lots of free time to socialize and read old books.

Let a million campgrounds bloom!

F&F were conduits for corruption and socializing losses. The provided cover for corruption, whether in the "historian services" provided by Newt, Barney's meddling, or handing out big compensation packages to well-connected executives at the firms. They accumulated bad assets and then used taxpayer funds to pay off private investors while allowing the executive perpetrators to walk off with tens of billions.

So we want to avoid "defending" these organizations. They were bad actors. Instead of battling lies with lies - "F&F 'caused' the housing crisis" vs. "F&F weren't at fault" - let's tell the real story: F&F were a component of the housing bubble and contributed to the misallocation of resources into the housing sector. They created moral hazard in leveraging up their balance sheet against implicit taxpayer backing. However, most of the bad loans issued and securitized during the housing bubble did not involve F&F (and the entities involved were not subject to the CRA).

The small (5 branches) local bank where I have done business for 15+ years failed and was taken over by a large regional bank because it had invested in preferred stock of F&F which was wiped out in the restructuring. Poetic Injustice I called it.

@Pete: do you get paid to repeat that zombie lie, or are you just a fool in your spare time? F&F weren't involved in the subprime market - in fact, they LOST market share during the boom to the non-bank lenders who were writing the worst of the loans. Anyone asserting otherwise is just following the old Lee Atwater strategy and ginning up racial resentment.

Oh, and BTW, it's "Lexis-Nexis". You probably want to learn how to spell words before you use them to look smart.

HaHaHaHaHaHa!!!
You are a liar and a fool, Pete! What mediocre private school let you in for undergrad? Bucknell? Pepperdine?

No one here is defending F&F, least of all Dean. Did you and Pete meet at the sigma chi - tri delt mixer and start exchanging notes?

@Pete writes as if the George W. Bush Ownership Society never happened. He just repeats the Zombi lies. Just classic.

http://rortybomb.wordpress.com/2011/01/31/frum-reads-the-fcic-or-the-ownership-society-as-the-bridge-to-a-permanent-republican-majority/

" ... the four-legged stool of [George W. Bush's] ... Ownership Society: tax cuts for the wealthy, health savings accounts, privitizing social security, and mass home ownership. Homeownership is a big deal in the fact sheet (“…The President believes that homeownership is the cornerstone of America’s vibrant communities and benefits individual families by building stability and long-term financial security…The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade…”).

What he really promoted was homebuyership, not homeownership. But politically, why was this a big deal to the Republicans? Egalitarian concerns? As the historian Rick Perlstein found in a 2005 special Ownership Society edition of the American Enterprise Institute’s magazine, Grover Norquist wrote that:

“Bush’s vision also calls for efforts to increase home ownership. Here’s a hint of what that could mean: in House Speaker Dennis Haster’s Congressional district in Illinois, 75-80 percent of voters own their own homes. In Democratic minority leader Nancy Pelosi’s district in San Francisco, the number is 35 percent…. A transition of great political importance is under way. Fifty years from now the move to an Ownership Society will be recognized as a change to America’s political landscape as dramatic as the move from farms to factories.”

Here’s James Glassman:

“Bush wants more ownership because he wants to change the shape of America. He understands that people who own stocks and real estate–who possess wealth of their own–have a deeper commitment to their community, a more profound sense of family obligation and personal responsibility, a stronger identification with the national fortunes, and a personal interest in our capitalist economy. (They also have a greater propensity to vote Republican.)…

Here’s more from what Perlstein found in that 2005 American Enterprise Institute magazine (my bold):

“The places with the higehst levels of homeownership generally vote Republican…. “Our analysis shows that this connection between homeownership and voting Republican holds broadly at every level–from large regions all the way down to metro areas….more and more of the places offering new homes to young families following their dreams are in the heart of Red America.” Not wanting to own your own home is revealed as downright European; Kotkin singles out Prague’s homeownership rate at “about 12 percent.” No Republicans there! He concludes by calling cities like Fresno, Orlando, Dallas, Houston, Phoenix, Las Vegas, and Atlanta “Our New Cities of Aspiration”–”the de facto headquarters of the American dream.”…

Once more our conservative think tank hammered home the electoral point: “Married couples with families, a key Bush constituency, had the highest rates among all groups: over 83 percent.” No wonder Bush won: “Homeownership momentum continued right up to the election. Sales of new homes rose 4 percent in the fall, to an annual rate of 1.2 million units – the third highest level on record. Sales of previously owned homes also rose to their third highest level.”

Especially bustling? California, where first-time homeowners are said to “head for towns like Tracy, Modesto, and Grass Valley. Along the way, many embark on a journey that ends with them voting Republican.”

They thought getting homeownership rates up to 70%+ would secure a permanent Republican majority, the 2005-era dream of Rove and other thinkers on the Right. They looked at the data and saw that suburban homeowners are more worried about tax issues, crime, and tend to vote more conservative on economic issues, and they thought they could let the financial sector do its thing and turn a critical mass of swing voters into suburban bourgeois tax-haters. There’s an element of the GI Bill and post-war suburbanization in this strategy, which was designed in part by the GOP to get people to the new suburbs and weaken the power of Democratic city bosses.

They actively applauded themselves for attempting this distinctly political project in their magazines. And then they blame poverty programs and the idea of government when it all collapses."

On a recent drive across Texas using two-lane U.S. highways, I passed through numerous smaller cities and towns and couldn't help but be impressed by how tidy and prosperous the (largely Mexican) downtowns were. Anglos had moved out to the outer ring of suburbs with their neighborhood malls. The now-Mexican old inner core looked nothing like the decrepit inner city ethnic neighborhoods I had been familiar with. As former governor of Texas, Bush could not have been blind to this phenomenon.

Thus the housing boom, enabled by low interest rates, would simultaneously benefit Mexican-Americans, middle class whites, real estate agents, bankers, developers, builders, timber companies, window and carpet manufacturers etc etc. Keynes' virtuous upwards spiral making (paradoxically) Republicans of us all (as Greg said above).

Unfortunately, the loans were deceptively tricky. A few months after the crash, I followed a link to a federal government page that provided information to prospective home buyers on the subject of adjustable rate mortgages. Let me state up front that I am neither a trained economist nor did I study business in college. However I do well in Math and I had familiarized myself with basic macroeconomics through reading books. Now, it took me three careful readings of that document to fully grasp the implications of adjustable rate mortgages, that is, if interest rates ticked upwards--which was inevitable, given that rates were at near historic lows--the outstanding balance of the loan would be recalculated and a buyer would owe more on the home than they had agreed to pay for it.

Now if I, a college educated, math-savvy person, reading this document in the pressure-free atmosphere of their easy chair, blessed with 20/20 hindsight, needed repeated readings to grasp the possibilities then how much less a chance did the immigrant or sons and daughters of non-English speaking immigrants have of understanding what they were getting themselves into in the adrenalin-flushed atmosphere of the first-tiime homebuyer in a hermetically sealed room at the local bank?

The key here is that the bankers and Bush et al knew that interest rates would go up. After all, rates were at nearly all-time lows. What other direction was there for them to go? Therefore they knew that these people would be "trapped" by the human inclination not to give up their homes. Therein lies the great deception. So their "benevolence" in seeing all these people get into their own homes turns out to have been not so disinterested after all. And then, of course, when the sh*t hit the fan, they ducked and pointed their finger at the silly immigrants who didn't understand the moral implications undertaken in signing a sacred contract and so on.

So, the lesson to take away from this was that a smart operator takes advantage of other people's integrity and counts on them to honor the conditions of a quicksand-like contract that he knew would reset to his advantage and their loss, all the while invoking higher moral principles to coerce their compliance. I got it. It took me three readings, but I finally got it--but then I make no claims to the "exceptionalism" claimed by so many of my fellow citizens so likely I was just slow.

@Matt has most of his post wrong. F&F were very much in the subprime business. Do you even know what the definition of subprime is ? F & F continually loosened their underwriting criteria starting in 1999.

For all the liberals here to not even mention Maxine Waters and Barney Frank (as complicit) in the same paragraphs as they expound their view of the housing crisis - just shows the bias. Thee is enough blame to go around in this crisis and those guilty should be fined and jailed.

That's the how the title of Jethro's comment to Matt should read. Look, the GOP controlled the US House for 12 years, yet our good friend Jethro conveniently ignores this fact. Barney Frank and the Democrats were in the minority, which means they had no power. I'll repeat this point for you Jethro, because this is an important political fact, the GOP controlled the US House of Representatives from 1995 - 2007. Had the GOP been inclined to change Fannie and Freddie they could have done so easily. Why is this? Because they had subpoena power, they controlled the agenda, being in the majority makes all the difference in the world.

Liberals don't have to mention Maxine Waters and Barney Frank because THE GOP HAD TOTAL CONTROL OF THE US HOUSE FROM 1995 - 2007. Better still, just as a side note Jethro, the GOP controlled all three branches of the US federal government from 2001 -2007 (except from June - Nov 2001 in the US Senate before Scott Brown was elected).

So, to recap, the GOP controlled the US House from 1995 - 2007, and all three branches of the US government (US House, US Senate & Presidency) from 2001 - 2007 (except for five months in 2001 in the US Senate), yet somehow the Democrats, Barney and Maxine are to blame? Please.

Just hilarious.

jethro wrote,

For all the liberals here to not even mention Maxine Waters and Barney Frank (as complicit) in the same paragraphs as they expound their view of the housing crisis - just shows the bias.

That's funny, because while e.g. Barney Frank was somewhat complicit, there are far, far more culpable Democrats (like Clinton and Rubin).

"In an article on addressing global warming would a serious newspaper throw in a comment to the effect that "many Americans consider it a hoax," without pointing out that it is not?"

Yes. Also with evolution. And "alternative medicine". And any other issue where the general consensus of the scientific community is at odds with political/economic concerns. Denialists are treated far too compliantly by the press.

There was no one cause of the housing bubble. It was a confluence of numerous factors. But F&F had a BIG role in it.

First of all, it was NOT a subprime crisis - it was a housing crisis. ALL house prices were inflated by speculation and easy credit. GSEs rose from 25% market share of total mortgage debt outstanding to more than 40% between 1990 and 2006 while total volume was surging.

F&F took the best mortgages off the top, leaving private label securitizers with the junk. But it was the aggregate amount of loan origination and securitization that fueled the bubble. The subprime junk was just the first and the worst to blow up. The majority of loans originated in the past ten years were prime fixed rate loans.

Even when F&F retreated somewhat from securitization (because of their accounting scandals) they still ranks FIRST and SECOND among all securitizers. They securitized more mortgages than the top 10 private labels combined in every year.

On top of F&F, there were loans guaranteed by Ginnie Mae, the FHA, and the VA. Then there were high-cost advances from the FHLBs to banks right up to the market peak. FHLBs are GSEs too!

The GSEs were getting affordable housing credits for every loan they bought, and the top lenders from which they bought were Countrywide, WaMu, Wachovia, and IndyMac.

The willingness of F&F to buy mortgages was a huge part of the originate to distribute model. Private labels bought the nonconforming mortgages. Sovereign wealth funds, searching for yield in a low rate environment, scarfed up as much MBS as could be issued. Banks loaded up on MBS as a better yielding alternative to treasuries.

So don't even try to suggest that GSEs were not a major part of the housing crisis. That dog won't hunt! The very fact that F&F had to be nationalized proved they had too much exposure to systematic risk and were undercapitalized.

Yes, Bush's Ownership Society was a big part of the problem. Yes, Republicans did not reign in F&F when they had the opportunity. Low interest rates for too long, via Greenspan, created the interest in MBS.

But the inflation of house prices began circa 1996 when Bill Clinton's National Housing Strategy was unveiled. His HUD Secretaries (including Andrew Cuomo) approved the creation of all the "affordability" products that created the moral hazard and fueled speculation.

Both parties are to blame for passing around the housing Kool Aid.