Fed's seek further control...

[UnderseaLcpl]

Originally Posted by mookiemookie

This is absolutely false. Suprime lending didn't exist until the early 1990s.

Negative. The term "subprime" may not have existed until then ( I wouldn't know) but Fannie Mae was created with the intent of providing a secondary mortgage market through purchasing risky loans, thus setting the groundwork. A rose by any other name still has thorns.

Fannie and Freddie were actually losing market share to non-bank lenders in the subprime market during the runup to the crisis (2003-2007). And remember, the credit bubble extended to more than just home mortgages - commercial real estate, student loans, credit card receivables and other forms of debt that Wall Street had an insatiable appetite for. None of which involved Fannie and Freddie (hereafter referred to as government sponsored entities or GSEs).

Yeah, because Wall Street thought it had a backup plan in the security promised to GSEs by the Fed. You're missing a key point here, and that is that this whole industry is a reflection of what it is built on. Like dollars themselves, it was only worth anything because people thought other people thought it was. A whole industry was built, and then expanded upon the premise that the state would buy debt, and there was a killing to be made while high- interest payments came in. It didn't take long for a whole trading system to grow up around that system, but the system itself was bound to collapse. If there had been no Federal housing initiatives of this type banks wouldn't usually lend to high-risk customers and there would be no crisis.

The primary sources of the credit bubble and resulting economic collapse were the abandonment of traditional lending standards - banks didn't care if loans were going to pay, as they were moving them off their books to Wall Street within 30, 60, 90 days after closing anyways - and a Federal Reserve that brought rates to historic lows and kept them there for an extended period of time, all the while ignoring the bad behavior of the loan originators.

And why didn't they care? Why was there a way to trade bad loans in the first place? Government made it happen. It's just another unintended side-effect of screwing around with the market.

Again, none of this is directly a fault of the GSEs. They did purchase loans from banks, and they did lower their requirements for the loans that they would purchase, but the majority of the garbage loans were securitized by private label issuers, and not the GSEs. Indeed, by the time that the GSEs had relaxed their rules, the die had already been cast and the housing boom was in full swing.

Like I said, they laid the groundwork. They created a market where none existed before, and where one should not yet have existed.

The GSEs were not the first to fall. They were not even government agencies - they were government SPONSORED entities. The important difference being that they could borrow from the Treasury at more attractive rates than others. They were private sector, publicly traded firms.

I've made my argument, but I'd like to address this point. GSEs are no different from government agencies in my mind, as they are backed by a fitness guarantee and operate much in the same way government does, which is to say the same way any guaranteed industry does, which is to say stupidly. They are only private firms in the nominal sense in that respect.

Furthermore, they may not have been the first to fall out of everyone, but that's splicing hairs and disregarding the Federal backing they recieved. They were definetly the first dominoes to fall, though. When they went, the market built on top of them went.

The "blame Freddie and Fannie" argument even fails in terms of time and space....FNMA's been around for 70-odd years and just now they cause a collapse of the financial system? It makes no sense - especially given that the entire world experienced a housing boom during the early to mid 2000s. UK, France, Spain, Australia, Ireland - if the entire cause of the crisis could be laid at the GSEs doorstep, then how did they cause the runup internationally?

You've got me on that one. I don't know for sure. It could be any number of things, but I suspect that if the GSE's were to blame then the world runup would have something to do with everything being tied to the US economy and perhaps other nations following suit with respect to housing policies.

As far as the time element is concerned, that's a non factor. Times change, and when these agencies were established there was not a great demand for home-ownership from people who couldn't afford it. There was a moderate crisis in the late 70's, as I mentioned, which just happened to come right after an immigration spike, so this has happened before.

As I said before - blame the GSEs for taking part in the whole mess, but to say they were the cause and start of it is just not true.

Perhaps, but this crisis reminds me of a lot of earlier economic crises where everything under the sun was blamed except for government, or rather, particular policies embraced by persons in office at the time, and all that turned out to be BS. As such I am inclined to believe that the simplest explanation is the correct one.

Take, for instance, the gas crisis of the 70's, as one of the most severe in recent history. The shortage and inflation of the time were blamed on everything from the weather to OPEC to speculation to greedy oil tycoons, but those things have always been around. What caused the shortage was the government price-fixing gasoline. As Milton Friedman put it (paraphrased)"Economists may not know much, but we know how to create a surplus or a shortage. Want a surplus? Set prices above the market rate. Want a shortage? Set prices below the market rate."
He was right, and the whole truckload of BS that followed was blamed on everything except the bulls.

I see the same thing here. Affordable housing is a popular political stance, and it comes with all the trappings of similar failed initiatives of the past. You can blame anything on anything if you try hard enough, but you can't deny empirical evidence unless you are blind.