Advertisement
Politics

Did Fannie Mae Cause The Economic Mess?

The Humpty Dumpty economy has fallen off a wall, and while the government scrambles to put the pieces back together again, lawmakers are also furiously examining the scene of the crime to see who shoved him down in the first place.

The Humpty Dumpty economy has fallen off a wall, and while the government scrambles to put the pieces back together again, lawmakers are also furiously examining the scene of the crime to see who shoved him down in the first place. Democrats are quick to blame the Bush administration's lax regulatory approach, while Republicans increasingly point a finger at Fannie Mae and Freddie Mac -- and the Democrats who refused to rein them in -- for causing the housing bubble to collapse and creating financial ruin.

Advertisement - Article continues below

One reason that blaming Fannie and Freddie is in fashion now is that looking elsewhere creates too many headaches. Blaming the banks would hamper attempts to woo them into helping out with economic rescues. (The Obama administration has already had to backpedal on its criticism of excessive executive bonuses after some firms became hesitant about getting involved with government programs.) Lawmakers aren't going to take the blame for not being more vigilant, and few are eager to criticize voters for buying homes they couldn't afford.

Those who blame Fannie and Freddie say they not only failed to spot the housing bubble but they also contributed directly to it by securitizing mortgages and making it so easy for so many to buy a home. There's undoubtedly some truth to that, but defenders of Fannie and Freddie say they had a relatively minor role in the push for easy credit.

Advertisement
Advertisement - Article continues below

The truth is more complicated than either side claims. An economic rout this big doesn't lend itself to easy answers. There's the problem of low interest rates that fed an appetite of home buying; a culture of excessive spending that pushed savings rates into negative territory; new financial products that weren't understood by the banks that created them; housing policies that promoted loose underwriting standards; and state and federal regulators who were clueless about shenanigans happening under their nose.

Fannie Mae and Freddie Mac played a role in all of these areas. But it was Wall Street banks that created the practice of bundling loans into packages and selling them off to investors, allowing them to leverage their balance sheets to outrageous levels.

Fannie and Freddie came late to the game and quickly grew to dominate it, taking it to new highs, and they certainly failed to see the trouble coming. But Fannie and Freddie say they had little choice because they are half public and had to get into the securitization game to keep shareholders happy. That also gave them vast pools of money to play with. By the time the government placed the failing agencies into conservatorship last year, they had owned or guaranteed $5 trillion worth of mortgages.

Fannie and Freddie may not have given the economy its fatal push, but they certainly accessories to the crime. 

Advertisement
Advertisement

Most Popular

7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020
Turning 60 in 2020? Expect Lower Social Security Benefits
Coronavirus and Your Money

Turning 60 in 2020? Expect Lower Social Security Benefits

When you file for Social Security, the amount you receive may be lower.
July 30, 2020
Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy
mortgages

Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy

One 70-year-old’s story highlights the challenges. Prepare for more paperwork and hoops to jump through than you could imagine.
August 2, 2020

Recommended

Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
July 22, 2020
Answers to PPP Loan FAQs (Now That There's Fresh Funding for the Loans)
small business loans

Answers to PPP Loan FAQs (Now That There's Fresh Funding for the Loans)

Small business owners are getting another crack at Paycheck Protection Program loans. Here are answers to some frequently asked questions about the lo…
July 21, 2020
Travel Planning in the Time of Coronavirus
Travel

Travel Planning in the Time of Coronavirus

Insurance may not cover canceled vacations, but airlines and hotels may be flexible.
June 11, 2020
13 Things That May Soon Disappear Forever (The Pandemic Edition)
business

13 Things That May Soon Disappear Forever (The Pandemic Edition)

Emerging technologies (and now the COVID-19 pandemic) are putting an end to these familiar items and practices.
June 9, 2020