Fannie and Freddie sounds like a doowop group from the 50’s, doesn’t it? Anyway, I found a blog called the Economists View. He tries to do a causation analysis of the crisis.
Rather, than just repeat my list of factors what were the causal factors, today I want to try a different approach. Let’s do a “Causation Analysis” of the biggest factors to see if we can determine not just the various elements that contributed to the credit collapse, but which factors actually caused it to occur and what merely exacerbated the collapse, making it worse.
Understand that this is a theoretical discussion based on counter-factuals — what is likely to have occurred if various elements leading up to the crisis were different. We are trying to discern the differences between primary and secondary factors, separating the causes from theexacerbators.
Whenever someone asserts as a cause an event or force relative to a particular outcome, you should always ask: “Is this a “BUT FOR cause of that outcome?” In terms of a specific result or outcome, “But for” this factor, how would the outcome have changed? Would the result have been the same or different?
My top 3 list of crisis “BUT FORs” are:
1) Ultra low rates;
2) Unregulated, non bank, subprime lenders;
3) Ratings agencies slapping AAA on junk paper.
Why are these “But Fors?” But for these things occurring, the crisis would not have happened…, there is no boom and bust, no crisis and collapse. … That is these are the big 3 — why I label them the prime cause of the crisis.
I think that EV has hit the nail on the head. He goes on with his analysis:
So are Fannie & Freddie a “BUT FOR” ?
I don’t see how. Wall Street had been securitizing most of the sub-prime mortgages for years without the GSEs (Government Sponsored Enterprise) — Fannie and Freddie jumped in very late because they were losing market share. Their timing was perfect they started doing nonconforming mortgages just as the market peaked.
And if Fannie & Freddie didn’t exist, mortgage securitization would have happened anyway, the way it did in areas where their were no GSEs — securitized credit card receivables, auto loans, small biz loans, etc. took place without GSEs. I assume there would likely have been a private sector version for conforming loans, the way there was a private sector securitizing response to the demand for non-conforming (sub-prime) loans.
So, EV has looked at the data from a different vantage point than I did but basically came to the same conclusion as I did. Freddie Mac and Fannie Mae threw fuel on the fire, but they did not cause the meltdown.
I also found this from CalculatedRisk:
I think we can give Fannie and Freddie their due share of responsibility for the mess we’re in, while acknowledging that they were nowhere near the biggest culprits in the recent credit bubble. They may finance most of the home loans in America, but most of the home loans in America aren’t the problem; the problem is that very substantial slice of home loans that went outside the Fannie and Freddie box.
Finally, I’m going to include a table from the San Francisco Fed. This simple table looks at the mortgage characteristics of several players in 2006 (the last year of the mortgage boom). Note the average credit score of Fannie and Freddie back loans.