Among the econoblogs, there's a fascinating ongoing discussion about the role of Fannie Mae and Freddie Mac in the financial crisis. This is a debate with deep roots in policy arguments, partisan maneuvering and infighting, perhaps even personal antagonisms that has now attracted the attentions of several dozen bloggers. It is a classic product of the blogosphere: arcane, if often ad hominem; flashing various aspects of a major theoretical issue, from the political to the economic to the, quite frankly, philosophical; and taking a wandering unpredictable path, much like blog comments or financial crises themselves. It resolves very little, but it does air out any number of issues that surround the role of the mortgage agencies in the financial crisis.
The debate launched last week with an attack on Peter Wallison, a mortgage analyst at the American Enterprise Institute, by Rortybomb's Mike Konczal, who pivoted off analysis by David Min from the Center for American Progress and a report from the House Committee on Oversight and Government Reform accusing Wallison of pushing Republicans on the Financial Crisis Inquiry Commission to emphasize the centrality of the two government-sponsored enterprises' in the causation of the crisis. Wallison wrote a minority report for the FCIC, arguing his GSEs-as-ultimate-cause-of-the-crisis thesis; Min, House Democrats and Rortybomb essentially argued that he was trimming facts to fit his purpose. Wallison struck back on the American Spectator blog. Rortybomb then assembled quite a bit of detail, mostly in the form of e-mails, and fired back in two different posts, suggesting that even Republicans on the commission thought Wallison and his research partner Ed Pinto, were stretching the evidence.
This debate then seemed certain to descend into the usual politics, which Mark Calabria at the Cato Institute described as "the CAP-AEI food fight." Indeed, this was a typical policy cat fight: partisan sniping fought over the interpretation of obscure housing statistics, charges of bad faith and ignorance, in short, much heat with only a little light.
But lo and behold, the debate this time managed to climb out of the mud, if not completely into the bright sunlight, when Tyler Cowen at Marginal Revolution and Berkeley's Bradford DeLong jumped in. Late last week DeLong, who had served in the Clinton Treasury, summarized the dispute and took a shot at the "bizarre claim" in the recently published "Reckless Endangerment" by Gretchen Morgenson and Joshua Rosner (reviewed here) that while James Johnson retired from Fannie Mae in 1999, " 'he is crucial to understanding the origins of the worst financial debacle since the Great Depression.' As I see it," DeLong continues, "this is simply wrong: We would have had the housing boom, the housing crash, the financial crisis, and our current Little Depression had James Johnson never set foot inside Fannie Mae, and even if the GSEs had not made any mistakes at all."
Cowen, in his usual understated way, then tried to rise above it all, offering five points that he, as a self-described "non-spinner," thinks about the role of the GSEs (declaration of nonspinning should trigger some skepticism, like Bill O'Reilly's "No Spin Zone," though Cowen is, in the main, fair-minded). He takes a position between DeLong and Wallison, offering a series of circumstantial arguments for suspecting that the GSEs were guilty of something bad, but not willing to charge them with the ultimate sin. Cowen emphasized that half of the mortgages in America were guaranteed by the GSEs just before the crisis, that leverage "arguably" would have been lower in real estate without the agencies and the fact that the banks paid back the bailouts while the GSEs are still deeply in the red. Cowen then began to play with the definition of "cause." He writes, "It is wrong to suggest that the agencies caused the crisis in the sense that I will cause myself to eat breakfast this morning [his point here, I have to admit, escapes me]. One can debate which weaker notion of cause might be appropriate, but I will just say that the mortgage agencies made the crisis much, much worse."
DeLong then fired back. He argued that Cowen "is playing three-card monte with the word 'crisis.' " He then offers three different definitions of crisis in the context of the downturn: crisis1, the failure of GSEs, which involves the government paying out a lot of money; crisis2, the failure of "the web of financial trust and leverage," that is Wall Street and the banks; and crisis3, the long-term effects, notably higher unemployment. DeLong then tries to take apart Cowen. His key point is that while Fannie and Freddie clearly caused crisis1, they had little to do with crisis2 and crisis3. Writes DeLong: "What Fannie and Freddie created was a crisis1 -- like the S&L crisis of the late 1980s. But S&L crisis-like crisis1 do not create Little Depressions. They create embarrassments for the government, and bills for the taxpayer to pay, but because the government is on the hook and will pay there is no collapse of trust, no flight to quality, no persistent high unemployment. It's only the failure to distinguish between the meanings of 'crisis' at play here that allows fuzzy thinkers to even advance the idea that an institutional flaw that creates a crisis1 is in some way responsible for our crisis2 and crisis3."
DeLong goes further in his final point: "Fannie and Freddie did not make the crisis worse but rather made it better." The logic of this surprising statement? Because the government had seized Fannie and Freddie, there was no resulting systemic rupture and panic like Lehman Brothers' bankruptcy. Well, that may be true, narrowly construed. But while the seizure of Fannie and Freddie did help contain further damage in crisis2 and possibly crisis3, Cowen is right when he replies that this hardly undermines his main point: that the crisis would have been far worse if Fannie and Freddie had never been created in the first place and helped feed the real estate bubble. Matthew Yglesias at CAP's blog, Think Progress, who mostly aligns with DeLong, doesn't agree that Fannie and Freddie was a boon. In an update to a post, he writes: "American housing policy is really bad, along a number of dimensions, of which Fannie and Freddie were one and I don't think that does much to help anything. But I see F&F's critics as trying to make the problems with housing subsidies do ideological work regarding bank regulation in a way that doesn't make sense."
Where does all this leave the casual reader of esoteric blogs? First, convinced that the need to keep one eye on policy and politics does tend to simplify these complex historical episodes in ways that's not always helpful. DeLong is not wrong to separate out various manifestations of the larger crisis. But he acts as if they're as clear and separate in real life as they are in his analysis. In real life, they tended to bleed into each other. Cowen has a point when he suggests that leverage and risk might have been less if the GSEs didn't exist; and he is certainly correct when he quotes Fischer Black's notion that "the longer-run causes of underlying economic vulnerability are important and not just about the shocks themselves." But then we don't really know what conditions might have existed in housing without the GSEs; maybe, for reasons that elude us now, they might have been worse or at least different. The fact is, the crisis had no single, overarching unitary cause, whether it was the GSEs or deregulation or loose monetary policy. DeLong is right to say that Fannie and Freddie alone would have replicated something like the S&L crisis, not a larger financial crisis. These causes, like these crises, tend to bleed into one another. The crisis resulted not from one black swan bobbing toward us, but from the confluence of a flock of black swans, one of which was Fannie and Freddie.
I'm more than aware that that's hardly a striking conclusion or one that's helpful to any political ideology or policy. But even after paddling through this discussion, it's the best I can conjure up.
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