Uh Oh. Guess What’s Really Behind the Financial Crunch?

It’s not the “Wall Street fat cats,” unless you mean by that the head of the the government sponsored corporation known as Fannie Mae.

Buried in the NY Times archives is this little gem of a story from Sept. 10, 1999:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

”Fannie Mae has expanded home ownership for millions of families in the 1990′s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

(Raines, incidentally, is an adviser to Barack Obama.)

Now here comes the best part.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”


So you see, the problem isn’t greed (which exists in every market, because it’s part of human nature) and it’s not a Lack of Regulation(TM).

No, it’s government pressuring the market to make irrational moves like loaning money to people with bad credit in the name of “fairness.” The problem is not too little, but too much, government regulation. As usual.


  1. Frank says:

    It is so sad that the truth and intricacies of the current fiscal crisis will get swept up under the rug and piled under further regulations.

  2. Anonymous says:

    Good work, Trey. I knew the GOP had nothing to do with it.

  3. DR says:

    EXCELLENT. I found this website throught Reasons Hit and Run blog. I sent the article to everybody I know. I am checking this website everday. From the New York Times! Brilliant!

  4. QDC says:

    This is really sloppy thinking. What evidence is there that these loans actually had bad outcomes? What evidence is there that, prior to this program, we had attained an equilibrium with an appropriate level of mortgage risk?

    It’s silly to pretend that Fannie and Freddie somehow invented the notion of lending to borrowers with less-than perfect credit. Subprime lending was an innovation of the private market enabled by securitization. By 1999, the subprime market was already growing rapidly among private lenders outside the confines of the GSEs. And the thing is, it was a good innovation. Lending standards historically were far too tight, and mortgage securitization freed up capital to make loans that approached a more optimal level of risk. Of course, when a bubble formed, we at some point crossed that optimal level.

    Even if you think that the government was encouraging banks to make too many bad loans, certainly no one was forcing banks to make leveraged bets on the riskiest tranches of CDOs. Those bets, which are the proximate cause of the crisis, were simply plain old bad investments. It happens.

    Look, there’s plenty of blame to go around, and government subsidization of the housing market (mostly through the mortgage interest deduction) certainly worsened the housing bubble, which led to the mortgage-backed security bubble. But to just point at some particular government program (a pilot program!) which started ten years after subprime lending started its ascendancy, and say “Aha!” is simply not a persuasive argument. Every side of the debate needs to try to see around their own cognitive biases (Regulation cased the crisis! Regulation would have prevented the crisis!) and understand that a crisis like this is caused by the interaction of many forces, some private, some governmental, and some systematic.qd


  1. [...] Journalist Trey Garrison wades ten years into the New York Times archives and finds warnings of what was to come: In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. [...]