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