Blaming Fannie Mae


Fannie Mae and Freddie Mac, the so-called Government-Sponsored Entities, really did have some serious problems that have contributed to the current financial crisis. They also really were, politically, generally closer to the Democratic Party. Thus it’s useful for Republicans to act, as John McCain did in his speech this morning, to focus on the tree GSE malfeasance rather than the forest of overall systemic failings. But it doesn’t really make sense. Consider the term “subprime mortgage” that you may have heard. Well, it turns out that what it means for a mortgage to be “subprime” is that it doesn’t meet Fannie or Freddie standards.

Beyond that, it’s impossible to say whether additional regulatory authority over the GSEs would have been necessary or sufficient to reduce the impact of this crisis because the existing regulators weren’t using their existing authority. Arguably, the authority they already had would have been sufficient had they used it. Indisputably, giving additional authority to people unwilling to use their existing authority wouldn’t have changed anything. And that set of regulators wasn’t the only set asleep at the switch — the Fed dragged its feet on the subprime issue despite Fed Governor Ed Gramlich’s warnings about problems here, and the SEC ignored the risks associated with the highly leveraged trades that were being made.

Problems existed with the regulatory oversight across the board. And of course part one crucial common thread here is that all of these agencies were headed up by conservative deregulators. The same people not enforcing environmental regulations and not enforcing civil rights law and not enforcing labor rights were also not doing their job at the financial regulatory agencies. Conservatives believe that the role of agency heads is to avoid using their regulatory authority in constructive ways.