I sometimes don’t know what it is people mean by the phrase “the financial crisis” and certainly Tyler Cowen’s post in defense of the “blame Fannie Mae” account leaves me scratching my head as to which crisis he’s talking about. This, to me, is what “the financial crisis” is:
1. There was a large run-up in property values.
2. Many highly rated mortgage backed securities were created based on the assumption that that a systematic decline in property values was impossible.
3. A lot of financial transactions were undertaken based on the assumption that the high ratings were deserved.
4. Property values declined.
5. Highly rated MBS lost their value.
6. Financial panic!
The part where unwise public policies to subsidize homeownership would seem to come into this is step (1), but we in fact see this happening in many markets (Spain, commercial real estate) where Fannie and Freddie weren’t players. Admittedly, about a hundred other terrible economic things have happened over the past four years. But this chain, to me, is the financial crisis. Before the financial crisis, I remember a number of people warning that the problem with Fannie and Freddie was that they could leave the taxpayers on the hook for a lot of money if something went wrong. And, indeed, something went wrong and Fannie and Freddie left taxpayers on the hook for a lot of money. That, to me, seems sufficient to make the case against Fannie and Freddie. But people want this fact to do some kind of ideological work that it won’t support. Banking activities need to be regulated or else asset price fluctuations will lead to macroeconomic instability.
[UPDATE] I don’t think I want to endorse Brad DeLong’s conclusion that Fannie and Freddie made the crisis better. 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.