Causes and Instruments

George Will asks rhetorical questions:

Suppose there had never been implicit government backing of Fannie Mae and Freddie Mac. Better yet, suppose those two had never existed — there was homeownership before them, just not at a level that the government thought proper. Absent Fannie and Freddie — absent government manipulation of the housing market — would there have developed the excessive diversion of capital into the housing stock?

I completely agree that spinning Fannie and Freddie off as private firms with a hazily public mission and implicit government guarantee was a mistake. But that said, while I understand conservatives’ desire to push the “real” blame for the present crisis far enough into the past so as to exculpate the Bush administration but as with the Community Reinvestment Act you have to think about the timeline. The financial panic is happening in 2008. The housing bubble burst in 2006. And it only really came into existence in the 21st century after the bursting of the tech stock bubble. Fannie and Freddie were spun off in 1968. So it hardly makes sense to say that their mere existence is responsible for our current predicament. Rather, because Fannie and Freddie exist an unsustainable housing bubble brought them down. But it’s bringing other firms down, too, and if they didn’t exist there would just have been some other firms taking on these bad loans. They were the instruments through which some portion of these problems occurred, but not the root of the problem.

What’s more, in terms of the housing bubble the policy error (if any) was much more plausibly a sin of omission than one of commission. Perhaps policymakers — most plausibly those in the Bush administration, but in theory congressional Democrats as well — could have done something to try to end the bubble psychology back in 2003 or 2004 or 2005, but they didn’t. But for various reasons they chose not to do so.