Tuesday, January 29, 2013

How Fannie Grew (fin, probablement)

It should be stressed that James R. Hagerty's The Fateful History of Fannie Mae: New Deal Birth to Mortgage Crisis Fall is not an anti-government polemic.  Not even an anti-government sponsored housing one.  It's a serious work of scholarly journalism (which is not actually oxymoronic) that details the history of the evolution of that institution.

That said, Housing Cause Denialists will hate it.  Not because Hagerty promotes Fannie (and the other GSEs) as the great villain in the recent economic unpleasantness, but because of all the facts marshaled to show just how big and influential the GSEs had become.  It beggars belief that we could have had a housing bubble without the participation of Fannie and Freddie.

As Hagerty shows, the FMs ran the show for mortgages.  Fannie's software sat on desks of brokers and bankers throughout the country, so it determined who got a loan and who didn't.  Especially after the demise of the Savings and Loans around 1990.  The FM's standards became the industry standards.  They, at one time in the 1990s, owned or guaranteed half of all mortgage loans in the U.S.

Many influential people saw the risk in this (especially their low capital/high leverage model), including Alan Greenspan, David Stockman, Fed vice-Chair Preston Martin, Senator Phil Gramm, Treasury's Larry Summers and Gary Gensler, the WAPO's economics columnist Robert Samuelson, and financial analyst Josh Rosner, who warned (2001); The virtuous circle of increasing home ownership through greater leverage has the potential to become a vicious cycle of lower home prices due to an accelerating rate of foreclosures caused by lower savings....

But all those voices were defeated by the lobbying arm of Fannie Mae.  Which managed to co-opt even Paul Volcker (hired as a consultant to assess its own capital adequacy in 1990).  CEO Franklin Raines commissioned the Fannie Mae Papers written by economists Joseph Stiglitz and Peter Orzag that defended Fannie's risk models and claimed the danger of a taxpayer bailout to be near non-existent (2002).

It might have been the greatest lobbying offensive in U.S. history.  It worked because the benefits of the arrangement to Fannie Mae and its army of consultants, the realtors, builders and lenders, the political activists promoting affordable housing, were concentrated and easily visible to those beneficiaries.  They had powerful incentives to defend their privilege.

Not so the potential--now, after the housing bubble has burst, actual--costs.  Those were dispersed among tens of millions of taxpayers who had lives they could (and had to) live in ignorance of the machinations of the politicized class.  Which is how it was allowed to happen, pretty much the way Buchanan and Tullock predicted back in 1958.

No comments:

Post a Comment