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Dogma Versus Reality
Posted By Barry Ritholtz On December 18, 2010 @ 6:48 am In Bailouts,Credit,Really, really bad calls | Comments Disabled
In tday’s NYT , Joe Nocera calls out FCIC member and long time AEI analyst Peter Wallison, and his inconsistent narrative about Fannie and Freddie:
“As he wrote in 2004, “Study after study have shown that Fannie Mae and Freddie Mac, despite full-throated claims about trillion-dollar commitments and the like, have failed to lead the private market in assisting the development and financing of affordable housing.”
After the crisis, his tune changed considerably — as did that of many other Republicans, who tended to follow his intellectual lead on this issue. Now, he said, it was government policy aimed at increasing homeownership that essentially forced the private sector to make bad subprime loans.
And Fannie and Freddie, with their enormous power in the securitization market, were the government’s vehicles in leading Wall Street and the other market participants down this garden path. “Fannie and Freddie were in competition to reduce underwriting standards,” Mr. Wallison told me when I spoke to him this week. This of course directly contradicts his criticism of six years ago, but never mind.”
This is not intellectual flexibility, it is the opposite: The conclusion is always the same — government bad, markets good — but the rationales are what changes. Different theories, arguments, rhetoric all are in service of the same narrative regardless of facts and data to the contrary.
Start with the conclusion, look for confirming facts; If they don’t exist, make them up.
Wallison’s white whale obsession with Fannie and Freddie has led him to exist in a fantasy world, filled with intellectual artifice, devoid of empirical evidence.
“The only problem with Mr. Wallison’s theory is that it’s not, as they say, reality-based. Anyone who has looked at the role of Fannie and Freddie will discover they spent most of the housing bubble avoiding subprime loans, because those loans didn’t meet their underwriting standards. (Indeed, for most of their existence, Fannie and Freddie didn’t so much meet their affordable housing goals as gamed them.)
When Fannie and Freddie finally did get into the business, it was very late in the game. But the motivation wasn’t pressure from the government; it was pressure from the marketplace. You see, the subprime companies and Wall Street had long used subprime loans as a way to do an end-run around Fannie and Freddie. By the mid-2000s, subprime underwriting and securitization had become so profitable — and such a large part of the overall mortgage business — that Fannie and Freddie felt they had no choice but to dive in. In other words, the G.S.E.’s were reacting to the realities of the market, not to the government. They were worried about losing market share.”
Never let the truth get int he way of a good narrative . . .
Explaining the Crisis With Dogma 
December 17, 2010
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URL to article: http://www.ritholtz.com/blog/2010/12/dogma-versus-reality/
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 NYT: http://www.nytimes.com/2010/12/18/business/18nocera.html
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