All last year, I kept getting emails from people asking me: “Why do you keep hammering  on these issues?  Why do you beat up on the eejits who push the Fannie Freddie CRA meme? Its dead, everyone knows its nonsense.”

Except, not so much. That 4 members of the FCIC could push such as discredited meme reflects a broader strategy of Agnotology.

Even Gretchen Morgenson, of that liberal media outlet NYTimes, began her column on Sunday with this sentence: :”DECIDING what to do with Fannie Mae and Freddie Mac, the taxpayer-owned mortgage giants that helped set the financial crisis in motion, will be a huge job for Congress next year. ”

That single sentence is a huge victory for the reality challenged.

Repeat a lie enough times . . .


Category: Bailouts, Credit, Financial Press, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

54 Responses to “Repeat A Lie Enough Times . . .”

  1. wally says:

    This is not a small problem.
    What do you do when a group of people with powerful positions deliberately lie to advance their agenda? And when they are allied with major media outlets that support those lies?

    When you call them out and confront them with facts and realize that they are well aware of the facts but they lie anyway… what do you do? You may be operating in good faith, but they are not.

  2. Chris Gaun says:

    Exactly, the FCIC was doing their part for argumentum ad nauseam. The reality challenged has said it before, they say it in this report, and they will continue to say it ad infinitum in pages of WSJ opinion pieces until it becomes accepted as historical truth.


  3. maybe, ‘Arequipa’ will sally forth with a fuller disquisition, but the operant term, here, is afoot..


    “If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”

  4. wunsacon says:

    Barry, Geithner said something like “moral hazard was mostly a problem with the GSE’s”:

    [eye roll]

    Huh…maybe this is a live stream, because I can’t rewind this back to where I heard it.

  5. KentWillard says:

    Brilliant. Unfortunately the truth is sometimes complex, so simple lies are a lot easier to understand and sell. Particularly when they blame somebody in particular.

    Other big lies:

  6. jaymaster says:

    I agree that the “big lie” is that Fanny and Freddy caused the mess.

    But it is also a stretch to say they had NO part in it.

    I don’t see how anyone could argue that implied (and later, actual) federal backing of marginal loans did not create moral hazard.

  7. Arequipa01 says:

    The last time I had anything to do with a ‘disquisition’, I learned the meaning of mercurochrome.

    Here’s something that some may find appealing:

    Mr. Ritholtz- it’s about the ‘Joy of Stats’, yeah, man. Work those numbers, work’um! Shake that abacus!


    BR: We posted that last month

  8. DL says:

    Pretty hard for me to believe that Fannie/Freddie had no effect on housing prices during the period 2003-2006. Those who argue that Fannie/Freddie were minor factors in the housing bubble should at least have the conviction to state that it has been a mistake to pump taxpayer money into these entities over the last few years.


    BR: That is not the argument being made

    Fannie/Freddie have bee4n around since 1938 and ’68 respectively. Were they a prime factor tot he credit crisis circa 2008-09? How about even a significant contributor?

    If this was math quiz, the teach would say: PLEASE SHOW YOUR WORK — and that is where the Fannie bashers fall short.

  9. diogeron says:

    Well, it drives me crazy as well to hear this meme spun over and over again by people who haven’t a clue and others who should know better. Freddie Mac was a client of mine for many years, primarily in the 80s and 90s. (FWIW, I was a consultant and trainer and worked with their communications people on the presentation skills of some of their senior executives, underwriters etc.) I was heavily involved around 1987, when they took the company public, for example. While I’m certainly no expert in the mortgage business, one can’t work with a client that long without getting at least a basic understanding of what they do and their history. Thus, when my sister starting ranting and raving about Freddie and Fannie “purchasing mortgages from people who couldn’t afford them” and pushing the related meme about the CRA causing the meltdown, I knew I had a challenge on my hand. The first thing I did was to explain to her that the CRA has been around since 1977, Freddie since 1970 and Fannie since the 30s. If the problem was inherent in the basic idea of GSEs, I argued, why did it take so long for things to blow up? Moreover, my sister (a Fox viewer, which may explain it) like some others in the media, don’t seem to understand that FRE and FNM don’t ORIGINATE loans. Why is this so hard? If a guy like me who has two grad degrees, but in subjects unrelated to finance and the mortgage business understands that, why can’t some of the journalists and commentators who cover the business grasp those elemental facts? I get the entire argument about Congress et al undermining the original mission by redefining “investment quality loans” etc., but if people are going to comment on Freddie and Fannie, one would think they would at least have some idea what they actually do.

    The last thing I did was to buy a copy of Barry’s book for her and gently request that she attend to the chapters which address those issues. Hell, I didn’t expect her to take MY word for it given my limited background in the area, so I thought she might benefit from somebody who knows the business a lot better than I. I don’t know if she ever read the book, but she’s not mentioned either of those issues in the last year.

  10. DeDude says:

    The exact entities that saved our residential RE market from a complete meltdown after the iBanks had plundered and destroyed it is being blamed. Data-based reality is indeed under attack from the right wing.

  11. gordo365 says:

    Short answer to “Why do you keep hammering on these issues?”

    Because these a@@hats are influencing policy.

  12. BennyProfane says:

    I recently read that a very large segment of our society believes that Obama is a Muslim, so, just imagine how this Fannie Freddie thing will go down when the campaign gears next year. The Palin Alaska TV show is getting high ratings, and, I’m guessing a lot of those people actually vote.

  13. Johnny99 says:

    Interesting. I had not heard of “Agnotology” before, but it reminds me a lot of the concept of “Epistemic Closure” I’ve read about in the past couple years:

    However, Epistemic Closure seems like a more passive concept, as it is the result of simply surrounding yourself with like-minded influences. Agnotology, as you present it, seems more sinister, as it suggests there are those who use Epistemic Closure to further a point-of-view (which is usually untrue).

    Anyway, whatever you call it, bullshit is still bullshit. It’s unfortunate we have to shovel through so much of it in order to get close to the truth.

  14. cdrueallen says:

    Wars and economies are the points where bullshit eventually meets reality. I wonder what the reality of the “Fannie and Freddie are evil and have to go” bullshit will be when their fate is decided by Congress next year. Will the Republicans be willing to deal the housing market another crushing blow (Fannie and Freddie guarantee > 90% of new mortgage loans), possibly sending the economy back into recession? Or will they find some way to continue ranting while acting to preserve the status quo? And what will the economic fallout be if Congress does cut off all federal support for housing?

  15. Bill W says:

    I have a coworker who claims that Fannie and Freddy caused the financial crisis, because they “got the ball rolling” on securitization, and that Wall Street “could not help themselves” once that Ginnie was out of the bottle. So it is not their fault.

    I try to remind him that Republicans are supposed to believe in personal responsibility, and that bankers who cannot estimate risk are responsible for their losses. I think he went to the Rush Limbaugh school of economics.

    Personally, I think their were plenty of bad actors, and more than enough blame to go around. Therefor, I think it’s appropriate for pain to be felt by many different people. I realize that type of thinking is heresy these days. But I don’t think there is any other way to avoid another crisis.

  16. machinehead says:

    ‘Fannie/Freddie have been around since 1938 and ’68 respectively. Were they a prime factor to the credit crisis circa 2008-09? How about even a significant contributor?’

    Freddie Mac and Fannie Mae were put under government conservatorship on Sep. 7, 2008, accompanied by promises to inject up to $200 billion to replace their depleted capital.

    So the answer is yes, they were a prime factor in the credit crisis of 2008-9, along with Lehman, Bear Stearns, AIG, GM and others. Why is this even in dispute?

  17. FrancoisT says:

    “This is not a small problem.
    What do you do when a group of people with powerful positions deliberately lie to advance their agenda? And when they are allied with major media outlets that support those lies?”

    You chase them from power. There is no other choice isn’t it?

  18. FrancoisT says:

    “So the answer is yes, they were a prime factor in the credit crisis of 2008-9, along with Lehman, Bear Stearns, AIG, GM and others. Why is this even in dispute?”

    The answer is yes for those who are reality-challenged and obtuse enough to refuse to review historical facts. I can see that those who repeat the lies scored an easy victory with you.

    Pray tell WTF a depletion of F&F capital has to do with them being ‘a prime factor” in the mortgage crisis? This is as logical as stating that the alignment of the planets resets the horoscope.

  19. zzzz says:

    how can anyone complain?
    the bigest lie of all, GOD
    and 70% of the world believes it, and many die in its name
    The people who tell these BIG lies know it, humans are sheep for the most part

  20. dss says:


    The problem is that because of “Agnotology” the brain washing of enough Americans prevents that from happening, in fact, we elect more of the same types that got us into this pickle.

  21. dss says:

    It would be funny if it were not so tragic, the continual parroting of the lies as if linking to a media site “proves” that F&F was the prime factor.

    Linking does not make it so…

  22. ruetheday says:

    Debunking the CRA myth is trivial. Apart from the fact that the law has been around for 30+ years without incident, you have 1) the fact that the majority of subprime loans were made by institutions not even covered by the CRA and 2) the fact that the CRA in no way, shape, or form requires banks to lend to people who are not creditworthy as measured by objective factors like DTI, LTV, and FICO. It prevents banks from discriminating based upon, among other factors, income. The latter is a key point – the Republican myth relies on conflating “low income” with “bad credit”. They are obviously not the same thing, just as telling banks you may not completely refuse to provide credit to those with low income is not the same thing as telling them they have to make loans of a size that cannot be paid back.

  23. Bill W says:


    I agree with you that Fannie and Freddy are not evil, but I do think they should be wound down over time and eliminated.

    At this point, the GSE mission in life is to keep real estate prices high. I think that is counter-productive. Water needs to find its own level. But I can appreciate the idea that we don’t want to do that all at once.

    On the subject of affordability, if the government want’s houses to be affordable, it needs to create a federal home builder to create supply, not a federal home lender to create demand. Personally, I wouldn’t do either.

    I love the movie “It’s a Wonderful Life.” If George Baily was making home loans in 2010, what would they look like? I bet he would want no less than 5% down plus closing without a down payment scheme, PMI for less than 20% equity, a proven income history, no more than 36% yearly debt to yearly income, and a truthful home appraisal. Do we really need Freddie and Fannie for that type of lending to occur in the future?

  24. jaymaster says:

    One good thing about these posts is that the comments illustrate that some of the folks who blame Republicans, Rush Limbaugh, Fox News, etc. are just as gullible in falling for The Big Lie. Seems like a few might even be intentional promoters themselves.

  25. Lyle says:

    While Fannie and Freddie are an important cause its not because of the CRA but because their management wanted to keep getting bonuses. It appears that in the past they acted to effectively set minimum standards for mortgages. But when their market share began to shrink they decided that market share was more important than standards. Wall Street was accomplishing what it wanted to do which was to kill them off to irrelevancy just like it had done to the FHA program. However because they wanted to keep the stockholders happy in the short term, and keep the bonus gravy train going, the management decided to lower standards, and keep their market share up. As a result a race to the bottom started.
    So yes it is F&F but because management wanted to keep them relevant that is a large part of the crisis.

  26. Johnny99 says:

    An interesting post from back in June:

    I’m not bashing Clinton, nor am I absolving Fannie and Freddie (or Wall Street) of their roles in this debacle. But the government did play a part, and the most damaging things it did may be in the more subtle actions it took.

  27. Majorajam says:

    Cross posted on earlier 10 questions thread:

    Barry, I appreciate that your focus here is on slaying one politically-motivated zombie meme rather than delving more deeply into the credit crisis and on that score would give you full marks. Saying that, I think you’re wrong to say that Fannie and Freddie didn’t play critical roles in the development and fostering of the largest Minskian credit bubble in human history; notwithstanding that that bubble was global in nature, and grew up alongside a massive global asset bubble and its special case of US residential real estate.

    This is not to suggest that the GSE’s were instrumental as the badly-run/minority-lending banks of the woefully-devoid-of-evidentiary-basis conservative meme would have it, but rather, that they were instrumental as underwriters of market liquidity, i.e. as instruments of monetary policy.

    The numbers speak for themselves, as Doug Noland has busily documented for over a decade. This was written in July of 08:

    GSE assets expanded 15% ($115bn) during the 1994 [bond market/tequila/hedge fund] crisis, 28% ($305bn) during tumultuous 1998 [emerging market crisis], 23% ($317bn) during 1999 [LTCM], and another 18% ($344bn) during the corporate Credit crisis of 2001 [post TMT bubble]. And keep in mind that Fannie’s and Freddie’s combined Books of Business have ballooned more than $3.1 TN so far this decade.

    Most of that $3.1 trillion with a t came of course before the economic recovery while rates were being held down at 1%, (huge by today’s standards), as the accounting scandals that rocked the GSE’s during the Bush administration basically halted their balance sheet growth for a few years in its tracks. By then of course the private label folks were off to the races. Of course, since 2008 Freddie, Gennie, Fannie and the FHLB have underwritten nothing short of the entirety of the US residential real estate market.

    That is what Bernanke has called credit easing. Whatever name it goes by, whatever the mechanism by which it was coordinated, (telepathy come what may), it is utterly undifferentiated from the unconventional monetary policy of the here and now. And it is exceedingly difficult to believe that the Fed was not cognizant of this TARP-before-TARP vehicle for underpinning market liquidity in times of crisis, and less the case that Wall Street speculators weren’t. Certainly the Fed’s own Z1 report was.

    Of course, this all goes to the co-dependency that grew up between speculator and monetary policy makers during the most bubblicious of the bubble years (which, unfortunately due to the fact that I work in finance, do not include the here and now), which is the yet-to-be-discussed elephant in the living room in all of this. There will come a time though when it is discussed. And how.

    When that day comes, people will be sure to note the Fed’s elaborate and very speculator friendly ‘communication policy’, in addition to the simple decision to target short rates at all, in addition to Fannie and Freddie’s ‘backstop bid’ as Doug Noland aptly refers to it, in addition to the Fed’s joint ‘hear no evil see no evil’ approach to asset bubbles and explicit commitment to reliquify/clean up/prop up the mess that results, (something Jeremy Grantham has correctly recognized as a working definition of moral hazard), in addition to the Fed’s refusal to acknowledge the systemic importance of institutions and markets until nanoseconds after they fail after which bailouts become obvious and urgent imperatives for the Serious, etc. etc. etc.

    All of which is to say that Fannie and Freddie were integral parts of this whole God forsaken fiasco, just not in the way that the politically motivated would prefer (hey, facts are stubborn things). Would be interested to hear your thoughts.

  28. edwards183 says:

    @ Bill W

    If fannie and freddie go away, say goodbuy to fixed 15/20/30 year loans. If you want to see a world without GSE’s just look at the EU. The longest rate you can fix is 7 years on an ARM.

  29. Estragon says:

    Does the GSEs’ existence for some period of time, by itself, preclude implicating them in some role in the crisis? If I smoked 500,000 cigarettes over 30 years without getting cancer, can I conclude they don’t cause cancer?

    The GSE’s were a large part of the US mortgage market, so they obviously had some role in the crisis. That role may have been positive, or negative, or more likely some combination of both. It’s also a mistake to consider the GSE’s role in isolation, rather than in terms of interactions with the larger system.

    There are no GSE’s in Canada, and Canada had nothing near the scale of crisis seen in the US. An obvious conclusion would be that GSE’s were a big factor in the US crisis. In fact, Canada does have a GSE-ish entity called the Canada Mortgage and Housing Corp., and a banking system much more akin to a regulated public utility. What a first blush seems like a very different system isn’t actually all that different. The seemingly obvious conclusion becomes less obvious on closer inspection.

    This brings me to “agnotology”. The root is gnosis (knowledge). Agnosis would be the lack of knowledge. It’s been my experience that seemingly obvious conclusions in almost any question of non-trivial complexity become much less so as I look more closely at the question and the facts. The more I learn, the less I “know”.

    Maybe the crisis was so complex that a truly thorough understanding is beyond us, and that’s why we end up with opinions polarized either around the GSE’s being the devil incarnate, or GSE critics as obviously promoting “The Big Lie”

  30. axiom says:

    The best rebuttal in my opinion to this popular meme (including the CRA caused the crisis) is our econometricy friends over at econobrowser:

  31. diogeron says:

    @Bill W

    Your colleague must know my sister (see above post if this doesn’t make sense.)

    Fannie was chartered in 1938 and Freddie in 1970, so how can one logically conclude that the collapse in the early 21st century was caused by events that happened over 70 and 40 years ago respectively? It sure took a hell of a long time for that securitization ball to “get rolling” to the point where it started crushing homeowners, banks and investors.

  32. Bill W says:


    First of all, thanks for reading what I wrote. I didn’t think anyone ever did.

    Are you telling me that the GSEs are the only financial institutions that own thirty year fixed rate mortgages on their books, or would own them if there were no GSEs? I find that hard to believe, but I’m not an expert in finance.

    If you are correct, I would admit that the GSEs play a valuable role in our financial markets. Should the GSEs exist with more controls? Maybe, but that’s difficult to implement.

    Either way, what bothers me most is the governments counterproductive thinking in making anything affordable.

    There are two lies relating to the GSEs that I don’t like:
    1. Fannie and Freddie caused the financial crisis.
    2. The ability to borrow = affordability

    The ability to borrow does not equal affordability, low prices are what equal affordability.

  33. Estragon says:

    Axiom – One of the reasons I like reading econbrowser is summed up in their “rebuttal” (as is often the case). It concludes: “I think all of this leads to a more nuanced view of the role of CRA and the two GSE’s in the crisis.”

  34. obsvr-1 says:

    As discouraging it is to see the 4 republicans on the FCIC bail on producing an accurate and objective report, they have a tremendous store of information collected on the site that tells the story.

    Go check it out for yourself, look for the FNM information, particularly the strategic plan from Daniel Mudd
    which contains a ton of market data clearly showing when FNM lowered their underwriting standards for purchasing loans/mbs which FOLLOWED the entrance and penetration into the market of Private Label Securities (PLS), Sub-prime and Alt-A from the banks, mortgage brokers, investment banks. FNM and FRE dropped their standards in effort to compete with the PLS to maintain or increase their market share (after all their bonuses depended on it).
    ref: FNMA strat plan

    Oh yeah, don’t forget about all of that “financial innovation” CDO’s, CDO Squared securitizations that came out of i-banks not FNM or FRE; remember that fine organization (AIG) that wrote those “insurance products” CDS on the whole mess and last but not least the quality work from the RATing agencies.

    Now FNM and FRE do not have clean hands in all of this, there were years and regimes that participated in fraudulent behavior, accounting scandals and the like (remember the private side of the GSE operated with the same ethical and moral standards of those from FIRE industry ). The public side of the GSE did strive to meet the objectives of the CRA and home affordable programs as good gov’t soldiers. However, these only contributed to the problem, did not cause the problem.

    The shame (sham) is once a rat always a rat, looks like Daniel Mudd is at it again. I guess he didn’t get enough flesh from the homeowner while he was at FNM.

    Wall Street Quietly Creates a New Way to Profit From Homeowner Distress

  35. cdrueallen says:

    @ Bill W.

    In theory I agree with you – the government should not subsidize mortgages in any way, including with the mortgage tax deduction. And I have a personal interest in falling housing prices since I’m looking to buy one (cash). But I am pretty nervous about the effect of shutting down Fannie and Freddie. How many banks will go down with them? What will be the government’s cost if the FDIC has to be bailed out? What will happen to spending and employment if mortgages are impossible to get? My libertarian-anarchist side says let the chips fall where they may and be prepared for some great deals on housing. My anarcho-socialist side says maybe it’s not a good idea to make drastic changes to a tottering economic system.

  36. willid3 says:

    if the GSE’s didn’t exist today, there would be no housing market. the private label version has collapsed, probably to never return. unless investors (aka suckers) get desperate again!

  37. DG_Allen says:

    The crisis started with alternative/subprime mortgages going sour as the housing market peaked and began to decline. I think we can all agree on that. Right??

    Who pumped up the subprime market? It wasn’t Fannie and Freddie. Yes, they got into backing subprime late in the game, but the damage had already been done. The housing bubble had already been over inflated. It would have popped regardless of Fannie and Freddie’s involvement.

    Let’s remember what they did before 2007. They backed “conforming loans” That’s it. Loans that had relatively small principles and met industry standard underwriting. This had worked fine for dozens of years and they survived other major down turns as recently as the late 80′s. (See BR’s book for charts, graphs and statistics.)

    You just cannot draw a logical conclusion that they were a cause of the crisis. They didn’t cause Lehman to collapse. They didn’t cause the other iBanks and regular banks to have problems with their balance sheets. Deregulation, TBTF, greed, stupidity and entitlement caused all those things. Remember Greenspan’s great mea culpa? He assumed that bankers concern for their shareholders would lead them to make prudent risk management decisions. He was wrong.

    As for the role in the larger system, do you blame someone’s perfectly pumping heart when they die of pancreatic cancer?? No, you blame the cancer. There can be major parts of a system that are functioning perfectly well and then have the whole system fail catastrophically due to a minor part of the system. Subprime, which was a small part of the total RE lending system, was the cancer that killed the system. Had those loans never been made, we wouldn’t be having this discussion. Why were those loans made? It wasn’t Fannie and Freddie.

    That’s the conclusion that is born out of the facts.

    Our economic system can be fragile. It has self reinforcing cycles in it that cause boom and bust to happen. Major actors in the system need to be prudent in how the plan for the bust, because there is always a bust at the other end of every boom. Deregulation, greed and stupidity allowed our system to get to the edge of a cliff and we the taxpayers had to come in to pull it back.

    If we don’t heed the facts, we don’t fix the underlying problems and this will all happen again. Will we as a nation be able to get out from under it the next time?? I’m not so certain.

  38. Why the desperation in defending Fannie and Freddie? There were a multitude of factors causing the housing market to overheat. The “but for” causation was Fed monetary policy. That combined with massive trade deficits that had to be financed, and technological innovations that made that vaporous “owner’s equity” as liquid as a dot com stock, sent Fannie and Freddie along for the ride, and along they way they helped facilitate the madness, particularly in the arena of financing the trade deficits. Their importance internationally in trade deficit finance is primarily why they would never have been allowed to fail.

    But going forward, they (Fannie and Freddie) are all that stands between continued muddling along economically and the financial system cleaning out that is needed. Continuing to subsidize them artificially props up home prices, keeps the banks solvent, and allows us to continue to borrow like a sailor in port buys drinks. If you want to know why the economy will tepidly limp along for seeming ever, it is at least partly because Fannie and Freddie subsidies (and, of course, Fed interventions) prevent clearing the forest of old growth such that new and viable green shoots can emerge. Trying to reinvent our economic past puts a chokehold on our economic future.

    But what compels this defense/attack of Fannie and Freddie befuddles me. If it is all politics, with one side believing government can do no harm and the other that markets can’t, there’s plenty to argue over. But to get to root causes, the argument must begin with the Fed, and then to trade deficits. Fannie and Freddie are several branches up the causation tree. The CRA isn’t even on it.

  39. DG_Allen says:

    I’m not sure who’s defending Fannie and Freddie and their existance or role in the economy.
    I agree with much of what your saying.
    I’m defending them *from blame* in causing the subprime mortgage crisis as it distracts away from the real causes.

  40. DeDude says:


    They can’t really do much to F&F that they have not already done. It got privatized long time ago (and that is the real reason they got into trouble, hunting profits rather than providing affordable loans to people who could afford them). They can sell the government’s current shares for an absurdly low price (to their corporate handlers), but that will not change these companies ability to conduct their business. That would just be one more in a long line of transfers of public money to private campaign donors. They can get rid of all government control and regulation of how these two private companies do business and (once again) state that F&F are NOT government backed. They might even change the names or sell new stocks in newly named companies taking over these entities assets and business (for a fraction of their value – and again transferring public money to private hands), but that also will not change much of anything for the economy or the mortgage market for the next few years. No matter what they do it will have no immediate consequences for residential RE market.

    Next time we have a “Nov 2008 style” freeze in the residential RE credit market they will have to do exactly the same as last time; that is to take over the largest privately owned players in the market and use them to ensure that there is still enough credit flow to prevent a complete collapse of residential RE markets. No matter who is in charge, it will not be politically or economically acceptable to have an overnight conversion of the residential RE market to become “cash only”. The extend to which share and bond holders get bailed out by government money will depend on whether the president is a GOP (big bailouts for all, as in the Bush bailout of the financial sector) or a democrat (small bailout of bond-holders, as in Obama auto-industry bailout).

    If there had not been any Fannie or Freddie companies in November 2008 they would have had to immediately create them, because the damage from overnight conversion of the whole residential RE market to “cash only” would be catastrophic.

  41. Part of this is that the Press is underresourced, undereducated, and underexpertised. It’s well worth it for society to pay for a far more competent press, but due to ginormous externalities it doesn’t happen; we grossly underpay for our press and as a result understanding and decision making is horribly worse. For more on this see this post which was in Mark Thoma’s links:

  42. Bill W says:

    I hit the submit button by mistake on my last post. Let me continue…

    1. Bankers should lose money when they make poor risk decisions. They should not be allowed to pass off poor risk decisions to GSEs.
    2. Only people who can afford to buy houses should be buying them. It’s counter productive to turn middle class people into debt slaves.

    Also, in a banking crisis, Fannie and Freddie could easily be created. I think a resolution authority would accomplish just that. And would it really be any more expensive than the bailouts for Fannie and Freddie, the 1.2 trillion of MBS garbage that the FED has taken onto it’s balance sheet, the TARP, and allowing banks to borrow at zero and buy treasuries.

  43. DeDude says:


    Are the violins instrumental in Mozart’s 2’nd? If violins had never been invented would he ever have created a 2’nd? Would this genius have created a 2’nd that was a fantastic piece of music listened to hundreds of years later?

    Yes violins are instrumental in Mozart’s 2’nd but you have to be pretty stupid to think that he would never have created a 2’nd if there were no violins. He would have composed a brilliant piece of music using other instruments instead. Similarly those who created and profited big time from the housing bubble and its bursting would have used other instruments if F&F had not existed. The same way they used other “instruments” in those countries that did not have F&F but had even worse bubbles in residential RE than ours. If you are looking for the causes in order to prevent a repetition you have to look other places than F&F.

  44. Ltdata says:

    I (conveniently?) missed much of the Fnma and Fmcc history. I understand that they were players in the mess, although not likely instigators in the crash (thanks to all the detail above I have a better idea).

    I just looked at their charts and my question is a simple one. If both are a sell at .30/share (both down to a buck about 10/08), what’s their buy point? (And yeah, I get it. This is more a rhetorical question than anything).
    I also wanted to say that I have noticed a number of new small businesses open around the area (Phila). It’s so refreshing to see this – with all this other stuff going on.

  45. hcgoddard says:

    For Machinehead.

    The NYT had a very thorough series on the financial crisis titled “The Reckoning”, at

    Start at the bottom to see the series in chronological order, but especially “Pressured to Take More Risk, Fannie Reached Tipping Point” on October 5, 2008. Fannie and Freddie were late players, and as another commenter indicated, they were not mortgage originators.

  46. Andy T says:

    “BR: That is not the argument being made

    Fannie/Freddie have bee4n around since 1938 and ’68 respectively. Were they a prime factor tot he credit crisis circa 2008-09? How about even a significant contributor?

    If this was math quiz, the teach would say: PLEASE SHOW YOUR WORK — and that is where the Fannie bashers fall short.”


    “Fannie and Freddie had purchased $4.9 trillion of the mortgages outstanding as of the end of 2007, 70% of which the GSEs had packaged and sold to investors with a guarantee of payment, and the remainder of which Fannie and Freddie kept for their own portfolios. The fraction of outstanding home mortgage debt that was either held or guaranteed by the GSEs (known as their “total book of business”) rose from 6% in 1971 to 51% in 2003. Book of business relative to annual GDP went from 1.6% to 33%.”

    33 PERCENT OF GDP BY 2003!

    It’s true that more reckless lending entered the picture in the mid-2000′s which set the stage for the “blow off” top in residential real estate–dumb money always enters the “trend” at the very end. THAT’S ALWAYS THE CASE.

    I have to actually agree 100% with Gretchen’s opening line: “DECIDING what to do with Fannie Mae and Freddie Mac, the taxpayer-owned mortgage giants that helped set the financial crisis in motion, will be a huge job for Congress next year. ”

    They did “help” set the financial crisis in motion. Those two firms, with implicit government guarantees, helped blow the real estate bubble of the 1980′s, 1990′s and early 2000′s. That humongous “bid to the market,” help create the “illusion” that home prices could appreciate “forever.” Speculators/Ponzi investors were drawn to the trend like moths to the flame.

    In a similar way, the pension fund money, which began mowing big dollars into the commodity complex in 2004, created the “illusion” of real demand for commodities across the board. Hedge funds/trend followers latched onto that bid and front ran it. John E. Retail eventually believed it to be true and jumped in before 2008 crash. As David Byrne of Talking Heads fame might say: “Same as it ever was.”

    To deny that Fannie and Freddie at least “helped” boost the “trend” in home price appreciation through the 80′s, 90′s and early 2000 is PURE and UNADULTERATED FOLLY.

    Note: I’ve never uttered the word CRA in the above argument. Please don’t lump me in with the people who talk up the minutiae details of the mortgage “crisis.” I’m talking about the multi-TRILLION dollar elephant in the room. You know who….

  47. gbgasser says:

    I think we need to give the GOP SOBs exactly what they ask for. Tell them “Ok tomorrow we shut down Fan and Fred …….. and btw……. all the bad paper they removed from the other banks balance sheets? Uhhh it gets returned……… at real value as in market value. Gonna make them insolvent you say? Oh gee too bad so sad!
    I hope you werent holding any of those stocks Mr Senator or Congressman”

  48. cyaker says:

    Isn’t it amazing how the Right has adopted the Communist’s favorite tactic. Lennon and Stalin must be having a grand old time wherever they are.

  49. cyaker says:

    By the way we live in the land of “no soap radio”

    I hope I am not the only one old enough to understand this.

  50. Majorajam says:

    Dedude, you’re responding to a political argument I’m not making. What I’ve written there hints not at culpability, and certainly not culpability as anticipated by our narrow and inane ideological divisions, but at dynamics of the financial economic system and its mechanisms.

    The problem with Mr. Ritholtz’s list of 10 questions for the GOP is that that’s all it is. There is no cogent underlying understanding of market dynamics that ties it together. Is the argument that had the Fed moved interest rates to 2% instead of 1% we wouldn’t have had a housing bubble? Is it if it had tightened 6 months earlier, or 1 year earlier it would all be good? Who knows. Suffice it to say, that’s not terribly satisfying.

    If you look at the inexplicably largely ignored work of Hyman Minsky, in particular his Financial Instability Hypothesis, there does exist a powerful theoretical framework through which the events of 2008, and before and since can be viewed and learned from. When you employ such a framework and look back at the data it becomes clear that policy responses, which is to say monetary policy responses, to prior Minskian credit cycles were instrumental in the ultimate development of asset bubbles erstwhile unprecedented in scope (global residential real estate is a mind boggling large asset class, and that doesn’t come close to the whole story).

    When you look at the record, which Doug Noland has been writing about since at least 1998, Fannie and Freddie were critical instruments of that monetary policy. They underwrote liquidity by issuing riskless (as Noland calls them ‘money-like’) securities and using the proceeds to provide a ‘backstop bid’ in the most important of markets, the US residential mortgage market, at the most critical junctures in the past. That liquidity was essential for the leveraged speculating community which was itself a powerful instrument of credit creation. Just go to any blog written by a macro hedge fund manager, and you’ll see how much emphasis they place on policy makers keeping markets liquid and interest rates communicated. It’s their life blood. The thing without which they would simply cease to exist.

    Fannie and Freddie’s role in this was not accidental as it is also a matter of record that politicians and policy makers of all stripes were very aware of their capacity to affect not just the market for residential mortgage debt but the entirety of the debt markets, and by consequence of that, the price of housing and all other assets in the economy. As Jeremy Grantham astutely caught in his latest quarterly:

    “Monetary policy works for the most part by influencing the prices and yields of financial assets, which in turn affect economic decisions and thus the evolution of the economy” (Bernanke, May 2004, American Economic Review).

    You think they weren’t paying attention to these government-security-issuing multi-trillion dollar institutions that were highly attuned to the interests of politicians (and vis versa)? I mean, the GSE’s (including Gennie, the FHA and the FHLB) are currently the only things between residential real estate prices and the sewer line. They were thrust back into that role at the urging of politicians and, (less explicitly though almost assuredly) Bernanke and co at very start of this crisis even after Fannie and Freddie were shown to be insolvent (!!!). Would anyone argue that that was a special case, an epiphany that these policy makers had out of thin air?

    The reality is that these guys were just reading from the first page of the Greenspan ‘when in crisis’ songbook (the part after his version of the hippocratic oath ‘First, do no harm to the money for nothing speculating community or financial institutions writ large’) written back in 1994. It’s that policy that has arrived us to the precipice. And that truth that needs to be broadcast for fear that we won’t learn, as we haven’t learned, how never to return.

  51. DeDude says:

    What I am saying is that to mention F&F in the context of trying to understand what went wrong and how it could have been stopped, is dead wrong. If someone is gruesomely murdered with a hammer, you don’t blame the hammer, get rid of all hammers, and presume that nobody again will be gruesomely murdered.

    F&F were used as instruments, but are quite irrelevant, because other instruments would have been used just as effectively (and actually were in other countries), if F&F had not existed. They were private companies and somewhat responsive to political pressure, but had they not existed then other private companies would have existed to do exactly the same thing they did, and those companies would have been subjected (and reacted similarly) to the same political pressures. However, the main reason they did what they did was not political pressure (something they internally joked about), but rather that they were private companies who wanted more profit and bigger market share. When other private companies started taking away their market share and making big profits on sub-prime, they copied their competitors’ business model.

    Yes the government has strong interest in what happens in the market for the largest single sector or private credit creation, but that has nothing to do with F&F as such because that interest would exist whether or not F&F existed. They care about the symphony, not the instrument. Since F&F is the residential real estate credit provider they will be using them to obtain larger economic goals influenced by residential real estate; if F&F is dissolved they will use whatever entity takes over that business.

  52. Majorajam says:

    Dedude, it looks like the conversation has moved on. Before I follow it, let me just say that I continue to see your response to me as less of a response than a separate point. As that goes I don’t violently disagree with you, but take exception along a few dimensions.

    Firstly, F&F were hardly just another bank. They issued securities that financial market participants considered as being guaranteed by the US government- witness the massive central bank participation in the agency market prior to 2008. During periods where spreads on banking debt blew out in the past, those on F&F securities widened only modestly, and that mainly due to the ‘melt-up’ rallies in treasury securities (and their superior liquidity). This notwithstanding the fact that by 2007 Fannie had a book of business of over $3tn, if memory serves secured against a razor thin slice of equity of something like $60 billion. Long Term Capital notwithstanding, not many institutions could get away with such a thing.

    Furthermore, it was not only investors in agency debt that saw them as quasi-arms of the federal government but speculators in the mortgage markets as well. They saw F&F’s support for mortgage securities during times of extreme duress (the 1994 convexity hedging fiasco being a prime example) as a blessing from up on high in the federal government that they were on the side of angels. How much prodding do you think such carry traders really need?

    Finally, as the GSE’s business model- which is to say, approach to making money- was predicated on the implicit guarantee of their obligations by the federal government, their tie up with federal politicians was a cut above those of your average private organization (not that these aren’t knee deep in politics, they are, just that the GSE’s whole world revolved around it, which was reciprocated in many cases by federal politicians that did well by their legendary largesse). This makes it very hard to believe that F&F’s 15 years of miraculously-timed-to-coincide-with-market-busts-balance-sheet-ballooning was coincidental.

    Given all that, it is very difficult to argue that Greenspan could’ve commandeered so much liquidity during crises past, so quickly, without the help of the agencies. Nor is it easy to believe that the effect of their role in the vaunted Greenspan/Bernanke Put was not central to the otherworldly extremes our adventure in monetary policy has driven us to.

    As I said though, I do not entirely agree with what you’ve written and that is because I’m not doing blame attribution here. Certainly there are villains and many of them, but it’s not fair to blame people for unintended and entirely unanticipated consequences of their actions. Not to trivialize the event by comparison, but is Richard Nixon at fault for the Khmer Rouge genocide in Cambodia? Certainly his decisions were critical to its precipitation, but he would have had no idea of that when he made them.

    The financial crisis is no different from any historical event in that it involved millions of decisions and circumstances which conspired to its end. There was no puppet master, not even Alan Greenspan who, though he was most directly culpable of anyone, found out what would happen to him if he didn’t play ball back in irrational exuberance.

    Point being that we have to get through the normative process before we can get anywhere near positive analysis, and to my utter mystification, we haven’t come anywhere near it. Unfortunately, we’ll have a new crisis to obfuscate shortly.

  53. red_shoes says:

    Repeat A Lie Enough Times . . .

    And there, ladies and gentlemen, in a 5-word phrase is the entire mission statement of Fox News. Genius, no?

  54. DeDude says:

    Lots of things should be and should have been different with F&F. However, none of that would have prevented the housing bubble. You can look all over the world and find that countries without F&F or entities with “implicit” guarantee from government had housing bubbles just like us. The common factors were low rates and funny “innovative” financing products allowed because of a lack of regulation and adult oversight/supervision. The other common factor was that this was all driven by the profit motive and idiotic compensation structures that provided instant rewards and shipped the risk to someone else.