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  • Paul Krugman 'Egregiously Wrong' on Fannie and Freddie

    Nobel Laureate Paul Krugman did some fine work on international trade theory 20 years ago. When he writes about economic policy today, however, he often just gets his facts dead wrong. This past summer Krugman devoted an op-ed to exonerating Fannie Mae and Freddie Mac from their key role in the current financial crisis. We called him out on it at the time. This past Friday, National Journal‘s Stuart Taylor finally got around to noting where Krugman erred:

    Fannie and Freddie appear to have played a major role in causing the current crisis, in part because their quasi-governmental status violated basic principles of a healthy free enterprise system by allowing them to privatize profit while socializing risk. …

    This accusation has spurred furious rebuttals by Democrats and their media friends. Some — especially a July 14 column by New York Times columnist Paul Krugman, who was awarded the Nobel Prize in economics this week — have been flat-out incorrect.

    As [Peter Wallison of AEI and Charles Calomiris of Columbia Business School] demonstrate, Krugman was egregiously wrong in writing that “Fannie and Freddie had nothing to do with the explosion of high-risk lending.” He was wrong again in stating that “they didn’t do any subprime lending, because they can’t … by law.” He was further wrong in writing that the GSEs were “tightly regulated with regard to the risks they can take.”

    Posted in Economics [slideshow_deploy]

    9 Responses to Paul Krugman 'Egregiously Wrong' on Fannie and Freddie

    1. dfelton says:

      Please vote for Bob Barr, the Libertarian Party's candidate for president.

      Only Bob Barr opposed the bailout and the use of US government money to invest in banks, which is Socialism.

      Both McCain and Obama were in favor of the bailout and the use of US government funds to buy equity in large banks.

      And Bob Barr opposes Fannie and Freddie even more than McCain. Bob Barr wants to shut down Fannie and Freddie.

      With the election probably lost by Republicans, it is a good time to vote on principle. Send a message to both parties that we oppose the bailout and oppose Fannie and Freddie!

      Please vote for Bob Barr for President on Election Day.

    2. Pingback: Paul Krugman ‘egregiously wrong’ on Fannie and Freddie - Jason’s Blog

    3. Nick, Tampa says:

      Fannie and Freddie DIDN'T, in fact, do any subprime lending — they don't make any loans at all. They only securitize and (to a lesser extent) purchase mortgages and mortgage-backed securities. So it's Krugman who's right on that score, and Stuart Taylor who's "egregiously wrong." It's sad when you have to fact-check the fact-checker, but that's what it's come to, I suppose.

    4. Zack, Boston says:

      Respectfully Nick from Tampa, Fannie and Freddie are amongst the largest lenders in the world. Buy buying debt, you are in fact lending. And Fannie and Freddie combined owned trillions in MBS and large percentage of which was subprime. They also owned a large quanitity of Alt-A loands, which are also problematic. This is excluding the additional $3.4T in loans they guaranteed, thereby reducing the cost of those loans below what the risk of them dictated they should be. This in turn leads to unworthy borrowers being able to get mortgages when in a normal market they would not have been able to. All of this is documented in the 10-K's of both Fannie Mae and Freddie Mac. In their SEC disclosures it even states their intention to expand their purchases of "affordable" loans through 2011. So Krugman was definitely incorrect in his assertions on Fannie and Freddie.

    5. Pingback: Paul Krugman ‘Egregiously Wrong’ on Fannie and Freddie - Jason’s Blog

    6. Ray, Barrington, RI says:

      It's not Freddie.

      It's not Fannie.

      It's not the lenders.

      It's not oversight (Dodd, Frank)

      It's no wonder there's no accountability in our Gov't.

      No one is ever responsible. (Except Bush, I guess)

    7. Nick, Tampa says:

      Zack from Boston: Securitization is not lending. Securitization FACILITATES lending, but they're fundamentally different. When Fannie and Freddie bought mortgages from commercial banks and securitized them, the commercial banks were under no obligation to take the money they made by selling the mortgages to the GSEs and lend it out again. If a commercial bank sells a group of mortgages to Fannie Mae to be securitized, and doesn't re-lend the proceeds of the sale, then no argument can be made that Fannie's securitization of those mortgages was equivalent to lending. The fact that most commercial banks do re-lend the proceeds of sales of mortgages to the GSEs does not make securitization equivalent to lending.

      Also, your argument that Fannie and Freddie, by guaranteeing conforming loans, reduced the cost of mortgages below the market-clearing price, does not hold water. A secondary mortgage market (i.e., a market for purchasing and securitizing mortgages) is necessary for an efficient mortgage market. The creation of a secondary mortgage market cured a market failure. And Fannie and Freddie are, of course, secondary mortgage market-makers.

    8. David, NYC says:

      Nick,

      Securitization is -not- lending; you are correct. It is really more like insuring loans. However, your analysis misses the larger truth: a policy of quasi-public securitization is -bound- to lower the perceived risks inherent in the assets being secured. On the macro scale of an entire economy, this policy is *absolutely* bound to encourage the increased diversion of capital towards those assets. The idea that banks are not bound to do this is just wash, a technicality that diverts our attention from what centuries of economic experience has taught us.

      In fact, as was well known during the halcyon days of the housing bubble, encouraging more sub and alt-a loans was the purpose for which freddie and fannie existed and purchased those loans. This was not hidden.

      Of course, individual banks, as you have pointed out, did not have to buy into this. That is why I am not in favor of bailing out those that did, Community Reinventment Act nonwithstanding. But the effects of this policy over the banking industry as a whole were precisely predictable.

    9. Pingback: Transfer of power..."healthcare reform" - Page 3 - TDR Roundtable

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