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In their September 23 Wall Street Journal article, Charles Calomiris and Peter Wallison opined the vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) — and their sponsors in Washington — are largely to blame for our current mess.
Well, sure. But, as I wrote yesterday, Fannie and Freddie chose that path because they were pressured by the Clinton administration to loosen loan requirements for minorities and others unable to qualify for conventional financing. And, as Ben commented, Clinton relied on the Community Reinvestment Act (CRA), passed under Carter in 1977, for authority.
Didn’t anyone realize what was happening and sound the alarm? Sure, many. And in the wake of Freddie’s 2003 accounting scandal, even Fed Chairman Alan Greenspan became a powerful opponent, calling for stricter regulation of the GSEs and limitations on the growth of their risky retained portfolios. But by presenting themselves to Congress as the champions of affordable housing, Fannie and Freddie retained the support of many in Congress, particularly Democrats, and they were allowed to continue unrestrained.
…Rep. Barney Frank (D., Mass), for example, now the chair of the House Financial Services Committee, openly described the “arrangement” with the GSEs at a committee hearing on GSE reform in 2003: “Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable … a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing.” The hint to Fannie and Freddie was obvious: Concentrate on affordable housing and, despite your problems, your congressional support is secure.
Eventually, of course, the bubble burst just as Alan Greenspan and others had predicted. Now Congress is trying to get out from under the weight of responsibility by pointing at everyone else while the Bush Administration is working with the Fed to propose a way for Congress to repair the damage with the least negative impact on American taxpayers.
And what were our current presidential candidates doing while all this was going on?
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