We had these big interconnected undercapitalized things that were mandated by federal policy to keep expanding the amount of paper they bought or backed, which meant inevitably they were going to reach the point where the paper they were backing was too risky, and the GSE’s mandated growth necessarily called for them to issue more paper of their own to do that..And then you had Basel II and its US application that made GSE paper Tier I capital to support maximum loan growth in private sector banks. No wonder credit dried up when the GSEs were taken over in Sept 08. But you never see the Rortys and Mins speak to this perspective.Damn. Thanks for beating the shit out of that strawman, esteemed commentator on Tyler Cowen's blog. Because I can't think of a serious leftwing economist who takes this position. Of course the GSEs where behemoth securitizing entities. Of course they provided liquidity in a market gripped by a bubble. Of course they were pro-cyclical. Of course they should be wound down. But that's not the argument. Because this whole thing kicked off with the question, "Did the GSEs cause the housing bubble?"
Even the most inveterate Kenyan-colonial socialists among us admit that privatising the GSEs was, in retrospect, a pretty significant fuck up. They were pro-cyclical entities backed with a government guarantee, and that's never going to be stabilizing. But that's a contributing, not a causual, factor. They did not cause the crisis; they enabled the other actors in the crisis through a combination of market making and liquidity.
Hating the GSEs is a lot of fun, but saying, "Lookee, it's all their fault" involves ignoring pretty much the entire behaviour of the private-label mortgage originators during the crisis, or the fate of their loan portfolios (yes, compared directly to Fannie and Freddie) after the crisis. The GSEs subprime originations look pretty damn terrible - PLS subprime portfolio performance looks like a goddamn catastrophe.
What we have here are two sets of people talking past each other. One set says, "The GSEs caused the crisis." The other replies, "No, they didn't, because they didn't start the subprime movement, they lost significant market share during the bubble, and even their eventual subprime market offerings fared better than PLS paper. But yeah, they were a pretty terrible idea." And then the other replies, "The GSEs were a terrible idea, why can't you just admit that?" And then the other replies back, "We just did, and what the fuck happened to your original question?"
Really, it just gives us a headache.
