While debating politics on Facebook the other night (specifically the Paul Ryan VP page) a Romney supporter claimed that Fannie Mae and Freddie Mac, along with the Civil Rights Act of 1968 (aka "Fair Housing Act") caused the housing crisis and the economic mess that followed.
Of course in the land of the living which most simply refer to as reality, Fannie Mae and Freddie Mac did not in any way cause the housing collapse much less the financial crisis which occurred.
To start off with, neither Fannie Mae and Freddie Mac had anywhere near the subprime mortgage exposure that the private investment banks did.
The tsunami of unregulated MBSs (mortgage-backed securities) and CDOs (collateralized debt obligations) in the private investment banks, who leveraged themselves often to over a 40:1 ratio with no idea how much toxic liabilities they actually held, along with the repeal of the Glass-Steagall Act are what caused the near catastrophe.
According to the non-partisan Government Accountability Office (PDF), there were only 4.58 million subprime and other high risk loans outstanding in the entire market at the time out of roughly 55 million total loans with hardly any of these originating with, or attributable to, the federal government or Fannie Mae and Freddie Mac.
The truth is, subprime lending surged from 2004 to 2006 during the height of the housing bubble and it was almost all occurring in the private investment banks on Wall Street. Fannie and Freddie started to get into subprime mortgages, with great trepidation, late in the game 2005 and 2006, and only because they were losing so much market share to the Wall Street banks.
Furthermore, after the collapse began in the private investment banks, the loans originated by and for private-label securitization defaulted at about six times the rate of Fannie and Freddie loans did after the housing sector collapsed. The Wall Street initiated collapse actually precipitated most of the subsequent defaults on the loans Fannie and Freddie guaranteed as the toxic paper killed the inflated values throughout the housing sector and left huge swathes of the loan holders (and homeowners) with houses that were now worth a fraction of what the loans on them said they were.
Due to the GOP led repeal of Glass-Steagall, the firewall that would have previously kept these investment banks which were busy going up in flames, fueled by chock full of crap mortgage backed securities which nobody knew what was in them, from burning down the entire financial system world-wide was no longer there. This is why when G.E. suddenly found their line-of-credit frozen in September of 2008 as the commercial banking system suddenly came to a screeching halt, Hank Paulson ran to Nancy Pelosi on bended knee (literally) to beg to step in and keep the banking system from imploding into a black hole.
Also worth noting is the fact that the housing bubble occurred contemporaneously in other countries such as Iceland, Ireland, and the United Kingdom, non of whom were connected to Fannie and Freddie, much less operating under either the Fair Housing Act or other U.S. housing laws, should also dispel this conservative myth Fannie Mae and Freddie Mac being the cause. But then that would require dealing with reality instead of the smoldering fumes of a burnt to a cinder laissez-faire dogma.
To underscore the point, this bogus argument that Fannie and Freddie were the problem, has even been rejected by Republican-appointed FCIC commissioners looking into the cause(s) of the crisis. To say nothing of the absurd arguments that get resurrected by the gullible that somehow it was the fault of things like the the Community Reinvestment Act of 1977 or even more absurdly, the Fair Housing Act, which was put into law the same year Lyndon B. Johnson announced he wasn't going to seek re-election and before most Americans alive today were even born.
Or to put it shorter terms, I was shocked the other night when I ran into a zombie conservative myth that Fannie Mae and Freddie Mac, along with the Fair Housing Act caused the economic mess we are in. A zombie myth which apparently refuses to die.
