Did Fannie Mae Really Do It?

Triple Crisis blogger Jeff Madrick originally published this article on the Schwartz Center for Economic Policy Analysis (SCEPA) blog, a Triple Crisis partner.

An old debate has been resurrected by the publication of Reckless Endangerment by respected journalist Gretchen Morgenson and financial analyst Josh Rosner. While sadly misleading, this book has energized another round of blame-it-on-the government posturing in Washington. Two politically conservative columnists, David Brooks of The New York Times and George Will of The Washington Post, use the book to tell us in recent columns that Fannie did it. Anti-government forces are lining up with even more vigor against Dodd-Frank rules. Here we go again.

The accusation that Government-Sponsored Enterprises (GSE’s) Fannie Mae and Freddie Mac are the major causes of the financial crisis is palpably wrong. However, while the Morgenson-Rosner book is being used to make a case against government housing policy in general, at this time I want to introduce another perspective about government’s role in housing. As usual, history provides us with much-needed perspective. If government caused the mortgage distress of the 2000s, why was there even more instability and excess in residential housing and commercial real estate in the 1920s – a time without similar federal interventions?

Few know this history, but it bears significantly on the depth and duration of the Great Depression that followed in the 1930s. There was a huge run-up in housing prices in the 1920s fed by privately placed mortgages. In fact, mortgages tripled in value from $9 billion to $30 billion, according to Census Bureau Data. Additionally, a private economist in the 1950s estimated that debt as a ratio of housing prices doubled from 14 percent to 30 percent. The resulting crash depressed incomes and resulted in multitudes of financial institutions going bankrupt.

Read the full article at the SCEPA Blog.

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