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Whether to blame the financial crisis on Freddie and Fannie is partially about the blame game between Democrats and Republicans inside the Beltway. But it is also about a battle for ideas.

Let me focus this post on those policymakers and scholars whose intellectual predisposition is that financial markets basically work (I'll save a later post for the dilemma that Freddie/Fannie pose for other scholars-including New Governance). If you believe markets works, the current crisis leaves you with two options. (a) think of yourself as on the road to Damascus, or (b) investigate the role that government intervention had in causing the crisis.

For option (b), one line of inquiry is to argue that markets would have self-corrected but for the bailouts of Bear, AIG, et al. I don't dismiss this, but the bailout decisions were not a hypothetical exercise: the costs of the correction absent a bailout could have been enormous, the uncertainty Bernanke and others faced was real, and given the utter lack of transparency of the Fed and Treasury decisions, we won't know for years what the real exposures to a Bear or AIG collapse were (or if there was a principled reason behind saving those institutions and letting Lehman implode).

A second line of inquiry is to look at how government policy “causes" the need for bailouts. One suspect is tax subsidies for mortgages. An easier target are the GSEs. At first glance, it is a tough attack, as Freddie and Fannie guaranteed only conforming (i.e. not subprime) mortgages. Next week (after I finish a draft of an article), I’ll give a more nuanced argument for the role of the GSE’s in the crisis.

Still, it still strikes me as a stretch to think of GSE’s as a “but-for” cause of the crisis. (Moreover, it would be far more appropriate to talk about contributions to the crises rather than insist on absolute parsimony when it looks like a lot of things went wrong.)

I should emphasize that scholarship critical of the GSEs is not necessarily ideologically or results-driven. A case in point: David Reiss’s excellent work on GSEs.

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Whether to blame the financial crisis on Freddie and Fannie is partially about the blame game between Democrats and Republicans inside the Beltway. But it is also about a battle for ideas.

Let me focus this post on those policymakers and scholars whose intellectual predisposition is that financial markets basically work (I'll save a later post for the dilemma that Freddie/Fannie pose for other scholars-including New Governance). If you believe markets works, the current crisis leaves you with two options. (a) think of yourself as on the road to Damascus, or (b) investigate the role that government intervention had in causing the crisis.

For option (b), one line of inquiry is to argue that markets would have self-corrected but for the bailouts of Bear, AIG, et al. I don't dismiss this, but the bailout decisions were not a hypothetical exercise: the costs of the correction absent a bailout could have been enormous, the uncertainty Bernanke and others faced was real, and given the utter lack of transparency of the Fed and Treasury decisions, we won't know for years what the real exposures to a Bear or AIG collapse were (or if there was a principled reason behind saving those institutions and letting Lehman implode).

A second line of inquiry is to look at how government policy “causes" the need for bailouts. One suspect is tax subsidies for mortgages. An easier target are the GSEs. At first glance, it is a tough attack, as Freddie and Fannie guaranteed only conforming (i.e. not subprime) mortgages. Next week (after I finish a draft of an article), I’ll give a more nuanced argument for the role of the GSE’s in the crisis.

Still, it still strikes me as a stretch to think of GSE’s as a “but-for” cause of the crisis. (Moreover, it would be far more appropriate to talk about contributions to the crises rather than insist on absolute parsimony when it looks like a lot of things went wrong.)

I should emphasize that scholarship critical of the GSEs is not necessarily ideologically or results-driven. A case in point: David Reiss’s excellent work on GSEs.

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