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What happened? “Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally”

Things fall apart: Kevin Hassett at Bloomberg.com is getting death threats over this news analysis:

The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.

But really, it isn’t. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.

Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street’s efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.

In the times that Fannie and Freddie couldn’t make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.

Take away Fannie and Freddie, or regulate them more wisely, and it’s hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.

Read the whole thing.

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  • 7 comments

    7 Comments so far

    1. Chris Johnson September 22nd, 2008 9:56 am

      Amen. Death threats? Woah. But it’s a succinct statement of fact to remember as we try and fight socialism with socialism.

    2. Greg Swann September 22nd, 2008 10:06 am

      One small sentence, for me, describes the fall of the Roman Republic: Marcus Tullius Cicero, reporting on the trial of Lucius Sergius Catilina (a/k/a Catiline), says, “Consputare coeperunt” — “They began to spit together in unison.” Some of the Obama supporters are starting to come across with an equivalent sense of civility.

    3. Chris Johnson September 22nd, 2008 10:09 am

      Heh. I don’t know that the social conservative wing of the Mcain supporters are any better. That’s why I’m trying to get a libertarian up. And by the way–we’re at double digits in the polls and have, besides Party contributions outraised the GOP.

    4. Chuchundra September 22nd, 2008 10:40 am

      I’m sorry, but that’s not analysis, it’s a partisan hit job. Hassett is parroting the McCain campaign’s talking points and trying to blame this mess on Democrats. To say that “Fannie and Freddie exploded”, taking out otherwise healthy firms is arrant nonsense. It was Bear and the rest of the IBs that wrote the worst of the bad paper that got us where we are today.

      The problem with the libertarian response to this crisis is that it puts the like to the libertarian credo that all we need to do is get government out of the way and the markets will self-regulate, running themselves better than the bureaucrats ever could.

      Well, that’s what happened here and it’s threatening to crater the entire financial system. The private companies that were supposed to be the “grown ups” and keep an eye on things — ratings agencies, insurance companies, even down to the minor players like real estate appraisers — got carried away with the vast torrents of money raining down on them and failed to do their jobs.

    5. Chris Johnson September 22nd, 2008 10:47 am

      Chuch-

      Fannie and Freedie were:

      1.) created by the government, thus distorting the market by providing artificial liquidity.

      That is the idea that is the problem. To say that Fannie and Freeddie are even remotely libertarian is like calling a pick up truck an airplane. They wouldn’t exist under any libertarian government, the artificial liquidity wouldn’t be there.

      This is a point of fact, and to throw libertarians in with McCain is an insult to clear headed, small “l” libertarians. McCain is a socialist neocon who will do nothing but enrich the fee income of Wall Street. Is he a better choice? Sure, but only in the same way that colon cancer is a better choice than pancreatic cancer.

    6. [...] read the article by Kevin Hassett, but, Greg Swann beat me to the punch posting about it. Here are a couple of key excerpts you might want to focus on: If that bill had become law, then [...]

    7. John Sabia September 23rd, 2008 6:16 am

      There is enough blame to go around, but, I think the article is very clear. Facts are facts. It’s ironic how talking about the economy helps Obama, when in this instance, he could have actually done something to help it.