Editorial License

The notion that financial markets are self-regulating in terms of risk and reward by absorbing all information, and work optimally without government regulation, has taken a bit of a tumble this year, no? I have no idea if that’s a central plank in Libertarian thought (though I think it is), but Cato’s blog, which is debating a slate piece about Libertarians by Slate’s Weisberg, writes:

With regard to government interventionism as a cause of the crisis, Charles Calomiris and Peter Wallison have marshalled strong evidence that Fannie and Freddie played a major role in inflating the real estate bubble. Despite the fact that these two gentlemen have forgotten more about financial markets than Weisberg will ever know, Weisberg dismisses their analysis as not only wrong, but risible.

Being interested in this, and having not read anything about this evidence, I run to the WSJ editorial – Blame Fannie Mae and Congress For the Credit Mess. It is terrible. It doesn’t do anything it sets out to claim – certainly nothing about inflating the real estate market. Here’s the key paragraph:

If [GSEs] were not making mortgages cheaper and were creating risks for the taxpayers and the economy, what value were they providing? The answer was their affordable-housing mission. So it was that, beginning in 2004, their portfolios of subprime and Alt-A loans and securities began to grow. Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period the quality of subprime loans also declined, going from fixed rate, long-term amortizing loans to loans with low down payments and low (but adjustable) initial rates, indicating that originators were scraping the bottom of the barrel to find product for buyers like the GSEs.

In the words of Billy Madison everyone is now dumber for having read that. Notice how they don’t come out and say: “Fannie and Freddie bought x% of subprime loans, which forced other market competitors to increase their holdings to near x% in order to stay competitive.” That’s because that didn’t happen.

See if you can find the several rhetorical tricks with logic they play. To start, “2004, their portfolios of subprime and Alt-A loans and securities began to grow” – that is still true if their Alt-A loans grew just a little, and subprimes stayed almost exactly the same, during that time period. Then there’s a nice trick with the next sentence, trying to confuse a reader with the US total loan industry instead of the GSE’s portfolio. Note that the GSE’s portfolio, total or newly acquired, looked nothing like that national average they quote. The last sentence is my favorite. “buyers like the GSEs” – note that they can’t truthfully say “buyers such as the GSEs, which bought x%” – all we get is “it could have been possible.” In another universe, sure.

Even for the WSJ editorial page, this is lazy. I have no problem thinking that the GSE’s were a major factor in the current problems, but critics need to deal with the fact that they lost market share during the time period (which implies they couldn’t have led market forces, just reacted to them) and their default rate is lower than nation-wide banks (implying they took on less risk than the banking sector as a whole). Their editorials should address Alt-A loans, or something that is relevant, and not churn out “must be completed by deadline” hack jobs such as the one above.

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2 Responses to Editorial License

  1. ginandtacos says:

    Your conclusion implies that there is some better argument that a pair of libertarian economists could be making; I think that being a libertarian economist precludes that. When one has to begin with the premise “No matter what, this is government’s fault, and it wouldn’t have happened under the providential hand of the market” the options are severely limited, no?

  2. Mike says:

    I understand the “don’t turn down editorial work” mentality for the professors, as well as a WSJ policy of “We need to attack the GSE no matter what out the door.”

    But yes, the options are incredibly limited as the data now stands – I mean, note how weak that the arguments are! Innuendo and hand-waving.

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