More from yesterday.
1. Mark Calabria refers to David Min’s critique of the AEI arguments that the GSEs caused the financial crisis as a “CAP-AEI Food Fight.” And from your point of view, this may be the framework that you’d likely use. The conservative think tank says A, the liberal think tank says not A, the answer is probably in the middle somewhere. In a lot of cases, that’s probably a smart approach.
But we aren’t talking about data-mining statistics on an obscure teacher bonus program in rural Wisconsin, or the ideologically-driven hallucinatory dreamscape about all the awesomez innovations that’ll happen once we give Grandma a coupon to go buy health care in the private market. We are talking about one of the biggest and most examined markets in the world – the United States mortgage market. And what do other people who have looked into this issue find? From Min’s recent paper, with a few sources made clear:
“Did Fannie and Freddie buy high-risk mortgage-backed securities? Yes. But they did not buy enough of them to be blamed for the mortgage crisis. Highly respected analysts who have looked at these data in much greater detail than Wallison, Pinto, or myself, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, including the University of North Carolina, Glaeser et al at Harvard, and the St. Louis Federal Reserve, have all rejected the Wallison/Pinto argument that federal affordable housing policies were responsible for the proliferation of actual high-risk mortgages over the past decade.”
That’s a lot of sources! Now what does the other side have?
(You can click here to hear cricket sounds on youtube.)
2. What’s even more interesting is that the network of research that does exist on this matter is basically the Pinto analysis redone over and over again. While the paragraph above has all kinds of experts using a wide variety of approaches, the “GSEs did it!” literature is the same exact heavily critiqued data point repeated like a creed.
As Leonard Architect writes in his devastating, very recommended, review of what we’ve just learned, professors who do take the GSE approach simply repeat Pinto’s research:
Professors at Berkeley and NYU have no such excuse for parroting Pinto’s misleading claims. Everyone who follows the mortgage data released by the Federal Housing Finance Agency, or the Mortgage Bankers Association, or Loan Processing Services knows that the loan performance experienced by Fannie and Freddie is exponentially superior to that of the rest of the mortgage market. Anyone who says otherwise is lying.
Berkeley Professor Dwight Jaffee is less than honest when he parrots Pinto’s dubious research in his proposal for privatizing the GSEs. NYU Professor Lawrence J. White is less than honest when parrots Pinto’s research in his book on the GSEs, Guaranteed to Fail. Jaffee, White and Wallison are all colleagues at the Mercatus Center, a right wing think tank founded and funded by the Koch Brothers.
Guaranteed To Fail was written not by one, not by two, not by three, but four NYU professors, who collectively tout Pinto’s deceptive labeling, but have nothing to say about the loan performance of the GSEs relative to that of the rest of the mortgage market.
3. For additional fun, the fact that we now know that Wallison leaked the critique of Pinto’s work creates an important timeline. From Leonard Architect:
“I get this memo criticizing Pinto’s data — what was I supposed to do?” [Wallison] told Huffington Post. “Pinto should be the one to respond to criticism of his data.”
Pinto got the opportunity, but he offered no response. He delivered three additional memos, here, here, and here. But he never responded to core criticism in the FCIC staff memo, which identified the fatal flaw in Pinto’s misguided labeling scheme.
From the oversight report, we know that Wallison leaked the FCIC memo to Pinto so he could address the arguments between August 9th and August 14th, 2010. The three additional memos Pinto submitted to the FCIC linked in the Architect piece above were draft date August 14th, October 10th, and November 4th, 2010. And evidently they didn’t address the argument at all.
Imagine if I say A, and then you point out there’s a really valid critique of A, and I respond by repeating A three more times but louder. What would you make of my argument?
Rortybomb 
Very funny at the outset, but you are not considering what can happen once Groupon or LivingSocial begin playing a role in the health care voucher sphere!
here lies
BERTOLD McNAMEFACE
1943-2011
“MAYOR of COLON WING, MERCY HOSPITAL”
I see Mankiw posted a Wallison quote about “risky” mortgages and the GSEs in his characteristic without comment way which always leaves one wondering just what the reason for posting it was. Does he really have nothing to say about this? Is it too unkind of me to think he posts bullshit to his widely read blog without comment to give himself plausible deniability of endorsing bullshit?
Mankiw’s approach is “I post, you decide”
Appreciate the linkfest and the dialogue, which I have to admit passed my attention span threshold somewhere in the first post – Min round.
I do think you’re missing some points, though – it isn’t all A and not A. It’s not binary like computer code – “Caused it! Did not! Did too!” It’s a complex world and there are causes and causes, even among first order effects and then you have second order effects. I’ll illustrate: Back in 00s, can;t remeber which but it wa well before the fall and might eeven have been 03, I asked a business acquaintance who worked for a European bank why the bank kept buying RMBS even as underlying fundamentals weakened (I was out of that sector by then)and i’ve never forgotten the answer “the US will never let the housing market fail; it’s the American Dream. A President could never just let prices fall or mortgages dry up.” If this were a Michael Moore film, of course, you know what the next scene would be. Point is, the GSE’s plus the mortgage deduction were walking advertisements for people to buy housing finance paper at any levels of risk.
Less anedcotally, the “A and not A” frame excludes the capitalization and interconnectedness issues – that 1) the GSEs were pushed politically (bipartisan, mind you) to expand through debt because of the US backing, and ineluctably to destroy their equity base and trigger the guarantee – which sort of moots, imo, the credit quality argument — the supposed outperformance was clearly too weak a performance for a lender capitalized 98+ to 1!!!, and 2) Banks were incentivized by risk capital guidelines to acquire as much GSE paper as possible because it was given the highest weighting and thus supported the greatest loan growth, which meant that when the GSEs went down, the lending function throughout the economy was tied to them and was at risk of going down with them: it’s no accident that all the collapses happened in a month after the GSE receivership.
I respectfully submit that regardless of the “Caused it! Did not! Did too!” debate, that the GSE program icy was a huge part of the problem and a less centralized and more market driven housing finance market would not have experienced the financial crisis of 08.
Well said Mark. You cut right through the NOISE and get to the point. Who funded most of the loan growth during the boom? The correct answer is Fannie, Freddie, Ginnie, and the FHLBs.
For the private labels who got into the securitization business, Fannie and Freddie had already demonstrated the profit model. The GSEs, with their market power, also got the best mortgages, leaving all the private labels with junk to get off their books through securitization. GSEs also helped create a worldwide appetite for MBS – seemingly well diversified assets with high yields to attract global capital.
You also bring up a good point about risk weighting. Regulation and debt covenants coordinated the actions of thousands of financial institutions that had capital requirements. They went for the highest yield their rules allowed relative to the risk weighting imposed on them. With more MBS on their balance sheet, they were free to continue growing loans, both residential and commercial. Let’s not forget there was a commercial real estate boom and bust on the heels of the residential cycle. This coordination also increased systematic risk since the fortunes of all financial institutions were now tied together by seemingly prudent and reasonable regulation.
Course, in order to make your point about the “GSEs funding most of the growth therefore they were responsible” make any sense whatsoever, you should follow it up with how the GSE portion performed. I mean, after all, we are not worried about the amount of mortgages, we are worried about the amount of mortgages that failed.
The GSEs certainly did not cover themsleves in glory during the boom, but I think it takes a “special” kind of mind to blame something on entitites that, despite your contention that they funded most of the growth(and which is disputed in Mike’s latest post), currently has less than one quarter(22% in Mike latest post) of all delinquencies.