November 10th, 2010


Behind the Meltdown

A couple of years ago, I posted a rant about Fanny Mae & Freddie Mac's involvement in the economic trainwreck still unfolding today. (Summary: RARGH ALL THEIR FAULT WHY DIDN"T ANYONE STOP THEM?!?)

jurann left a comment on my post last week that reminded me of this, and reminded me that I've never tried to organize all of my thoughts on What Went Wrong. Because of course, it's not all the fault of the FMs, although they helped.

I'm going to try writing about the gestalt now. I'm not sure I'm going to make it through everything, because there's just so much.

Fannie Mae is the Federal National Mortgage Association. It was created as a government entity to create a secondary mortgage market -- that is, to allow banks and mortgage brokers to make loans, and then sell those loans to other investors. Once the loans were sold on the secondary market, banks and mortgage brokers could go make more loans. This was a reasonable idea, as xthread pointed out on my previous rant, because it diversifies risk. If Itty Bitty Bank makes a bunch of loans to people in Small Town, a crisis in Small Town could destroy Itty Bitty Bank. If Itty Bitty Bank sells a portion of those loans instead, and then buys some portion of loans from across the country, they're protected against localized crises. The secondary market also lets more people play in the game.

In 1954, Fannie Mae became a "mixed ownership" corporation (both private investors and the federal government held stock in it). In 1968, Fannie Mae was privatized and officially no longer owned by the government.

The big problem with the 1968 change is that no one has ever believed it. Collapse )