Could Frannie Have Prevented the Housing Bubble?

Dean Baker is right that the failure of Fannie and Freddie was due to the incentives that being private corporations gave them to take excess risk.

In the future, Fannie and Freddie can best serve their role of providing the stable anchor of the secondary mortgage market by being boring government corporations.

But I think he goes too far when he blames the whole bubble on Frannie.

If Fannie and Freddie had begun to tighten credit five or six years ago, when house prices were already clearly out of line, they could have stopped the growth of the bubble before it reached such dangerous proportions.

I’m not sure what he means by "tighten credit" here, but he certainly seems to imply that sans Fannie and Freddie the bubble wouldn’t have expanded so far:

Perhaps the private sector would have created a secondary mortgage market on its own, but it didn’t. Furthermore, private issue mortgage backed securities have performed far more poorly in the current crisis than the securities issued by Fannie and Freddie.

The problem with this argument is that the property bubbles in countries without Fannie and Freddie — Ireland, UK, Spain, South Africa, you name it — were even bigger than the property bubble in the US. Given US monetary policy, global liquidity conditions, and a society obsessed by home ownership, a bubble was going to happen, Frannie or not.

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