AEI scholar predicted GSE housing crisis 10 years ago

Next month, America will have officially entered the longest recession since World War II. Dubbed the “Subprime Crisis of 2008-2009,” much of the blame for the current economic turmoil can be attributed to greedy, predatory lenders that locked people in to homes they could not afford.

Fannie Mae and Freddie Mac, officially sanctioned as Government Sponsored Enterprises, were collectively behind this drastic increase in subprime and ALT-A mortgages. As lenders targeted individuals who had poor or no credit, Freddie and Fannie quickly pooled together these risky mortgages and sold them as Mortgage Backed Securities (MBS). Investors immediately recognized the potential to make a quick and sizeable profit off of these securitized mortgages, and little by little, these MBS’s poisoned the portfolios of banks across the world.

Ten years ago, the New York Times issued a prophetic warning (PDF of article), cautioning policy makers to be weary of easing credit requirements for low income home owners.

My AEI colleague Peter Wallison was one of the first to recognize the systemic risk in these GSE’s: “If [Freddie and Fannie] fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

The Times reinforced this ominous warning, “Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.”

We are now facing such a time, and the scale of government intervention has surpassed that of the S&L crisis of 1980s.

Ten years ago, we knew we were putting the tax payer’s dollar at risk. Individuals at the helm of Freddie and Fannie gang—Barney Frank, Rahm Emanuel, and Chris Dodd—are still in power and pushing for more government intervention into the private sector.

We cannot wait another ten years to reflect upon the warnings today. We cannot depend upon another massive government bailout. Freddie and Fannie should be liquidated, and we should put an end to the this troubling legacy of GSE gambling at the taxpayer’s expense.

Emily Renwick is Newt's Research Assistant at AEI

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Comments

By Anonymous @ Monday, April 20, 2009 11:14 AM

Newt, Get a life, Your hissy fit with regards to Obama and Chavez is irelevant. Leader's talk and exchange smiles, big deal.

Just goes to show that all the undemocratic right wing actions and the damage caused by Reagan's death squads in the 80"s interventions in Central America did not work. We have democraticly elected Ortega and Chavez.

You Republican's need a new play book to complete in a globally intergrated world. Frankly the concept of supper power and all the sabre rattling means nothing in a world where all the high tech weapons are of little use.

You're supposed to be a student of history, obviously Lating American history does notappear to have been an area of concentration, the US has a long and damaging series of involvements throughout Lating America.

Read about it and learn.

By Anonymous @ Wednesday, April 08, 2009 1:35 AM

Mr Gingrich, How can Obama make the statement that he don't know when life begins. He contradicted this statement while defending his stance on stemcell research. If life can begin in a testube then surley it begins in the womb.

By Anonymous @ Thursday, April 02, 2009 2:06 AM

How do we legally take our nation
back, and impeach Obama?

I am serious! If we wait 6 more
months, our freedoms, and national
safety will be down the tubes, just as
our financial situation is already in ruin.
The buck stops in the white house, and
congress!!!

By Anonymous @ Thursday, April 02, 2009 1:46 AM

hEALTH cARE

By Anonymous @ Monday, March 30, 2009 4:32 PM

FAIR TAX, the republican strategy.

By Anonymous @ Sunday, March 29, 2009 6:01 AM

I re-read tonight Karl Marx’s The Economic and Philosophic Manuscripts of 1844, and really thought about his concerns with “Alienation.” He describes this concept as the breakdown of the natural human life and the interconnectedness that is an essential part of life, as alienation, collapsing the possibilities of what people can be potentially. As a result of alienation, work and therefore, life is reduced to sheer toil in which the individual “does not affirm himself but denies himself, does not feel content but unhappy, does not develop freely his physical and mental energy but mortifies his body and ruins his mind” (Marx, 1932/1964:110).

Is there a perversion of humanity in our society? Ideally, people can be no more or less than they actually are, but in our society money can bestow on people powers and abilities that they do not actually possess. In The Economic and Philosophic Manuscripts of 1844, Dirk J. Struik (ed.). New York: International Publishers; Marx states:

That which is to me through the medium of money that for which I can pay that am I, the possessor of the money. The extent of the power of money is the extent of my power. Money’s properties are my properties and essential powers the properties and powers of its possessor. Thus, what I am and am capable of is by no means determined by my individuality. I am ugly, but I can buy for myself the most beautiful of women. Therefore I am not ugly, for the effect of ugliness its deterrent power is nullified by money. I, as an individual, am lame, but money furnishes me with twenty feet. Therefore I am not lame. I am bad, dishonest, unscrupulous, stupid; but money is honored, and hence its possessor. Money is the supreme good; therefore its possessor is good. Money, besides, saves me the trouble of being dishonest: I am therefore presumed honest. I am stupid, but money is the real mind of all things and how then should its possessor be stupid? Besides, he can buy talented people for himself, and is he who has power over the talented not more talented than the talented? Do not I, who thanks to money am capable of all that the human heart longs for, possess all human capacities? Does not money, therefore, transform all my incapacities into their contrary (Marx, 1932/1964:167)?

Although money is capable of buying virtually anything in our world, it cannot perform that meaning in a truly human world; in such a world where one simply, “exchanges love only for love” (Marx, 1932/1964:119). Wealth is only a veneer that when stripped away leaves nothing but “the universality of needs, capacities, enjoyments, productive powers, etc. of individuals, produced in universal exchange.

As a result therefore, man only feels himself freely active in his animal functions such as eating drinking procreating and in his human functions he no longer feels himself to be anything but an animal. What is animal becomes human and what is human becomes animal (Marx 1932/ 1964:111).

In our rationalizations and efficiencies of the “industrial age and that of scientific management theory,” have we stepped over the edge a little too far causing the alienation of human life by denying the possibilities of human potential and communicative action?

By bigpicture @ Sunday, March 29, 2009 1:44 AM

I am tried of hiring people blaming the banks
and "predatory leaders" for our current economic problems. Lets use some common sense here instead of listening to the self serving politicians and Liberal media. Why would a bank lend money to someone who can't pay it back. Simple because they were forced to by the government tightening the strings on the Community Reinvestment Act.

By Anonymous @ Saturday, March 28, 2009 10:59 PM

Why should we wait til 2012 for change??? People! This is Newt's page for crying out loud. Change in 2010!!!!!!!!! Get your okoles in gear!

By Anonymous @ Saturday, March 28, 2009 9:34 AM

A Recipe for Scratch Socialism

Begin with an aged wedge of national overspending. Take the wedge of aged national overspending and carefully separate the over spenders from the pay their bills on time everyday citizens, into individual bowls. I prefer to use colorful bowls. Place the over spenders to your far left in a blue bowl. Note, the over spenders will need a larger bowl. Place the pay your bills on time everyday citizens to your right in a conservatively colored bowl, red will do nicely. Carefully stir into the overspending mixture a cup of a sense of entitlement. Stir slowly, then blend in even potions of mortgage buyouts, auto industry buyouts, bank buyouts, extended unemployment benefits, and uniform healthcare. Sprinkle the overspending mixture with a tablespoon of fresh partisan politics. Set aside.

Take your conservatively colored red bowl and slowly stir into your pay their bills on time everyday citizens mixture, a heated cup of additional taxes. Combine the heated cup of additional taxes with hard working people and add a dash of no incentive to increase personal income. Pour into the pay their bills on time everyday citizens mixture, a strong dose of betrayal.

Carefully combine the red bowl with the blue bowl and stir until the there is no visible sign of capitalism or the free market system. Should the pay their bills on time everyday citizens mixture rise up, don’t worry, the mixture from the left has the majority and will crush it back down. The mixture will closely resemble freshly disguised socialism.

Pour the freshly disguised socialism into a chilled bowl and toss and serve equal portions to everyone regardless of their appetite. Your meal should be served with a 2009 bottle of a gifted orator and masterful politician who convinced a nation to believe in change and hope. As you pour the wine, enjoy the fragrance of numerous broken pledges and a sense of shock and disbelief. The wine may taste sour initially, and if the meal sticks in your throat a little, don’t worry as you have 4 years to keep perfecting the recipe.

Substitute ingredients: Self-rising American spirit combined with everything that makes our nation the greatest in the world. Combining the two yields true hope and change in 2012.

By Anonymous @ Saturday, March 28, 2009 1:00 AM

I cannot believe people are honestly talking about how the Democrat "folk" are messing up this country, and talking about sending people to jail over trying to fix the mistakes of previous years. If were going to talk about punishing politicians, we need to charge Bush and his gang of cronies with war crimes, and have them hung in the same fashion as Saddam himself was. Stop trying to distract yourselves from how out of touch you are, and try to come up with some good ideas to help out.

By Wally @ Friday, March 27, 2009 3:58 PM

Emily,

It now appears that One of the Few Ways to stop Fannie Mae and Stop Freddie Mac, Both bastions of Clinton Democrat-Socialist Alumni, Is to Send Some Folks to Jail.

Chris Dodd & Barney Frank for starts. Then it will become apparently that these two institutions need to be dismantled (blown-up).

I dis agree with the premise of "preditory lending" be the majority of the reason for the subprime loans going to po'folk.

In South Chicago and in Cincinnati, I saw the destruction of prefectly good Public Housing Projects by the GOVERNMENT so that these bastions of crime and Democrats could be dispersed into mostly Republican niddle Class and Working Class neighborhoods.

Of Cincinnati's 52 designated "neighborhoods", two formerly peaceful solid Republican neighborhoods of Price Hill and Westwood have flipped to crime riddled Democrat neighborhoods in just 15 years.

These Democrat folks brought with them the crime and failed property upkeep practices of the "projects". Huh.

Those with resources left Cincinnati all together and went to low tax, low crime Northern Kentucky, Southeast Indiana and to other Surrounding Ohio Counties.

Government is creating Low Income Housing Markets and Dodd, Frank and others need to go to jail to stop the insanity that is Fannie Mae and Freddie Mac.

By Anonymous @ Friday, March 27, 2009 1:28 PM

We need more co-sponsors to HR 1207 and S 603 today.

If your congressman/woman has not co-sponsored these bills, then you need to vote them out in 2010/2012/2014.

Audit the private bank called the Federal Reserve that has caused the dollar to be devalued 95% since they took over what Congress should be doing - coining money.

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