Last week I expressed some disappointment that while Nobel prize winner Joseph Stiglitz now raises the issue of “privatized gains and socialized losses” in our financial system, he made very different claims about Fannie Mae some years ago. In a NPR piece back in July, Professor Stiglitz offers his response to this charge. You should read it and decide for yourself. To the Professor’s credit, he does admit that we have a problem with Fannie (and Freddie). Such an admission would have been more helpful a few years ago. But better late than never.
For the sake of brevity I will address one of the many claims now, and address the others later this week. Stiglitz argues that “our big banks get finance at lower rates of interest than do others, because of the belief, in part, that should they have a problem, they will be bailed out.” His implication is that had Fannie not existed the risk would have just flowed to the big banks, who had to be bailed out too. Now I’ve questioned elsewhere just how much of a problem “too big to fail” banks were before the crisis, but one critical point bears remembering, even the most higher leveraged and reckless of the big banks still had to hold multiples of the capital that Fannie and Freddie held. In the extreme the GSEs only were required to hold .45 percentage points of capital against their MBS guarantees. Had a bank held that same risk on portfolio, it would have been required to hold 4.0 percentage points. That’s correct, a bank would have held almost 9 times the capital for the same risk as did Fannie. Even if Fannie held that risk on balance sheet, banks would still be required to hold 160% more capital. The simple fact is that had Fannie/Freddie not existed and banks had instead held that risk, there would have been over a $100 billion more capital in our financial system.
Professor Stiglitz was far from alone, and far from the worst, in terms of academics writing work to provide cover for Fannie Mae. Current economic advisor to Mitt Romney and former Bush official Glenn Hubbard also produced work defending Fannie Mae. Fannie and Freddie were also some of the largest supporters of the various real estate finance academic organizations, like the American Real Estate and Urban Economics Association. This is less about picking on Stiglitz (or Hubbard) than exposing Fannie’s ability to corrupt academia for its own purposes.