It’s probably never wise to inject oneself into the middle of a food fight, but since I think both sides actually have something right and something wrong, its been a worthwhile debate to follow. That is the ongoing debate between Peter Wallison at the American Enterprise Institute and David Min at the Center for American Progress (at least we can all agree we love America) on the role of Fannie Mae (and Freddie Mac) in the financial crisis. If you can’t guess, Peter says Fannie/​Freddie caused the crisis, David says they didn’t.


David makes an interesting point, one I’ve actually argued, in his latest retort. That is, this wasn’t exclusively a housing crisis/​bubble. Other sectors, like commercial real estate, boomed and then went bust; other countries, with different housing policies, also had bubbles. True from what I can tell. I will also add that the U.S. office market actually peaked and fell before the housing market, so we can safely say there wasn’t contagion from housing to other parts of the real estate market. 


But the problem with this argument, at least for David, is that it undercuts the Dodd‐​Frank Act, which he has regularly defended. The implicit premise of Dodd‐​Frank is that predatory mortgage lending caused the crisis, so now we need Elizabeth Warren to save us from evil lenders. But how does predatory lending explain the office market bubble? Do we really believe that deals between sophisticated parties, poured over by lawyers, were driven by predatory lending practices? Do we also believe that other countries were also plagued by bad mortgage brokers? Again, I think David is right about the problem being beyond housing, but he can’t have it both ways.


What is the common factor driving bubbles in commercial real estate, housing, and foreign real estate markets? Maybe interest rates. This was a credit bubble after all. Especially since the Fed basically sets interest rate policy for the world. It is hard for me to believe that three years (2002–2004) of a negative real federal funds rate isn’t going to end badly. This is what I think Peter misses, the critical role of the Federal Reserve in helping blow the bubble. But Dodd‐​Frank does nothing to change this. 


Now there are a ton of things I think both still miss. We could argue all day about what a subprime mortgage is. I think the definitions used by Wallison (and Pinto) are reasonable. There is also a degree, a large one, to which David and Peter are just talking past each other. For instance, there is something special about the U.S. housing market that transfers much of the risk to the taxpayer. In contrast, the bust in the office market didn’t leave the taxpayer to pick up the tab. That has to count for something, unless one just doesn’t care about the taxpayer. 


There are a few other issues that make Fannie/​Freddie uniquely important in the crisis, but I lack the space to go into them here. Instead, I’ll wrap up by saying that their role in the overnight repurchase (re‐​po) market is under‐​appreciated and their ability to essentially neuter the Fed was critical in keeping the bubble going. What’s for dessert?