Was it the GSE’s?  Was it the Federal Reserve?   Was it massive trade deficits?  Was it the greed and avarice of borrowers?  Was it the Community Reinvestment Act? 

Barry Ritholtz at The Big Picture blog gets fired up disclaiming liability for the GSE’s, again:

Far too many electrons have been sacrificed in detailing my views on FNM/FRE, but the short version is they were just 2 more crappy banks — as much to blame as Citi and Countrywide and Bank of America  and Lehman Brothers and Washington Mutual and Bear Stearns and Merrill and . . . well you get the idea. But the talking point that this all was caused by Fannie & Freddie?

I think Ritholtz is knocking down a straw man.  Very few believe that the GSE’s caused the housing implosion.  They were complicit in it, of that there can be no dispute.  But the GSE’s (Fannie, Freddie and Ginnie Mae) did not cause the price run-up and subsequent fall.  There was one prime, and one corollary reason.  The prime reason was the ultra-low interest rates set by the Federal Reserve beginning in the latter half of 2001, turning real rates negative and keeping them there until 2005.  The corollary reason was the massive trade deficits that we were running with the rest of the world (China and Japan in particular) meant our trading partners were left with massive amounts of dollars that had to find a home.  Much of it found a home back home, in American cow pastures and corn fields turned to McMansionvilles.  

The GSE’s were prime facilitators of this reflex trade, as their obligations were viewed to be (almost) as good as Treasuries, but paid better.   And their obligations were considered to be almost as good as Treasuries because it was believed the Treasury implicitly stood behind them.  Which proved to be a good bet.  The Treasury (i.e., the US taxpayer) has now pumped almost $150 billion dollars in the GSE’s to keep them afloat and operating, with no end in sight. 

Their failure was the most spectacular of the crisis, save possibly that of AIG, mostly because of their massive scale.  The GSE’s own or insure repayment on about $6 trillion residential mortgages, about half of the entire market.   They now exist as virtually the sole player in the market, providing funding for roughly 95% of all residential mortgages initiated since 2008.   With the end or curtailment of federal programs intended to shore up the housing market on the demand/sale side (the tax credit, e.g.), the GSE’s now exist as virtually the sole support for housing prices that wish desperately to fall. 

The GSE’s were only about 45% of the secondary funding market for residential mortgages before the crash.  This sounds insignificant relative to now, but was far and away the highest share of the market.   They set the tone so far as conforming first mortgages were concerned.  Investment banks used the GSE standards to sell their paper across the world.  If the paper “conformed” , it was considered good.  The GSE’s were perceived as  representing the interests of the US government and were correctly perceived to be underwritten by the US Treasury. 

The GSE’s ill-advisedly decided upon entering the subprime market, in a relatively small way, at roughly its peak, in about 2005.   Before about then, the subprime market had been a completely different animal than the first -mortgage conforming market.   But subprime and conforming slowly grew less distinctive as the securitization train kept looking for new borrowers to provide the fuel it needed to run, and it wasn’t because subprime mortgages were becoming less risky.  The GSE foray into subprime was disastrous, even if it did come at the tail-end of the boom and was small beer relative to other players.

But none of this would have been possible without the massive monetary stimulus being provided by the Fed that was mixed with a toxic soup of massive trade deficits and technological advancements allowing for income streams secured by mortgages on American real estate to be easily securitized and sold on international markets.   The GSE’s existed for decades without running into trouble in the (previously) relatively benign waters of the residential mortgage market.  Massive monetary stimulus; massive trade deficits that created dollars in foreign hands that needed somewhere to go; and the growingly sophisticated means of securitization, allowed for a massive oversupply of capital for residential real estate.  The GSE’s helped direct the capital to its destination, but this was not the cause of the crisis, it was an effect.

Incidentally, the Community Reinvestment Act had nothing, absolutely nothing, to do with instigating the crisis.  The CRA was a lackadaisical program that effectively did nothing more than provide Jesse Jackson some extortion money, while also providing cover to rich bankers so they could be seen as doing something for minority communities.   It was irrelevant so far as the housing market boom and bust were concerned.

The GSE’s did not cause the crisis, but they were not just another couple of crappy banks.  They were market leaders that, because of their special status as government sponsored entities enjoying the implicit backing of the US government, were especially able to set the tone and direction of the residential mortgage market as it was flooded with an oversupply of capital due to conditions beyond its control.