For quite some time, most books have blamed the U.S. financial crisis on the vices of Wall Street, often minimizing or ignoring the role of certain government-sponsored enterprises (GSEs). On Wednesday at AEI, however, panelists gathered to evaluate the GSEs Fannie Mae and Freddie Mac as drivers of the subprime lending crisis of 2008, as discussed in Oonagh McDonald's new book "Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare."
McDonald commenced with a keynote address discussing her book's research on the affordable housing ideology that drove Fannie and Freddie to pursue homeownership targets at the expense of adequate modeling, documentation and credit requirements. AEI's Ed Pinto went on to describe the gradual politicization of lending, demonstrating how Fannie and Freddie drove never-before-seen leveraging throughout the mortgage market.
Josh Rosner of Graham Fisher & Co. then demonstrated how, as standard setters, Fannie and Freddie seasoned the markets for subprime lending, the precursor to the great failures of ratings agencies to evaluate collateralized debt obligations. Finally, Lawrence White of New York University's Stern Business School presented data that shows that while government housing subsidies increased U.S. housing stock by 30 percent, these subsidies prevented over $1 trillion of U.S. gross domestic product growth. White concluded with suggested policy prescriptions for avoiding future bailouts, including greater capital requirements for systemically important financial institutions, a tax on institution size and a removal of government-backed guarantees.
For years, most books about the financial crisis blamed it on Wall Street greed or irresponsibility and — like the Financial Crisis Inquiry Commission — ignored or minimized the role of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Now, however, a number of upcoming books will evaluate the GSEs and their activities before the 2008 crisis. The first of these is “Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare” by Oonagh McDonald, a U.K. scholar of financial regulation, a former director of the U.K.’s Financial Services Authority and a former Labour Party member of Parliament. The book will be reviewed by a trio of authors who have studied and written about the GSEs over many years.
Full video will be posted within 24 hours.