Daniel Gross thinks that conservatives are placing too much blame on them. I asked Kevin Hassett of the American Enterprise Institute (a McCain adviser who wrote a much-discussed column of his own on the GSEs’ role) what he thought of Gross’s argument and he is allowing me to quote from his reply:
It was the 2005 Senate bill that was the turning point that is getting so much attention, not CRA or poor minorities. The fact that D’s opposed that on a party line vote is incontrovertible. In addition, that bill would have prohibited Fannie and Freddie from owning ANY subprime or Alt-A mortgages. It is hard to imagine how those markets would have taken off without Fannie and Freddie’s liquidity.
He drops this main point because there is no satisfactory response for Democrats.
Indeed, it seems that he and his partisan colleagues are caught in a logical trap on this one. If Fannie and Freddie were effective at liquefying and expanding markets, as their Democratic supporters always argued, then stopping them in 2005 should have slowed or halted the expansion of the subprime market. Their opposition back then to the reform bill is only inconsequential if Fannie and Freddie were too. But if the GSE’s were perceived to be ineffective in achieving their mission, then why did they receive so much Democratic support? If the Democrats always believed that the GSE’s were ineffective but supported them anyway, then the only other explanation for their constant obstruction would be corruption.
I would prefer to believe that Democrats were well intentioned, correct in their belief that Fannie and Freddie contributed to market creation in this area, but incorrect about the systemic risks that Greenspan, McCain and others warned about. Because they underestimated the systemic risks, they erred in their cost benefit analysis when supporting the GSEs and opposing McCain’s reform.