Wednesday, July 16, 2008

The Downturn - Part 2

Not sure how it's playing in the rest of the country, but Fannie and Freddie are top-of-the-fold news in Washington right now. Not surprisingly, then, Paul Krugman - one of the world's top economists right now, and perhaps the top trade economist - is talking about it on his blog. He kind of puts a positive spin on it the way Samuelson does - and I'm similarly sorta-convinced.

Krugman cites another guy who suggests that Fannie and Freddie essentially took the place of S&L's over the 1990s... this is theoretically bad because S&L's crashed in the late 1980's in a very bad banking crisis. His argument is "yes - they grew, but they were crowded out by other, riskier lenders who are the real risk now". Essentially he's saying that Fannie and Freddie won't follow in the footsteps of the S&L debacle because they aren't at the heart of the REALLY bad lending that's going on.

Fair enough - they're not at the heart of it - but their stock price is still in the dumps and they exist in the context of a very bad credit market! They may not be the source of the problem this time, in the way that the S&L's were in the 80's - but so what? Who do you think is more vulnerable - a large bank with no involvement in the mortgage market that has done some moderately risky lending, or Freddie and Fannie who may also be only moderately risk in their lending but live and breathe the mortgage market! They may not have started the fire, but I don't see how they're not going to get burned! And the problem with that is that Freddie and Fannie are household names - trouble there is a much bigger deal than trouble at some random local lending institution down the street. Krugman is right that they're not the center of the story here in the sense that they're not going to spark anything major... but that doesn't reassure me that much.

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