The Downturn - Part 3

So I just traced Krugman's post back through the original blog post that he cites, and I was reading some of the comments - and two, "Ex-Worker" and "dan" (not me), make the same point I do about Krugman only better.

First, they make the basic point that "just because Fannie and Freddie aren't ultimately responsible for the crisis doesn't mean that they're not at risk of experiencing what the S&L's did". That's the point I made in "The Downturn - Part 2".

The second point Ex-Worker and dan make is even better and more interesting... Fannie and Freddie basically subsidized risk taking with public money (federal government guarantees their loans), so they subsidized all the good lending that was out their to do (Fannie and Freddie are pretty responsible in their lending). By bringing down the cost of risk, though, Fannie and Freddie made it cheaper for other less scrupulous lending institutions to take on the bad risks that caused this crisis.

Moral of the story:

1. Subsidizing "good loans" isn't going to solve these problems because it will just artificially lower the cost of credit, which is just going to make it that much easier for the bad loans to be made by someone else - the solution is to regulate ALL lending to turn those bad loans into good loans... and yes, this may raise the cost of capital.

2. Just because Fannie and Freddie aren't culpable for bad loans doesn't mean they're not at risk.

BOO-YAH Paul Krugman!