Barney Frank’s Fantasy World

by Russ Roberts on January 29, 2010

in Government Intervention

At Big Think, they used one of my questions in their interview with Barney Frank:

Question: How can Fannie and Freddie be structured to avoid the moral hazard problem and a too-cozy relationship with regulators? (Russ Roberts, Café Hayek)

Barney Frank: Yes, in 2004 the Bush Administration significantly increased those housing goals and particularly ordered Freddie and Fannie to start buying up a lot of low income individual mortgages, and I opposed it at the time.

Interesting answer. Here is the relevant data on the housing goals from my soon (really) to be finished essay:

Starting in 1993, Fannie and Freddie have affordable housing goals—30% of Fannie and Freddie’s purchases of loans have to be loans made to borrowers whose income was below the median income in their area. These are interim goals. In 1996, the interim goal becomes firm at 40%. In 1997, the number rose to 42%. In 2001 it rose to 50%. The Bush Administration increased this number to 52% in 2005, 53% in 2006, and 55% in 2007.

So it turns out there was no increase in 2004 and a minimal increase in 2005. The big increase was in 2001, the legacy of Clinton and Andrew Cuomo his HUD chief. Of course Bush embraced the housing goals and did increase them. But “Bush in 2004″ is a red herring.

I’d love to see the evidence that Frank “opposed it at the time.”

And none of Frank’s answer addresses the moral hazard problem–that people kept lending to F and F as the quality of their portfolio deteriorated because they knew the government stood behind them.

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