≡ Menu

Krugman gets the facts wrong

Back in July, as Fannie and Freddie were starting to implode, Krugman concluded that Fannie and Freddie weren’t part of the subprime crisis:

But here’s the thing: Fannie and Freddie had nothing to do with the
explosion of high-risk lending a few years ago, an explosion that
dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after
growing rapidly in the 1990s, largely faded from the scene during the
height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals
at the companies, placed temporary restraints on both Fannie and
Freddie that curtailed their lending just as housing prices were really
taking off. Also, they didn’t do any subprime lending, because they
can’t: the definition of a subprime loan is precisely a loan that
doesn’t meet the requirement, imposed by law, that Fannie and Freddie
buy only mortgages issued to borrowers who made substantial down
payments and carefully documented their income.

So whatever bad
incentives the implicit federal guarantee creates have been offset by
the fact that Fannie and Freddie were and are tightly regulated with
regard to the risks they can take. You could say that the
Fannie-Freddie experience shows that regulation works.

His conclusion is quoted approvingly by Economist’s View, a couple of days ago. [CORRECTION: Economist’s View didn’t quote Krugman directly, just a post by someone else that referenced the Krugman article. But Economist’s View does argue like Krugman that Fannie and Freddie didn’t cause the meltdown.]

Alas, Krugman has his facts wrong. As the Washington Post has reported:

In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

Eager to put more low-income and minority families into their own
homes, the agency required that two government-chartered mortgage
finance firms purchase far more "affordable" loans made to these
borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

Housing experts and some congressional leaders now view those decisions
as mistakes that contributed to an escalation of subprime lending that
is roiling the U.S. economy.

The agency neglected to examine whether borrowers could make the
payments on the loans that Freddie and Fannie classified as affordable.
From 2004 to 2006, the two purchased $434 billion in securities backed
by subprime loans, creating a market for more such lending.

$434 billion isn’t zero, and that’s just from 2004 to 2006.