Monday, September 08, 2008

Evaluating Bush's (inevitable) decision to bail out Freddie Mac & Fannie Mae

I applaud liberal political journalist and blogger Ezra Klein for putting together an important road map for the systemic collapses on Freddy Mac and Fammy Mae over the last few years. His coverage is marked both by erudition as well as an almost uncanny ability to imagine how changes in legislation, bureaucracy and better regulation in general could have helped prevent (or at least mitigate) this mess. He put a number of economic policy gurus on the record to try and explain the origins of this whole filthy mess the US taxpayer will be underwriting for decades.

And as for Dean Baker, the collapse of Fannie and Freddy was also utterly predictable as well: see this post "Fannie and Freddie Go Under: Yes, This Was Predictable."
Okay, this is a bit of gloating. After having debated the economists at Fannie and Freddie more than a dozen times over the past six years, I am going to take the opportunity to say that I was right and they are bankrupt.

Their economists consistently dismissed the possibility that there was a housing bubble and were enraged at the suggestion that these two corporate giants could face financial problems. Of course there was a housing bubble and it was inevitable that it would collapse and impose serious strains on Fannie and Freddie.

As I said back in September of 2002:

"If housing prices fall back in line with the overall rate price level, as they have always done in the past, it will eliminate more than $2 trillion in paper wealth and considerably worsen the recession. The collapse of the housing bubble will also jeopardize the survival of Fannie Mae and Freddie Mac and numerous other financial institutions."

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