In yesterday’s New York Times, Joe Nocera incisively attacked the persistent falsehood that Fannie Mae and Freddie Mac were “ground zero” for the financial crisis. In “An Inconvenient Truth,” Nocera correctly observed that: “The reality is that Fannie and Freddie followed the private sector off the cliff instead of the other way around.”
In an analysis of the Financial Crisis Inquiry Commission Report, I challenged the blame-Fannie-and-Freddie for the crisis myth, here. As I wrote early in 2011:
Myth 4: The big government-sponsored companies (GSEs), Fannie Mae and Freddie Mac caused the Financial Crisis because the government pushed them to guarantee mortgage loans to poor homeowners as part of their public housing mission. Variations on this are that public housing mission drove bad underwriting by lenders who had to create risky mortgages to fulfill the demand of the GSEs who needed to buy them, as they were desperate to meet housing goals.
Reality 4: Not exactly. Both the Report and the primary dissenting statement agree that on their own Fannie and Freddie did not cause the financial crisis. They focus blame largely on the so-called “private label” mortgage market. These are bank and non-bank, brokers, lenders, and securitizers. Fannie and Freddie did not originate loans; the “exotic” and dangerous loans were designed by and extended to borrowers through the private label channel. While the Report and the Thomas Dissent support the notion that Fannie and Freddie’s business model was flawed, they also agree that affordable housing goals did not either drive Fannie and Freddie to ruin or cause them create the overwhelming demand for predatory, high-risk, mortgages.
So, why is it that the distortions repeated by folks like Peter Wallison have traction with the public?
This phenomenon reminds me of an early scene in F. Scott Fitzgerald’s The Great Gatsby. At the start of the novel, upon reacquainting with her cousin Nick Carraway, Daisy Buchanan inquires whether the rumors of his engagement to a woman out West are true. Even Daisy’s husband Tom chimes in. Nick quickly denies any designs to be wed. However, Daisy brushes off his response and insists that she knows better: “We heard it from three people, so it must be true.”
The statement is funny on its face because Nick is the primary source. Surely, Daisy should recognize that he is more capable, than three gossips, of knowing whether he is or was engaged to be married. Yet, what is also amusing is that beneath the surface, there is a kind of familiar truth to Daisy’s rejoinder. It resonates, echoing various biases to which many of us succumb. Through exposure to repetition, particularly by a seeming variety of sources, we accept a certain version of reality. Even when faced with credible contradictory evidence, we have a hard time shaking free of the various “truths” we have collected.
So what does this have to do with the financial crisis? The story of the crisis deals with very real people offering fictions, steeped in ideology. Yet, there is a connection. There is much the falsehoods about the financial crisis, fed on ideology, politics and economic-self-interest have in common with Daisy’s triple-sourced “truth.” The myths about the causes and responses to financial crisis are repeated by many people. Yet, notwithstanding clear evidence refuting them, even from a number of sources with better information, many of us continue to hold on to them.