Paul Krugman: Eat your words!

Defending Fannie and Freddie, Paul Krugman posted “Fannie Freddie Phony” a month ago:

…Fannie/Freddie did some bad things, and did, it turns out, get to some extent into subprime. But thanks to the accounting scandals, they were actually withdrawing from the market during the height of the housing bubble — the vast majority of the loans now going bad came from the private sector.

This whitewashing of Fannie’s/Freddie’s role in the housing mess was proven absolutely false today when Krugman’s own paper reported on one insider’s account of the VERY LARGE extent to which Fan & Fred gorged on toxic mortgages:

Fannie Mae and Freddie Mac engaged in “an orgy of junk mortgage development” that turned the two mortgage-finance giants into vast repositories of subprime and similarly risky loans, a former Fannie executive testified on Tuesday…

The former executive, Edward J. Pinto, who was chief credit officer at Fannie Mae, [said] that the mortgage giants now guarantee or hold 10.5 million nonprime loans worth $1.6 trillion — one in three of all subprime loans, and nearly two in three of all so-called Alt-A loans, often called “liar loans.”…

Such loans now make up 34 percent of the total single-family mortgage portfolios at Fannie Mae and Freddie Mac, a level that will link them to eight million foreclosures, or one in six, in coming years.

The article notes how Fan/Fred “adopted accounting practices that masked their subprime and Alt-A lending…[even while they] insisted that their involvement with subprime and other nonprime loans ha[d] been minimal.” Indeed despite the concerns of its own risk managers, Fannie “further increased its purchases of subprime loans, according to a January 2007 internal presentation.”

Clearly Fannie and Freddie weren’t “withdrawing” from this part of the market as Krugman would have us all believe.  But then he might have realized that if he bothered to read the footnotes in the companies’ financial statements.  See, for instance, page 129 in Fannie’s latest 10-k:

Alt-A mortgage loans, whether held in our portfolio or backing Fannie Mae MBS, represented approximately 16% of our single-family business volume in 2007, compared with approximately 22% and 16% in 2006 and 2005, respectively.

Despite the companies’ efforts to hide the fact, there was plenty of publicly available evidence tying them to toxic mortgages.  See also the table on page 127 of the 10-k.

The larger point I want to make is that too often, Krugman’s judgment is clouded by his politics. His knee-jerk defense of Fannie and Freddie is a sad (and poorly researched) attempt to provide cover for Democrats that supported the mortgage giants, and to get in a dig at Republicans.  He concluded his Fannie/Freddie apologia thusly:

Yet it’s now clear that the phony account of the crisis — that it’s all due to Fannie, Freddie, and nasty liberals forcing poor Angelo Mozilo to make loans to Those People — is setting in as Republican orthodoxy, part of what you have to believe to be a respectable member of the party.

Who, precisely, is saying that the mortgage crisis is “all due” to Fannie/Freddie AND that Angelo Mozilo bears no responsibility?  And anyway, it doesn’t take an orthodox Republican (I’m certainly not one) to admit that EVERYONE tied to the mortgage biz screwed up.  This includes free market conservatives like Alan Greenspan who refused to regulate subprime as well as misguided liberals who wanted to lever up Fannie’s and Freddie’s balance sheets in order to “promote” home-ownership.

It was, of course, the Democrats who in 2003 blocked Republican efforts to tighten Fannie’s/Freddie’s capital requirements:

‘These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

”I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said.

…

All of the above just confirms what any thinking reader of Krugman’s posts/columns/books already knows, that he long ago traded intellectual honesty for liberal orthodoxy.

That’s a shame.  He really was a good economist, deserving of his Nobel for the groundbreaking work he did on trade.  Unfortunately, his opinions are so polluted by ideology, he obfuscates issues and misleads his readers.

Absolutely the same thing applies to, for instance, the Wall Street Journal editorial page’s weird defense of the CDS market. (just to take one example of their bullshit)

At the end of the day we need someone to play the Jon Stewart role (next post), to get all these ideologues in a room and shout: “we need help from the media and you’re hurting us by making intellectually dishonest arguments to protect yourself and your friends.  Suck it up, admit you’ve been wrong as often as you’ve been right and let’s actually solve this crisis!”

Posted in GSE, accounting, politics |