Quote:
Originally Posted by Libertine
Here are just a few points...
Fannie Mae and Freddie Mac contributed to the housing bubble. By using loose standards for buying loans at the bottom of the market, credit supply in that part of the market increase, and thus housing demand in that part of the market increased, which increased prices in that part of the housing market. That, in turn, drove up prices in the middle and upper parts of the housing market as well.
Shareholders of Fannie and Freddie, two of the biggest companies in the world, lost shitloads of money.
By buying loans, Fannie and Freddie increased the value of loans and reduced availability for other buyers. This encouraged other buyers to find profitable assets elsewhere in the market. In many cases, that meant going for the ones that didn't conform to Fannie's and Freddie's standards.
The impending failure and subsequent federal rescue of Fannie and Freddie convinced many investors to pull their money out of related markets.
Etc.
Of course, the wondrous new financial products of the past ten years, made possible only by a lack of regulation, have also played a huge role. And the ratings agencies' failure to correctly assess the risk on such products played a significant role, too. As did interest rates, which were kept too low for too long.
As I said before, many factors played a role. But Fannie and Freddie most certainly did contribute to the mess we're in right now.
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Thank you, that was a good answer, you made a good point, and kind of made my point for me.
Fannie and Freddie definitely helped to cause the housing bubble and by extension the subsequent pop...but the main problem with our financial system now, the problem that the Treasury wanted $700 billion to fix, is with
loans that didn't conform to Freddie and Fannie standards.
It was investors chasing yield, and thinking they were safe because of the insurance products being marketed by Wall Street. These are the "toxic securities" that are clogging up the bank balance sheets and making it hard for people and businesses to get credit, and they happened independently of Fannie and Freddie.
Unless of course we go with your assumption that the reason people were buying bad loans is because Fannie and Freddie bought all the good ones....but still nobody made those other investors buy the bad loans, they could have invested in something else.