24 July 2008
Gaming the Mortgage System
Paul Gigot’s OpEd in the July 23, 2008, Wall Street Journal is a self-righteous diatribe against the usual demons of the paper—“journalists on the left and pseudo-capitalists on Wall Street,” “liberal Democrats and country-club Republicans.” Fannie Mae and Freddie Mac were in fact established in 1938 and 1970 to help expand home ownership in the U.S. by well-meaning Democrats who controlled Congress. They were extremely successful in supporting broad family wealth creation, but they also provided large temptations to smart operators for gaming the mortgage system.
Nevertheless, Mr. Gigot does make a valid point, if with too much umbrage. Franklin Raines, with sterling Democratic credentials and recognized Wall Street talents, fell prey to the possibility of reaping outsized rewards from making Fannie Mae a darling of speculators on the real estate boom. In this period of “irrational exuberance,” Angelo Mozilo and his cohorts skillfully took advantage of the non-market intervention power legislatively granted to the two home-mortgage guarantors. Barney Frank, Paul Krugman and other Fan and Fred defenders are indubitably mistaken, probably innocently, for not acknowledging that any insertion of government regulation into the machinery of the market offers clever financiers an opportunity to profit from the unintended consequences.
Paul Gigot’s OpEd in the July 23, 2008, Wall Street Journal is a self-righteous diatribe against the usual demons of the paper—“journalists on the left and pseudo-capitalists on Wall Street,” “liberal Democrats and country-club Republicans.” Fannie Mae and Freddie Mac were in fact established in 1938 and 1970 to help expand home ownership in the U.S. by well-meaning Democrats who controlled Congress. They were extremely successful in supporting broad family wealth creation, but they also provided large temptations to smart operators for gaming the mortgage system.
Nevertheless, Mr. Gigot does make a valid point, if with too much umbrage. Franklin Raines, with sterling Democratic credentials and recognized Wall Street talents, fell prey to the possibility of reaping outsized rewards from making Fannie Mae a darling of speculators on the real estate boom. In this period of “irrational exuberance,” Angelo Mozilo and his cohorts skillfully took advantage of the non-market intervention power legislatively granted to the two home-mortgage guarantors. Barney Frank, Paul Krugman and other Fan and Fred defenders are indubitably mistaken, probably innocently, for not acknowledging that any insertion of government regulation into the machinery of the market offers clever financiers an opportunity to profit from the unintended consequences.
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