Where is the US economy headed?

The government used Fannie Mae & Freddy Mac to artificially attract capital to the housing market through the largely government-directed actions of these quasi government corporations, which borrowed money at reduced rates because of the implied Federal guarantee and used it to buy mortgages from primary lenders and then securitize them for sale to investors.

While the housing and credit bubbles were growing, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations.[8] These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses.

That summarizes it very well; most republicans blame Fannie and Freddie, and forget the true underlying problems with the financial institutions and their reckless behavior all under the eyes of the government, the S&P and other rating agencies.

I challenge you to go to the Wall Street Journal's website and find a pre-2007 article complaining about Fannie, Freddie, and their role in inflating a housing bubble. I bet you won't find one. This story is entirely made up after the fact. Repeating it endlessly won't make it real, or even a credible theory.

Let's start with the Wall Street Journal...

The first page-one story questioning the lenders' practices ran on July 14, 2000. Brauchli was called to Fannie Mae's headquarters in 2001 to meet with CEO Franklin Raines, who was upset about the tone of the articles. "He felt we were unduly critical," Brauchli remembers. "We were just reporting the facts."

The Journal published numerous stories about the lenders, hammering away at the excesses it uncovered – often on the front page. On January 2, 2002, reporters Jathon Sapsford and Patrick Barta wrote about the dramatic increase in consumer lending. On August 6 of that year, Barta followed up with a 2,400-word examination of Fannie and Freddie that asked, "With homeownership already so high, are Fannie and Freddie running out of room to grow?" In the fifth paragraph, he wrote, "The huge size and rapid growth, coupled with their concentration in a single industry, has brought concern about possible risk to the U.S. economy should one of them ever fail."

A month later, on September 17, a Barta story on the front of the Journal's Money & Investing section pointed out the increased risk on Fannie's financial statements because of falling interest rates. On August 19, 2003, Barta and fellow reporter Ruth Simon wrote a front-page story on the hidden closing costs for mortgages.

And a month later, a 3,000-word bombshell on Freddie, written by Barta, John D. McKinnon and Gregory Zuckerman, appeared on the Journal's front page. They wrote: "Far from the sleepy mortgage company of its carefully cultivated reputation, Freddie Mac in recent years has evolved into a giant, sophisticated investment company, running a business laden with volatility and complexity. That change has sent risks soaring, not just for investors but for U.S. taxpayers, who likely would be on the hook if the federally chartered company stumbled."

Stories about the increasing uncertainty in the real estate market appeared regularly in the Journal for the next several years until the market imploded. A May 2005 front-page story focused on homeowners who took on too much debt while buying real estate. An August 2005 front-page story examined the fact that lenders were selling more mortgages because investors wanted the securities that backed them. James Hagerty wrote a front-page story on March 11, 2006, about the dangers of adjustable-rate mortgages. In December 2006, a front-page article about the increase of delinquent subprime mortgages appeared, noting, "If late payments and foreclosures continue to rise at a faster-than-expected pace, the pain could extend beyond homeowners and lenders to the investors who buy mortgage-backed securities."

Another Journal reporter, Jesse Eisinger, wrote extensively during this period about the risks posed by derivatives. And since joining Portfolio in 2006, Eisinger has repeatedly written about how derivatives might cause turmoil on Wall Street, going as far as to predict in a November 2007 cover story that Bear Stearns and Lehman Brothers would struggle to remain independent.

Nikhil Deogun, a former editor of the Journal's Money & Investing section and now deputy managing editor, says the coverage was intentionally repetitive to hammer home the point. "People may not have heard you, so you have to explore different angles to tell the same story a different way," he says. "I'm kind of curious as to..why is it that people were shocked, given the volume of coverage."

Warren Buffett invested $5 billion into BofA which indicates to me that Buffett believes saving the US bank is a necessary evil to save our economy. BofA is also one of the largest five banks in the world

The Wall Street Journal's aggressive coverage of government-based lenders Fannie Mae and Freddie Mac dates back nearly a decade. In 2004, one piece in the Journal compared Fannie Mae to Enron and WorldCom, two companies that crashed and burned the last time business journalists were blamed for an economic downturn.

georgeob1 wrote:

The government used Fannie Mae & Freddy Mac to artificially attract capital to the housing market through the largely government-directed actions of these quasi government corporations, which borrowed money at reduced rates because of the implied Federal guarantee and used it to buy mortgages from primary lenders and then securitize them for sale to investors.

That's not a fact, that's just an after-the-fact rationalization conservatives like to peddle. It helps them blame the collapse on the government rather than the free market for sub-prime loans. (Here are the top-15 sub-prime lending institutions at the time of the crash; Fannie and Freddie weren't among them.) I challenge you to go to the Wall Street Journal's website and find a pre-2007 article complaining about Fannie, Freddie, and their role in inflating a housing bubble. I bet you won't find one. This story is entirely made up after the fact. Repeating it endlessly won't make it real, or even a credible theory.

There were also several attempts during te Bush years (not energetic enough) to rein in these institutions - attempts which were energetically opposed by the esteemed Barney Frank in the House Committee.

From a financial perspective I would have been better off selling property in California, but I do enjoy the Bay area.

You are omitting the far more significant role of Fannie & Freddy in buying and securitizing the loans made by other lenders,

You are also ignoring the fact that the continuing government bailout of these institutions will exceed by far the net cost for all other banks.

The articles already cited in the WSJ

georgeob1 wrote:

You are omitting the far more significant role of Fannie & Freddy in buying and securitizing the loans made by other lenders,

What percentage of sub-prime loans did Fannie and Freddie buy and securitize? Can you provide an independent source for your number?

I agree that bailouts of any lending institutions are bad, be they Citibank or Fannie. It would have been much better to buy equity at their fair, but depressed market prices, throw the bums out, or at least keep the bums from lobbying against regulating the banking system, and selling back the equity when markets have recovered. But hey, that's what you get when your Democratic president governs as a closet Republican. Aside of that, the US government should never have privatized Fannie and Freddie.

Are you suggesting that our hapless President "governed" at all ? I doubt that you could find any Republicans who would agree that Obama behaved in any way as one of them. That is your own private fantasy.

When Obama and Congress get back there is supposed to be a major plan announced by the administration