What Krugman Said

September 8, 2008

I’m with this guy:

I wish people wouldn’t say that Fannie and Freddie have been “nationalized.” I mean, it’s basically accurate, but it conveys the wrong impression.

The fact is that Fannie Mae was originally a government agency; it was privatized in 1968, not for any good economic reason, but to move its debt off the federal balance sheet (and Freddie was created 2 years later as a competitor.) Private ownership of Fannie and Freddie never made any real sense, and was always a crisis waiting to happen.

So what we’re really seeing now is deprivatization. It’s not something like the UK government seizing the steel mills; it’s more like firing Blackwater and giving responsibility for diplomatic security back to the Marines.

More details from Brad DeLong.

I wonder how many laymen equate the Fannie/Freddie situation with the subprime mortgage meltdown? It’s wrong to blur the two, because the underwriting standards on Fannie and Freddie loans have been higher than average. The subprime mortgage industry was made up of lenders eager to cater to and exploit borrowers whose credit wasn’t good enough for the agencies. By “deprivatizing” the agencies, mortgage rates should drop again.


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