The housing market and the 2008 crisis
In the April 18, 2010 episode, Bob Zadek argued that the housing market fell into disarray only when the government entered it, naming Fannie Mae and Ginnie Mae alongside Barney Frank as the agents that “started injecting steroids into an otherwise totally calm market.” He described a policy originating in Washington in which Fannie Mae and Ginnie Mae agree to insure loans, inducing banks to sell mortgages that carry no risk to the banks. On his account, housing had not been a problem for most of his life; it was a lifestyle choice rather than a national crisis, and the housing market “for 225 years worked perfectly” until those interventions. The Credit Crunch (2010)
Zadek framed the broader crisis as a distraction operation. He said the Washington establishment blames the alleged crisis on the market in order to divert attention from its own failures, quoting William Dudley, whom he identified as the present Fed Chairman holding Geithner’s job: “Significant weaknesses in the execution of the supervisory program occurred,” and that the Federal Reserve and other regulators “could have done much better.” Zadek read this as an admission that regulators, not the market, were at fault. He extended the same pattern to healthcare, which he said was not a problem until World War II wage and price controls led the government to let corporations pay for employee healthcare, and to education, which he said worked until the 1960s, when statutes allowing teachers to unionize turned control over to the teachers union. The Credit Crunch (2010)
A libertarian budget plan
Matt Welch, identified by Zadek as editor-in-chief of Reason Magazine, appeared on the October 10, 2010 episode and put housing first among his proposed cuts. He asked why there is an entity into which $150 billion of bailout money had already been thrown, referring to Fannie and Freddie, which he said guarantee trillions of dollars worth of mortgages including the toxic material that was supposed to be cleaned up. A Libertarian Plan (2010)
Zadek added that Fannie and Freddie guaranteeing mortgages is a relatively new federal activity, and that for most of American history people bought houses and paid fair prices for mortgages without any federal guarantee; private guarantees existed in certain instances but were not needed to fuel growth. Welch argued that other countries without a similar institution have the same or higher levels of homeownership, and that the purpose behind the American arrangement—raising the homeownership percentage—does not make the country better. He called it “at the root of our financial crisis and economic crisis” and said no one is talking honestly about it. A Libertarian Plan (2010)
The two men disagreed about who would feel pain from unwinding the guarantee. Zadek said there would be no pain felt by anybody: qualified buyers would still buy houses at about the same mortgage price, and the only difference is that unqualified buyers could not buy. Welch said the pain would be felt by Wall Street companies that assumed the government would back their gambling, and by people who used their houses as ATM machines or casinos; he welcomed falling house prices because they would let a lifelong renter like himself finally afford a place in Palm Springs. A Libertarian Plan (2010)
John Allison on Freddie and Fannie
John Allison, whose book The Leadership Crisis and the Free Market Cure was the subject of the January 8, 2015 episode, described the financial crisis as primarily caused by government policy. He said the United States does not have a free market but a mixed economy, and that financial services is the most regulated industry in the world and the one with the biggest problems. He attributed the economic correction to government policies that incented people to buy homes they should not have bought, financed by the Federal Reserve artificially printing and expanding the monetary supply. John Allison on the Leadership Crisis and the Free Market Cure (2015)
Allison traced the housing subsidy to a long history but said it became exponential because of a focus starting with Bill Clinton and other governmental leaders to force Freddie and Fannie Mae, which he called giant government-sponsored enterprises, to have at least half their loans to subprime lenders. When they failed, he said, they owed $5 trillion and had $2 trillion in subprime mortgages, and they dominated the subprime market. John Allison on the Leadership Crisis and the Free Market Cure (2015)
Zadek drew the conclusion that the crisis was not a market failure at all: there were no markets involved, only humans responding to a government stimulus the way a plant leaf turns toward the sun, and a free market would never have made the subprime loans in the first place. Allison agreed, saying government incentive created the crisis, while adding that business leaders also failed because they lacked the long-term perspective and intestinal fortitude to protect their institutions against the incentives. He noted that his company, BB&T, had no single quarterly loss during the financial crisis. John Allison on the Leadership Crisis and the Free Market Cure (2015)
The conversation turned to the arbitrariness of the bailouts. Zadek observed that shareholders ultimately came out fine because of the bailouts, so the leadership failure at large financial institutions was not such a failure if executives assumed a bailout would always come. Allison agreed it was true for some institutions but noted that shareholders of Washington Mutual were wiped out, and he described what he called crony statism: Citigroup was saved and Wachovia failed for no rational reason except that Citigroup had more political contacts. Zadek called the process random, arbitrary and decided politically rather than on market valuations and management strength. Allison said the crisis was artificially created because there was no rationality or predictability, and markets cannot handle arbitrary decisions by government decision-makers with enormous power. John Allison on the Leadership Crisis and the Free Market Cure (2015)
Across episodes
The same question—whether Fannie Mae and its sibling institutions caused the housing crisis—is argued in all three episodes, and the excerpts show no development in the treatment. Bob Zadek advanced the claim in 2010 that Fannie Mae and Ginnie Mae injected steroids into a calm market; Matt Welch advanced the proposal to get government out of housing in the same year; and John Allison in 2015 supplied the figures on Freddie and Fannie’s subprime exposure, adding the business-leadership failure as a secondary cause. The later episode adds detail and numbers but does not revise the earlier diagnosis.
What the sources do not cover
The excerpts do not describe Fannie Mae’s founding, its original charter or its historical relationship to the federal government beyond the statements that its mortgage guarantee is a relatively new federal activity and that it is a government-sponsored enterprise. They do not name the statutes or bills that created or reformed it, nor any court case involving it. They do not give the date of the housing market’s collapse, the size of the bailout beyond the $150 billion figure Welch cites, or the outcome of any legislative debate over the institution.