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From the GSEs to Wall St. and back to the GSEs
Thursday, June 12, 2008
Recent data from the Fed's Z.1 report shows how home mortgage asset flows have changed over the last ten years - from the GSEs to Wall Street and back to the GSEs. Wasn't there some concern about systemic risk with GSEs a while back?
The systemic risk associated with Fannie Mae and Freddie Mac growing their balance sheets too large was the only systemic risk that former Fed chief Alan Greenspan identified during almost 20 years of sitting in the big chair in the big building on Constitution Avenue.
See this February 2004 speech by the Maestro himself:Most of the concerns associated with systemic risks flow from the size of the balance sheets that these GSEs maintain. One way the Congress could constrain the size of these balance sheets is to alter the composition of Fannie's and Freddie's mortgage financing by limiting the dollar amount of their debt relative to the dollar amount of mortgages securitized and held by other investors. Although it is difficult to know how best to set such a rule, this approach would continue to expand the depth and liquidity of mortgage markets through mortgage securitization but would remove most of the potential systemic risks associated with these GSEs.
This article in Slate shortly thereafter has more on the subject.
In case anyone has forgotten, after the initial accounting problems at the GSEs in 2003, Alan Greenspan played a critical role in convincing Congress and regulators to limit the size of their portfolios.
This MBS origination work then swiftly moved to Wall Street in 2004, 2005, and 2006 (see the chart above) and we all know what happened next.
Well, for better or worse, the systemic risk is back.
2 comments:
We’ve tried just about everything else. There was the so-called service economy, an attempt to replace manufacturing with hamburger sales. Then there was the information economy, in which work would be replaced with knowing about stuff. Then there was the tech thing, which was about bringing internet companies that existed only on the back of cocktail napkins to the initial public offering stage of capitalization — which allowed a few-hundred-or-so thirty-year-old smoothies to retire to vineyards in the Napa Valley, while hundreds of thousands of retirees lost half the value of their investment portfolios. Then there was the housing boom, which was all about the creation of more suburban sprawl under the theory that houses (or “homes” in the jargon of the realtors) represent an obvious sort of wealth, and therefore that using houses as collateral would allow humongous sums of money to be loaned into existence — along with massive fees for structuring the loans into bundles of bond-like thingies.
You give Greenspan too much credit. He may have limited the GSE on-balance mortgage portfolios, but their portfolio of off-balance sheet credit guarantees were never constrained by the Fed or OFHEO. As Wall Street grew its market share of mortgage securitization from 2003 to 2007, it was solely because Wall Street was more aggressive on credit terms. The GSEs lagged Wall Street in loosening credit. Wall Street led the drive to easy mortgage credit, which inflated the housing bubble.
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