What is the deal with Martin Feldstein? He’s a conservative economist, but unlike the political funtionairies now operating what passes for a conservative party in this country, Feldstein understands that the government cannot just stand back and let the market work its magic. He understands that our economy faces a crisis, that government spending is the only plausible solution, and that we have to do something now. But he just can’t let go of the Fannie Mae myth. Here he is being interviewed on Frontline’s “Inside the Meltdown” last week:
Frontline: The conservatorship of Fannie [Mae (Federal National Mortgage Association)] and Freddie [Mac (Federal Home Mortgage Corp.)], again, a surprise that this step would be taken, or a necessity?
Feldstein: I think it was a necessity…. Their purpose on paper was to facilitate lower interest rates and the spread of mortgage availability to low-income individuals, but because there were no creditors watching, of course, why would you care what risks they were taking if you had a U.S. government guarantee? They were able to take outrageous risks, and that’s what we saw happen.
Frontline: And they contributed to the problem in a sort of big and fundamental way.
Feldstein: They did, yes.
It would have been nice if the interviewer had asked if he had any evidence to support that conclusion. Yes, we know they are big, government sponsored enterprises involved in the mortgage market. But if they were not involved in originating or securitizing junk mortgages (or even owning them as investments) until 2007–how exactly did they contribute to the problem in “a big and fundamental way”? Even Alan Greenspan acknowledges that Fannie and Freddie were not prime drivers of this fiasco.
Yet, Feldstein won’t give it up. I know everyone has a story they tell themselves about how the world works, and we are always looking for ways to confirm the truth of our own personal story. Conservatives tell themselves that government causes all problems. Therefore our financial meltdown must have been caused by some government action. Enter Fannie Mae. Evidence is irrelevant when the Myth Must Be Fed.