No topic has plastered the news in recent years as much as the financial crisis starting in 2007 that led to the worst recession since the Great Depression. One of the fundamental causes of this “Great Recession” was the bursting of the massive housing bubble that had been growing at alarming rates throughout the early 2000s.
The central players in the housing crisis were the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, more commonly known as Fannie Mae and Freddie Mac respectively. Franklin Raines, who served as CEO of Fannie from 1999 to 2004 spoke at Hopkins last Thursday courtesy of the Foreign Affairs Symposium (FAS).
In a sparsely attended event in the Glass Pavilion, Raines shared his view on the housing market and his own role in the build-up to the crisis. Raines used the opportunity to clear up some myths regarding the origins of the housing bubble and attempted to absolve himself as well as Fannie Mae from much of the blame that has been heaped on him since the housing market first collapsed.
One of the myths that Raines debunked was that Goldman Sachs and other investment banks are to blame for the global recession. According to Raines, the cause was “regular people making decisions.” More specifically, he referred to businessmen and aspiring homeowners collaborating to serve their own interests.
Many Americans who were denied traditional loans (because they did not have the required credit scores or ample money for down payments) turned to businessmen who sought higher yields. The result was an abundance of sub-prime mortgages. According to Raines, these types of people were the cause of the housing market’s collapse, but they are not entirely to blame: “They were individually pursuing what to them was a perfectly reasonable goal,” he said.
Raines also stressed the fact that poor people did not cause the crisis. Even if all of the loans made to lower-class Americans defaulted, he claimed, they constituted such a small portion of the total that they would not have triggered such a large collapse. Raines attributed the cause to the middle class homeowners who could not afford their all-paid loans.
Many people have been clamoring for increased regulation in the financial sector in order to prevent crises like this from ever happening again. According to Raines, regulation is a complicated issue. While imposing stricter regulations on the financial sector may seem like a cure-all solution, Raines argued that it would never eliminate crises completely, as crises happen over and over again and never come back in the same form. He added that people in the financial sector will always manage to find loopholes to the laws, no matter how strict they become.
Raines also offered a perspective into the mindset of businessmen. He claimed that there is about a half percent chance that business people will be caught in a situation like this recession, and that the rest of the time they will be fine. Businessmen, he argued, always believe that they will make it out before the crash.
He elaborated that “incentives mean everything” to the financial sector and that it cannot be trusted to regulate itself.
Raines also drew on his experiences as the budget director under Bill Clinton by comparing current government spending to government spending in the ‘90s. In 1998, the US government spent only 19 percent of its GDP, far lower than all other developed countries, and still managed to balance the budget.
Today, taxes have dropped to 14 percent of GDP and spending has risen to 25 percent, causing the US deficit to grow to an unprecedented $1.5 trillion. Furthermore, Raines criticized the programs on which the government is spending its money.
“We are spending on consumption for today,” he said. Instead, the government should be spending money on things that people cannot do for themselves, like highways, education and the environment.
By spending on programs like healthcare and food stamps, Raines believes the government is hurting the American people. “We do not empower people, we empower institutions,” he said.
Raines went on to add that healthcare is a financial drain.
“People will consume as much healthcare treatment as doctors are willing to provide them.”
Raines’s speech also explained the role of Fannie Mae and Freddie Mac in the housing crisis. These two government-sponsored housing mortgage giants offered riskier loans to homeowners, many of whom then defaulted on their mortgages, causing the federal government to take over the two publically owned companies. Despite the heavy criticism of Raines’s loosening of mortgage application standards, Raines claims that he was not at fault.
According to Raines, Fannie Mae was not in the same situation as private banks, which can choose not to loan to potential homeowners if the risk is too great. Fannie Mae was supposed to be there to support those turned away from others and as a result was forced to make bad loans.
Some students who attended the speech thought that Raines, while providing insight into the housing mortgage industry, was evasive and refused to shoulder any blame for policies that were installed during his reign at Fannie Mae.
“I thought overall Raines was very vague and refused to accept any blame for the collapse of the housing market, something that he certainly was part of,” Freshman Class President Merrill Anovick said. “The roots of the crisis go back several decades and just because he was not holding the office during the collapse, doesn’t mean his decisions did not factor in.”
Sophomore Wyatt Larkin added that while Raines did not address all of the causes of the housing bubble, he did make some good points.
“He had some justification in pointing out the more structural elements of a free market that can lead to financial bubbles,” Larkin said.
FAS Executive Chief Caroline Berger termed the speech a success.
“He gave us a larger view of how specific people act in their own interests but how that aggregates into companies and bank loans and mortgages . . . A lot of people just look in the past decade and just blame Fannie and Freddie but I thought Mr. Raines looked further back and gave a great opinion of how the bubble burst,” she said.
