Scott Sumner On What Caused The "3 Crises"

See Fannie, Freddie, and the three “crises”.

"I see three separate crises. A “misallocation of resources into housing crisis,” a “federal bailout of banks crisis,” and a high unemployment crisis. Who’s to blame for each?

1. The private banking system and the GSEs both played a major role in causing too much housing to be built in the mid-2000s. The errors of the private banking system were due to both misjudgment (they did lose money after all) and bad incentives (moral hazard due to various government backstops.) Pretty much the same is true of the GSEs, although their role has always been a bit more politicized, and Congress must accept some blame for pushing them to boost the housing market. But this was a modest problem, as the first graph shows. It’s not the “real” issue that the left and right is debating so vigorously.

2. The GSEs are far more to blame than the banks for the bailout problem. And the banks most to blame are often smaller banks that made loans to developers, not the more famous subprime mortgages. Last time I looked the estimated losses to the Treasury from the GSEs was a couple hundred billion, from the smaller banks (i.e. FDIC–which is financed by taxes, BTW) was over a hundred billion, and the big banks was near zero (depending on how much they lose on Bear Stearns.) That’s all you need to know about where to apportion blame for the bailout crisis.

3. As far as the high unemployment crisis, the proximate cause is low NGDP, which means the Fed is to blame. Then we can apportion some blame to Obama for not putting more of his people on the Fed, and not doing it sooner. But ultimately we macroeconomists are to blame, as both the Fed and Obama take their lead from us. We were mostly silent on the need for vigorous monetary stimulus in the last half of 2008, and many have remained silent ever since.

The hero is the EMH, as markets warned the Fed that money was way too tight in September 2008."