The Housing Bubble and the Limits of Human Knowledge

Fannie Mae and Freddie Mac lost an aggregate $246 billion during the shriveling of the great American housing bubble. They lost all the profits they had made since 1971 plus another $140 billion — quite a performance. The government rushed in to rescue Fannie and Freddie’s creditors with $187 billion of taxpayers’ money, to bring their capital up to zero: this means that ordinary Americans are being taxed so that foreign and domestic bondholders get back every penny they lent Fannie and Freddie.

The reality of the government guaranty of the debt of these “government-sponsored enterprises” (GSE) has thereby been unambiguously demonstrated. Senior government officials previously denied that the government was on the hook for Fannie and Freddie (presumably thinking that their denial would never be tested by events — a bad theory).

What financial shape were Fannie and Freddie in as the crisis proceeded? How bad would the effects of the shriveling bubble be? How much can you trust the word of government officials? How much about the financial future can central bankers or anybody know? Consider the lessons of the following 10 quotations:

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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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