Did Fannie And Freddie Really Cause The Financial Crisis?

Jonathan Weil disputes the notion that Fannie Mae and Freddie Mac were the sole actors responsible for the 2008 financial crisis in his column, Financial Crisis Narrative Flunks Reality Check:”

If you and I were in a bar together, and you suffered a nasty bump on your head when I accidentally whacked you with a pool cue, there probably would be no disputing that my action caused your harm. But for my careless swing of the stick, the injury wouldn’t have happened.

Not all examples of causation are so simple. Often there is more than one cause when a person is hurt, just as there are usually multiple causes for any major historical event. This brings us to the long-running kerfuffle over the role that Fannie Mae and Freddie Mac played in causing the financial crisis of 2008, which hasn’t really ended.

The way the discussion gets framed tends to go like this: Did Fannie and Freddie cause the crisis? Although this is the wrong question, I’ll try to answer it anyway by highlighting the difference between the meaning of the words “a” and “the.”

Here goes. Fannie Mae was a cause of the financial crisis. So was Freddie Mac. U.S. government housing policies, which often encouraged people to take out loans they couldn’t repay to buy homes they couldn’t afford, were also a cause. None of these was “the” cause of the crisis, because there was no single cause. What we can say is this: But for the actions of a vast number of actors, including Fannie and Freddie, the crisis wouldn’t have happened the way that it did.

That seems straightforward enough. Yet this silly debate — over whether the government-backed housing financiers and their enablers were a cause or the cause — keeps raging anyway.