Joseph Stiglitz, Barney Frank Respond to 'Reckless Endangerment' Allegations

[Jefferson23]

Friday on the NewsHour, New York Times finance specialist Gretchen Morgenson and co-author Josh Rosner, a longtime housing analyst, talk about their new bestseller, "Reckless Endangerment" (no. 17 on the Times list this week). The book is a sustained indictment of Washington's role in the housing crisis and highlights the role of the so-called GSEs - the Government-Sponsored Enterprises, Freddie Mac and most especially, Fannie Mae, both of which were taken over by the Treasury when they teetered in 2008.

The GSEs and their role in promoting home ownership have been a favorite target of those who blame government - and especially Democrats -- for the crisis. The standard defense is that the GSEs were late-comers to the subprime game - following, not leading, the Wall St. rush to package and sell lousy loans. And Democrats argue strenuously that the goal of home ownership was wholly bi-partisan, from the days of Herbert Hoover and FDR to Bill Clinton and George W. Bush, as journalist Alyssa Katz has explained on our show and these pages.

In "Reckless Endangerment" and in the extended, multi-location interview with them on the NewsHour, Morgenson and Rosner take aim at Massachusetts congressman Barney Frank and Nobel laureate Joseph Stiglitz, one-time head of President Clinton's Council of Economic Advisors. We asked both men to respond to the on-air charges, at a length commensurate with the charges themselves, and so they did. You'll see (or hear) them in Friday's piece.

Snip* Joseph Stiglitz:

I would like to clarify what we did--and when we did it, which was before the practices that got Fannie Mae in trouble had started.

We did do an assessment of the risks confronting their portfolio, at that time (nearly a decade ago), and the scenarios we modeled were, if I remember correctly, more severe than any bank stress test of recent years. The tests used the Great Depression as a benchmark, unlike the rating agencies' assessments of private securities, which typically used only much more recent data (in which price declines were, at most, rarities). Further, had we discovered a problem, we would have raised a strong warning. No constraints were imposed on our work and our ability to disseminate our results.

Some time after we published our paper, Fannie Mae did lose its way--it forgot its mission, and got caught up in the financial "innovation" that brought down the rest of the financial sector as well.

The real problem with Fannie Mae was that it was allowed to get too big to fail.

in full: http://www.pbs.org/newshour/businessdesk/2011/07/joseph-stiglitz-barney-frank-r.html