Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

It was this conservative critique of the GSEs that shaped the Republican reaction when the crisis reached fever pitch in 2008. For many in Congress the bailout was not just of the banks—they at least were private businesses trying to make a buck. The bailout was also a desperate effort to make the taxpayer pay for the rescue of a Democrat-controlled parastate housing welfare apparatus designed to serve pampered minorities. This was powerful mobilizing rhetoric for the Republican base. But as an explanation of the crisis that was brewing in 2006, this political critique is wide of the mark. Fannie Mae and Freddie Mac set a high minimum standard for the quality of loans they would buy. The GSEs didn’t support the kind of low-quality, subprime loans that were beginning to fail in droves in 2005–2006. Those toxic loans were the products of a new system of mortgage finance driven by private lenders that came into full force in the early 2000s. Though the GSEs met their government lending quotas, private lenders driven by the search for profit were far more adventurous in lending to underserved communities.