Well yes, they do. But to that point, it still matters what percentage of such mortgages could be sold as such. If you can only sell one in four or one in five (which are the numbers I’ve been hearing), that’s not a whole lot of incentive, at least not if you’ve got any sense about you. Why would you make a lot of investments that you know are bad if you’re only going to be able to dump a quarter or a fifth of them?

Recall, too, that most of the bad subprime loans being made weren’t of the “get a low-income first-time-buyer into a home” variety being mandated by the CRA. Instead, they were loans being made to middle- and upper-middle class buyers trying to live beyond their means, and hoping that real estate values would continue to endlessly go up. It wasn’t poor minority guy in the city buying his first home that was the big problem; it was Joe Suburb buying that four-bedroom dream house he couldn’t really afford.

I’m still waiting for your example of any investment bank deliberately creating a bad MBS it couldn’t sell to anybody, all to benefit its affiliated lender.

That’s not what I’m saying happened. What I’m saying, instead, is that the bad MBS were hidden/buried among other vehicles so that they could be sold.

Setting aside Glass-Steagall/GLB for a moment, another problem is that the current administration simply doesn’t believe in regulation (at least, not of the financial markets), and as such, what rules did exist were simply poorly enforced. Regulators were far too likely to look the other way and allow the market to self-police.

If it makes you feel better (or even if it doesn’t), I think the Fed lowering interest rates a gazillion times was a major factor as well.

On this point, at least, we agree.

Making credit too cheap resulted in too many dollars chasing too few houses for years on end, sending real estate prices through the roof and fueling the perception that real estate values would always go up.

And that, to my mind, is a much larger contributing factor than Fannie/Freddie, and why we would have seen something similar even without them.

Lenders weren’t making bad loans en masse because the Big Bad Government made them do it. They were doing it because money was really cheap, and in the short-term, they were making an assload of money doing it.

Now, to some extent, I’m sure the Fannie/Freddie/CRA stuff helped exacerbate the bubble, but that’s all it did. With cheap money and lax regulation, we were going to have those practices anyway.

Note that I’m not saying Freddie and Fannie were the only causes of the meltdown, just that GLB wasn’t. The mark-to-market rules of Sarbanes-Oxley surely didn’t help, and that law really did take effect on Bush’s watch, so on that point I’d have to concede that there is some blame to go around (as with Freddie and Fannie reforms, which could have passed through a Republican Congress if 100% of the Republicans had been on board).

If it makes you feel better (or even if it doesn’t), I think the Fed lowering interest rates a gazillion times was a major factor as well. Making credit too cheap resulted in too many dollars chasing too few houses for years on end, sending real estate prices through the roof and fueling the perception that real estate values would always go up. That, in turn, motivated a lot of foolish business decisions all around. Greenspan and Bernanke did it to avoid a recession, but all I think it really accomplished was to give us a much worse recession later on.

Were Fannie and Freddie part of the problem? Absolutely. Were they the root cause of the problem? Absolutely not, for a lot of the reasons discussed above. As I’ve been saying repeatedly, here and elsewhere, there’s plenty of blame to go around. A lot of the blame falls to my own party in this — they were active in the kinds of deregulation that led us into the mess we’re currently in. But only one of us is trying to argue that the whole mess is principally the fault of the other party.