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Putting the pieces together, the evidence shows Fannie Mae and Freddie Mac were squeezed out of housing market finance when the bubble began. Throughout the bubble they had a declining share of the mortgage-backed security-issuance market and were significantly displaced by Wall Street. Lastly, the vast bulk of their losses were on their traditional business rather than reckless subprime purchases. Instead of causing the bubble, the evidence is consistent with a picture of Fannie Mae and Freddie Mac sitting on top of the bubble and rising with it as the bubble inflated their business. Only toward the end of the bubble in 2005 did they start departing from their mission, and that was in response to competitive pressure from Wall Street. Rather than driving housing market trends, they were following.
The final piece of evidence debunking the regulatory excess hypothesis comes from Paul Krugman who has pointed out that the real estate bubble extended far beyond the U.S. housing market and infected the entire U.S. commercial real estate market (6). (...) This shows that housing prices and commercial real estate prices both bubbled up together and have both fallen together (7). This is comeplling evidence that the bubble involved much more than housing policy, the Community Reinvestment Act, and the activities of Fannie Mae and Freddie Mac because none of these were relevant for commercial real estate. Each argument of the regulatory excess hypothesis fails to stand up to scrutiny individually, and they all fail when it comes to explaining why the bubble extended into the commercial real estate market.
The reality is that the regulatory excess hypothesis is ideological and empirically unsupported. Its purpose is to blame the government. Given that it is largely invoked by Republicans, its purpose is also to blame Democrats. However, here too it fails, because Republicans controlled Congress from 1994 to 2006 and the presidency from 2000 to 2008. Consequently, Republicans had the opportunity to rein in Fannie Mae and Freddie Mac had they wanted to. In sum, there is neither economic nor political merit to the regulatory excess hypothesis, yet it has still been embraced by many economists and has become part of the political mythology about the crisis.
(6) See Krugman https://web.archive.org/web/20140105145 ... struction/
(7) CRE prices have held up better than house prices during the bust. That is probably because the Federal Reserve and financial regulators have encouraged banks not to foreclose on commercial borrowers and instead engage in a process of "extend and pretend", whereby loans are extended under the pretence that the economy will eventually grow out of default.
