This is probably beating a dead horse, but yet more evidence has come out disputing the idea that Fannie Mae and other GSEs (Govt. Sponsored Enterprises) pushed lending toward risky sub-prime loans, encouraged people to take out loans they couldn’t afford, and otherwise precipitated the current economic recession.

Both of these come from Dr. DeLong’s blog.

First is a set of documents that show how Fannie Mae realized the risk involved in making adjustable rate loans and participating in the market for them created by the private sector.  Instead, Fannie Mae wanted to redirect the market toward fixed rate loans, which they had an advantage in selling, and to discourage the use of the home as an ATM.

Second, is a little Supply/Demand sort of discussion about how when the price of something drops, if it is because of increased supply, the quantity sold will increase.  If it is because of decreased demand, the quantity will also decrease.

So, knowing this, we should be able to look at a time-plot of the market share of GSE-originated loans and private sector loans, notice which way the “quantity” curve moves (up or down) and that will tell us if the crash (price drop) is a supply issue or a demand issue.  Looking at just such a graph (and reading Dr. DeLong’s explanation, which comes from Milton Friedman!), we see that in fact as price went down, quantity went down, leading us to conclude that:

This means that the dominant feature of the mortgage market in the 2000s was not an expansion of supply by Fannie Mae and Freddie Mac pushing their implicit government guarantee past the limits of prudence, but was a reduction in demand for Fannie Mae and Freddie Mac’s products as private-sector mortgage lenders aggressively pursued and took away their markets.