In his own words.  Excerpt from Tim Geithner's Opening Remarks at the Conference on the Future of Housing Finance, August 17th, 2010 - Link  

"Now, in order to better inform our discussion today, I want to take just a few minutes to address some persistent misconceptions about Fannie and Freddie.

First, the process of housing reform is not just beginning today.  It began in the fall of 2008. The first step in reform was the action taken to place Fannie and Freddie into conservatorship.

That step, taken by a Republican President, with authority from the Congress, was essential to break the model that helped produce the crisis.  And without that action, home prices would have fallen even further and the recession would have been dramatically worse.

Another myth is that by taking the time to get reform right, taxpayers are being exposed to even greater losses in Fannie and Freddie.

This is not true.

The losses that Fannie and Freddie face right now are the result of mistakes made in the years leading up to this crisis. They are the result of loans purchased and guaranteed in the years before the crisis, not the consequence of the actions by the GSEs since 2008.

There is nothing we can do to decrease the significant loses Fannie and Freddie incurred ahead of this crisis. All we can do is to minimize the risk that they get worse.

And the FHFA and the boards of those two entities have acted to raise underwriting standards so that new loans guaranteed since the end of 2008 have lower risk and higher credit quality and that the fees charged for the guarantees provide adequate income to cover future losses."


It is an atrocity that our misguided Treasury Secretary, who does not fully grasp the forces fueling The Affordable Mortgage Depression, is responsible for crafting public policy designed to resolve the economic downturn.

Observation 1

Mr. Geithner notes that without Fannie and Freddie's conservatorship, "home prices would have fallen even further and the recession would have been dramatically worse".  The Treasury Secretary's conclusion is that both of these results are negative, when in fact each would have been a positive step towards resolving the Depression.

Housing prices remain overvalued by every historical metric of which I am aware.  Given the current state of the mortgage industry, record low interest rates, high unemployment, growing foreclosures, massive inventories for sale and the changed perception of homeownership risk, housing values remains wildly overpriced and unsupportable even with massive Government subsidization.

Prices will fall.  Furthermore, this depreciation is necessary to resolve both the housing market's impasse and continued economic erosion. 

Tim is right that short-term the recession would have been dramatically worse.  But economic pain is unavoidable and will continue as long as housing prices are overvalued.  By propping up prices the Government hasn't avoided a worse recession, they have dragged it out unnecessarily while failing to resolve the structural challenges to a recovery.  A sharp correction in housing prices would have facilitated the conditions necessary for a sustainable recovery.

It has been two years since the nationalization of Fannie and Freddie, yet the housing market is in worse shape by most measures than at any point in the bust (foreclosures, shadow inventory, transaction volumes).  Meanwhile, the economy is backsliding as the distortive influence of coordinated stimulus fades.
Geithner has spent precious resources and invaluable time preventing a resolution to the recession because he doesn't appear to understand its causes.

Observation 2

Tim further argues that:

"Another myth is that by taking the time to get reform right, taxpayers are being exposed to even greater losses in Fannie and Freddie.

This is not true.

The losses that Fannie and Freddie face right now are the result of mistakes made in the years leading up to this crisis. They are the result of loans purchased and guaranteed in the years before the crisis, not the consequence of the actions by the GSEs since 2008."

Mr. Geithner is obtusely correct in stating that current losses are the result of pre-2008 underwriting actions.  But, as observed, the Treasury Secretary is blissfully unaware that housing prices remain overvalued, propped up only by flagging subsidies.

When housing prices fall, 3% down payment FHA, Fannie and Freddie loans issued over the past two years will sink underwater.  Defaults will grow and highly leveraged loans, made in a public policy attempt to prop up housing prices, will create a new and wholly unnecessary source of foreclosures.

"Loans purchased and guaranteed in the years" AFTER "the crisis" will expose taxpayers to massive losses which accomplished nothing but to needlessly extend the downturn.

It is difficult to fathom that someone so lost, as Tim Geithner, is allowed to further perpetuate economic damage resulting from 15 years of failed housing public policy.