Systemic Risk and Fannie Mae: The education of Joe Stiglitz and Peter Orszag

The Wall Street Journal reports:

As Congress lumbers toward creating a systemic-risk regulator, it's worth a look back—to 2002, when an economist named Stiglitz and a duo named Orszag wrote a paper with the droll title, "Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard".

We won't keep you in suspense. The paper, written the year after Joseph Stiglitz won the Nobel Prize for economics, concludes that "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero." Their analysis has recently been making the rounds on the Web to a chorus of chortles.

But the real lesson of the paper is not that Mr. Stiglitz, or Peter Orszag, the current White House budget director, and his brother Jonathan are dupes or rubes. The paper is notable because it represents the almost universally held view of the two government-sponsored mortgage giants at the time and for years afterward.

These pages began writing about the systemic risk posed by Fannie and Freddie at around the same time, but until the very end we were in the distinct minority. Fan and Fred's own regulator assured the world that they were well-capitalized almost until they were put into conservatorship in September 2008.

Fascist Mae... we mean Fannie Mae.