The key thing to recognize is that fanny may and freddy mac were the 800 pound gorilla in the mortgage market. They were giving effectively what people regarded as a pretty good put option. Only after we started seeing the default experiences in some of the categories of mortgages did we realize that they were effectively sub prime quality. The reason was because of the starti in two thousand four the rise of the so called alt a, non documented mortgagesand we didn't really know how severe those risks were until we saw it starting in two thousand seven.
Charles Calomiris of Columbia University and Stephen Haber of Stanford University, co-authors of Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, talk with EconTalk host Russ Roberts about their book. The conversation focuses on how politics and economics interact to give some countries such as Canada a remarkably stable financial system while others such as the United States have a much less stable system. The two authors discuss the political forces that explain the persistence of seemingly bad financial regulation. The conversation includes a discussion of the financial crisis of 2008.