It is entertaining to see all the folks who missed the housing bubble try to apportion blame after the fact. Tyler Cowan is the latest entrant, pronouncing Fannie and Freddie at least partially responsible. While his indictment is impressive, the real question should be, “what is the charge?”

Of course Fannie and Freddie are at least partially responsible, they purchased hundreds of billions of dollars of loans that were used to buy properties at what they should have recognized as bubble-inflated prices. If they had refused to buy such loans, it almost certainly would have brought the irrational exuberance of the housing bubble to a quick halt.

Fannie and Freddie could have adopted a policy of requiring appraisals of rent, and refused to purchase any loan for a purchase price that exceeded a 15 to 1 ratio to rent (adjusted by metro area). This policy would almost certainly have required many buyers and lenders to give more serious thought to their purchase price.

Since housing is all that Fannie and Freddie do, it is reasonable to expect that they would have recognized the bubble and taken steps to counter it and protect themselves. [I was beating them up on the bubble since 2002]. Instead, they continued to throw money into the housing market even as prices grew ever more out of line with fundamentals.

However, giving the primary blame to Fannie and Freddie and the government policy of promoting homeownership ignores the fact that the worst subprime loans were sold to Merrill Lynch, Citigroup and other private investment banks. These banks do not have any pretense of having a mission of promoting homeownership; they are there to make money. And, in the peak years of the housing bubble, they were booking huge profits on the loans that they repackaged into mortgage backed securities and more complex financial instruments.

If the moral of the story is supposed to be that financial institutions don’t make reckless and often fraudulent loans without the prodding of the government, no one can make this case with a straight face. Angelo Mozillo’s Countrywide and Robert Rubin’s Citigroup issued and securitized bad mortgages because it was profitable. No government bureaucrat forced them to do it to advance homeownership. In fact, the main motive of Fannie and Freddie in this period was also almost certainly profit, which allowed their top executives to pocket tens of millions in compensation that they still hold.

In the blame game there is plenty to go around. Certainly the economic policy wonks, regulators and business media who totally missed the largest asset bubble in the history of the world should all be wearing dunce caps for the rest of their career. The top executives of Fannie and Freddie also deserve to occupy one of the inner rings of hell. The fact these characters were able to pocket tens of millions from this disaster should have all right thinking people outraged. But no one acted worse than the issuers of subprime loans who often committed outright fraud by putting in false information to allow people to get loans for which they were not otherwise qualified. And the investment banks who securitized this garbage and the rating agencies who blessed it as investment grade come in a close second.

Unfortunately, the main lesson seems to be that crime pays. With few exceptions, the evils doers are doing just fine – in fact much better than almost anyone who doesn’t break the law for a living. And, we also seem to have learned nothing about pushing homeownership, as some community groups are now devoting their efforts to ensure nothing is done that could raise the interest rate on higher risk, low down payment loans.

If we were to ask George W. Bush’s famous question:

“Is our policy wonks learning?”  The answer would undoubtedly be no.

There is one final point that is worth noting on Tyler Cowan's scorekeeping between the banks and Fannie and Freddie. The banks got far more generous bailout terms than Fannie and Freddie, getting loans and loan guarantees at way below market rates. (In keeping to their deference to Wall Street, almost no economists are so rude as to point out that below market loans and guarantees involve massive subsidies. This allows people like Timothy Geithner to claim that we actually made money on the TARP, even though every card carrying economist knows this is nonsense.)

Also the policy of temporarily propping up the housing market with the first time homebuyers tax credit and Fed purchases of mortgage-backed securities allowed millions of mortgages, that would have otherwise soured, to be transferred from the banks to Fannie and Freddie through being sold or refinanced. So if Fannie and Freddie end up with the bulk of the bill it was not just the result of their bad judgment. It was a conscious goal of government policy.