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Originally posted by Naked Gents Rut
Not in the sense that they forced anybody, no. However, they did take away part of the privates' market and then increased the incentives for the privates to move into a riskier portion of the subprime market.
Not in the sense that they forced anybody, no. However, they did take away part of the privates' market and then increased the incentives for the privates to move into a riskier portion of the subprime market.
The returns for the privates in riskier subprime wouldn't have been nearly as enticing if they had been forced to hold the risk from those loans themselves.
Again, they did decrease the absolute cost of borrowing for subprime. This is not in doubt.
You're going to have to explain this whole "good borrowers vs. bad borrowers" thing in a different way. I'm not grasping the relevance.
Without GSEs: G pays r_G and B pays r_B
With GSEs: G pays r_G' and B pays r_B'
r_G' < r_G, r_B' < r_B, r_G' < r_B', r_G < r_B in any reasonable world
GSEs show preference for G over B (whether due to regulatory requirements, company history or sheer laziness due to privileged position). We can see this because they capture more of G market than B market. This means that in some sort of measure (r_G' / r_G) < (r_B' / r_B) (ratio is not necessarily correct measure; would need to write down a model for preference of GSEs for G to get right measure).
Now, since all borrowing rates lower with GSEs H' > H (housing prices). Amount of change depends on elasticities of supply and demand for housing, along with other, more nebulous quantities like increased confidence of homeowners in housing market due to GSEs.
What is the effect of H' > H and r_G' < r_G, with condition like (r_G' / r_G) < (r_B' / r_B)? In this model, unambiguous. More quantity of housing goes to good borrowers. Without increased housing investment, effect on bad borrowers is also unambiguous. Less quantity of housing goes to them. What makes effect on bad borrowers ambiguous is increase in total quantity of housing from increase in housing investment. DId this increase more than increase of quantity which goes to good borrowers? If so, then increase in housing going to bad borrowers.
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