> 2. Banks lend people the money to buy houses, but the government encourages them to do so by guaranteeing the loans.
> 3. Banks lend people the money to buy houses, but someone else guarantees the loans. There’s a big Mortgage Guarantee Company ... Mortgage Guarantee Company is a regular public company, owned by shareholders, but it is a large good safe company with sterling credit. And the Mortgage Guarantee Company is carefully regulated by the US government to make sure that it is well capitalized and safe, so banks will happily rely on its guarantees. They’re not government guarantees, but they’re AAA-rated, government-regulated guarantees, almost as good as the government. The government, in this approach, is not providing a financial guarantee, but it is putting its seal of approval on the Mortgage Guarantee Company’s guarantee, saying “you should trust this guarantee almost as much as you would trust our guarantee, because we endorse this company and regulate it carefully.
> The approach that the government settled on for many decades was “mostly 2, but kind of really 3.”
I like Matt Levine explicitly spelling out these details. Why? Because many people in the general public, especially leftists and socialists, believe that the 2008 Great Financial Crisis was caused by greedy US banks lending out money to unworthy people who had no ability to pay back loans, and take a profit from each transaction, and sell the toxic debt to other parties. It's a story directly attacking the greed and corruption in capitalism.
While those 3 points in the story are true, what this ever-popular narrative misses out is that the banks were motivated to make these loans because someone else - FMAC and FMAE - guaranteed them. And FMAC and FMAE basically have the full backing of the US government. The banks weren't risking their own money if loans fail; they were risking someone else's money. If the banks were the ultimate underwriter of these mortgages and thus defaulters would impact the banks, then the banks would've been way more diligent and restrictive about loaning out the money. So in the end, this is more a story about socialism and government interference that underlies the capitalistic greed. The bad loans were subsidized by the public at large, and that is a good example of socialism in practice.