Simon Johnson is a professor at MIT Sloan and the author of “13 Bankers.”.

Fannie Mae and Freddie Mac haunt our financial system and threaten our economy. Or do they?

Bethany McLean has written an insightful guide to one of the fascinating true-financial-crime cases of our time. Writing with the easy, incisive style that has brought her great success (“The Smartest Guys in the Room” and “All the Devils are Here”), McLean dispassionately explodes three myths.

The first myth is that these government-sponsored enterprises caused the financial crisis of 2008. You can see to whom this narrative would appeal — if Fannie Mae and Freddie Mac made them do it, powerful people in the private sector are essentially blameless. Repeal the Dodd-Frank financial reform legislation, lift the restrictions imposed on big banks, and you can have the boom back, according to members of the House Financial Services Committee.

But as McLean shows, Fannie and Freddie did not lead the push into subprime mortgages. They were not the innovators of reckless derivatives. And it was not their losses that threatened to bring down the financial system.

‘Shaky Ground: The Strange Saga of the U.S. Mortgage Giants’ by Bethany McLean (Columbia Global Reports)

The second myth is that Fannie Mae and Freddie Mac have been forces only for good. Fannie Mae was founded in the 1930s to support the U.S. housing market by guaranteeing home loans, and this form of government intervention is a major reason we have 30-year fixed-rate mortgages that we can prepay whenever we want (for example, when interest rates fall). But Fannie Mae became a major force in Washington, hiring politicians, congressional staffers and anyone else who mattered — Democrats and Republicans alike. It never lost a political fight.

And, as profit-seeking and publicly held companies, what Fannie and Freddie wanted from the 1970s was what everyone else in big finance wanted: permission to take on big risks, backed by very little loss-absorbing equity capital. The executives were very highly paid, and creditors received a great deal of protection. The gains for homeowners and for society are debatable. And the taxpayer ended up on the hook.

The third myth is that government guarantees are free or easy. Henry M. Paulson Jr., then treasury secretary, famously told Congress on July 15, 2008, “If you’ve got a bazooka, and people know it, you may not have to take it out.” He was arguing that giving the government greater ability to fully back Fannie and Freddie could make such action unnecessary. Unfortunately, Paulson was proved wrong when, in early September 2008, he placed Fannie and Freddie into conservatorship, preventing the firms from defaulting on their obligations.

McLean is right on all counts. Unwinding Paulson’s bazooka effect is a huge, unresolved public policy question, without easy answers. Disrupting the housing market is never wise. Yet muddling along with the current arrangement is asking for trouble; refloating the existing conservatorship structures would be foolish; and letting “too big to fail” banks take over the business and further increase their implicit government guarantee would be insane.


The Strange Saga of the U.S. Mortgage Giants

By Bethany McLean

Columbia Global Reports. 148 pp. Paperback, $12.99