Fannie and Freddie

Nationalize may be a word we will be hearing more of in the future. Nationalize is a more palpable word than socialism. Other names for socialism are receivership and semi-socialist. But, in the end, European-style socialism is the issue! The glory of America, the uniqueness of America, and faith in the free enterprise system is at stake.

  An odd variety of socialism rescued Bear Sterns. Intervention by the Administration by way of the Federal Reserve which was probably illegal. It was Wall Street taking care of their own at the expense of the rest of us because such action has incremental effects. Socialism will soon restore Fannie(Federal National Mortgage Association) and Freddie Mac(Federal Home Loan and Mortgage Corporation) as soon as the Senate can take care of the formalities. Of course, it will not be called socialism, as that word has a justifiable fear associated with it. The Fannie and Freddie package will give the companies a blank check from the federal government. There has been an “implicit guarantee” for government backing of the two companies, but soon that will mature to a full-fledged and open-ended government backing. Now, tell me that is not socialism. The beneficiaries of this government support is the Wall Street investors,other stockholders and the banks.

  Just today it was announced that foreclosures have increased 121% in one year. But, that is free enterprise. Free enterprise has a discipline that goes with it. Sometimes, it can be harsh discipline. The 121% made the same miscalculations as did Fannie and Freddie. The difference is Fannie and Freddie will be socialized. That is, their losses will be socialized. When everything is going well, as in the nineties and early this decade they become “private” again and enjoy the profits. Wall Street investors have a one-way bet. Fannie and Freddie’s stock prices are down now, but they will creep back up with the security that the Senate will soon codify.

  Advocates for government ownership of the mortgage insurance business(i.e. Frannie/Freddie) say their demise would choke off the mortgage business. Most people,they say, would not be able to finance a hew home or at a prohibitive rate of interest. Others argue that is not only inaccurate, but nonsense.  They contend the federal government has no more business in mortgages than they do in the car business, the furniture business, or the soft drink business. The mortgage business would function just as well without Fannie and Freddie. Also, banks would be more disciplined. The “ownership society” would continue to provide homes for people at the right time and at the right price.

  When Fannie was created in the depression in 1938 there was no sunset provision. Later joined by Freddie Mac they grew to handle roughly three-fourths of all mortgages. Why no siblings?  Even if this level of mortgage security was deemed essential why only two companies? Why not 4 or 8 or 20, and let the risk be spread and manageable.

  There is another important part of this Fannie and Freddie story. Getting the two companies back on their feet is not free. Nobody knows what it will cost the taxpayers, but 25 billion has been suggested by the Congressional Budget Office. When you hear someone refer to “taxpayers” picking up the tab, they are talking about your CHILDREN and GRANDCHILDREN. But the federal debt is now piling up and one day the Fannie and Freddie troubles may be America itself.