In the past several days, before the U.S. Treasury Department acted to seize Fannie Mae and Freddie Mac, several people asked me if I thought it was a good idea for the government to "nationalize" the two mortgage giants. In virtually none of the coverage of the Bush administration's latest emergency action, did anyone bother to tell the back story. Fannie Mae, nee the Federal National Mortgage Association, (FNMA) began life as a government invention. It was born "nationalized"--and it worked beautifully until it was privatized.
FNMA was part of the New Deal's trinity of housing agencies--the other two being the Home Owners Loan Corporation and the FHA-agencies that Roosevelt created in order to literally create the modern mortgage system. Before the New Deal, there were no long term, self-amortizing mortgages. The loan was due and payable at the end of the term--usually five years--and if you couldn't persuade a bank or savings-and-loan to roll it over, you lost the house. After foreclosures exploded during the Depression, Roosevelt invented a whole new system. FNMA's job was to buy approved mortgages from banks, to replenish their working capital, so that they could make more mortgages. As the biggest buyer, FNMA also maintained standards.
The system worked like a fine watch. Homeownership rates soared. Loan standards were generous but not stupid. Nobody in the home mortgage business got filty rich. And mortgage lenders hardly ever went broke. The government's bank insurance funds regularly turned a profit. And here's a quaint, archaic concept: it operated in the public interest.
Then in 1968, as part of a general budget reform, government technocrats decided to get FNMA off the government's books. This was intended as a purely technical revision. It was tacitly understood that Fannie was to keep doing the same thing it always did--buy mortgages from banks, turn them into securities, keep some, sell others, but maintain its standards and service to the public good.
It took about two decades for the wise guys to realize that there was big money to be made. And I am sorry to report that this was a bipartisan trough. In the Clinton era, many of the wiseguys at FNMA were Democrats.
Criticism was limited to the right and left. The Wall Street Journal and libertarian think-tanks regularly warned that Fannie was getting too big and too speculative with an implicit government guarantee. A few progressives like your faithful writer objected that FNMA's true purposes were being perverted and the system was being put at risk so that insiders could get very rich.
After 2000, Fannie also served to abet the sub-prime mess. For the most part, Fannie refused to buy the very worst sub-prime loans, but it was happy to buy so called "Alt-A" loans, which were a slightly milder version of the same abuse-very risky loans with exorbitant interest costs (and profits) and almost non-existent standards, that are now going into default at almost the same rate as sub-prime.
Under private management, Fannie did a 180. It was perverted from a government-sponsored and well managed agency that served the public interest into a privatized casino whose big bets enriched a few insiders and then helped crash the entire system.
So now, the Bush administration is playing half-of-FDR. It is saving capitalism from itself as Roosevelt did--but without getting serious about regulatory standards going forward. The taxpayers will bail out Fannie, but the rules for regulation of the mortgage system have yet to be written. That will await the next administration. And if the next administration is led by John McCain, the top financial guy is likely to be former Senator Phil Gramm, the senate's biggest cheerleader for reckless deregulation.
Here is the cycle: government invents something virtuous. The private market takes it over, loses hundreds of billions. Government then bails it out. This is best understood as socialized risk, privatized gain. Yes, the shareholders of Fannie Mae will deservedly lose a bundle--it's always the shareholders who take a hit-but the insiders who thought up subprime and the executives of Fannie Mae during the roaring '90s already made their pile.
Surely there is an Obama teachable moment here. It isn't even that complicated. To wit:
--Ordinary homeowners got suckered so that a few fat cats could get very rich.
--The needless damage to the mortgage sector has wreaked much wider harm on the economy--causing other people to lose jobs, not get raises, lose health coverage, and suffer losses to their net worth because of collapsing housing prices.
--This was all the fruit of ultra free-market ideology, as a carried out by an opportunistic Wall Street-Washington axis.
--In competent hands, government can do some things more reliably than Wall Street.
(That only took 65 words, less than a typical TV spot. This could also be the subject of a major, high profile Obama speech, laying out all the gory details and drawing the lessons.)
What has Obama said about the Fannie Mae rescue? Here's what the Obama campaign put out Sunday afternoon, the same day that a new USA Today poll was finding McCain ahead by ten points among likely voters.
"Given the substantial role that Fannie Mae and Freddie Mac play in our housing system, I believe that some form of intervention is necessary to prevent a larger and deeper crisis throughout our entire economy. I will be reviewing the details of the Treasury plan and monitoring its impact to determine whether it achieves the key benchmarks I believe are necessary to address this crisis."
"First, this plan must not focus on the whims of lobbyists and special interests worried about their bonuses and hourly fees, but instead on strengthening our economy and helping struggling homeowners who are also being hit by lost jobs, stagnant wages and spiraling costs of everything from gas to groceries. Second, the plan must protect taxpayers, not bail out the shareholders and management of Fannie Mae and Freddie Mac. Third, once we ride out the current crisis, the plan must move toward clarifying the true public and private status of our housing policies. In our market system, investors must not be allowed to believe that they can invest in a "heads they win, tails they don't lose" situation."
That's it. The entire statement.
He'll be reviewing the details of the Treasury plan and monitoring its impact to determine whether it achieves the key benchmarks...? Gawd, did they hire John Kerry's second-stringr 2004 speechwriter? That would put even a policy wonk to sleep.
I will be reviewing the Obama campaign and monitoring its impact--to see whether these people get off their fannies.
This whole thing goes well beyond the current mortgage meltdown.
Social security is not failing -- government overhead on SS and Medicare is about 4% while the vaunted private sector has an overhead of more than 25%.
For a hundred years utilities were heavily regulated -- when California lifted their regs, prices shot up, blackouts proliferated, obscene profits were made by a few while the rest suffered.
Evidence is mounting that the Republican's twin myths: Big Gubmint is bad; Magic Markets will deliver all good things by pure serendipity are dead wrong. But Democrats still cower in fear of confronting them. Thus, Reagan's mantra of "Government is not the solution, it's the problem" still resonates with people; "it's your money" still wins the day.
Things like pooled risk, government rules assuring a level and fair playing field -- the grease that makes a capitalistic system work -- remain taboo topics and a few fat cats extort money.
It's time to stand up and defend a civil economy in which rules are seen as necessary and desirable, and a government role is defended, and in which taxes are a fair price for letting government do th things it must -- and to do those things which no one else can or will, such as stopping global warming, curbing corruption, assuring transparency in markets, conducting research which has a high social return.. .
Gotta punch it up Obama.
if Obama won't do it - You do it!
If Obama won't get angry - You get angry!
Keith Olbermann in the interview with Obama last night had a great line from Harry Truman. "How many times do you have to get over the head before you realize who's doing the hitting?
Yoohoo Sheep! This ain't about Obama - it's about you, your family, your country. Obama is a man not a god. Get over it.
In any case you should be Green and not icky slimy Democrats all covered in cowardice and corruption.
Social Security, Medicare, Health Care, and now Mortgages! What else is coming that the taxpayer will have to bare and substract from their paycheck?
Get government out of our lives and force it to only do what the Constitution stipulates for it to do!! I'm really tired of all branches of our Central government ignoring the Constitution and doing anything it wants, and Communism is the driving force behind it all!
Wow.
You are kidding, right?
History didn't start with Franklin Roosevelt, and none of those programs were created out of a vacuum. Why don't you read a bit of history and learn something about the shape this country was in when Roosevelt took office. I don't know why I'm even responding to this.
Home onwership went form 30% or so to more than 60% under the federally administered programs, and they functioned quite well for three decades.
When government got out of the direct oversight and ownership of these programs things got funky.
In short, Einstien, government did good stuff and private industry screwed it up.
As for communism being the driving force -- that's a joke, right?
Government meddling in the free market (where people should be allowed to rise or fall on their own choices) is not the answer, it's the problem.
http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html
Top Recipients of Fannie Mae and Freddie Mac
Campaign Contributions, 1989-2008
Total
1. Dodd, Christopher J S D-CT $133,900
2. Kerry, John S D-MA $111,000
3. Obama, Barack S D-IL $105,849
4. Clinton, Hillary S D-NY $75,550
From the article,
"Both companies have poured money into lobbying and campaign contributions to federal candidates, parties and committees as a general tactic, but they've also directed those contributions strategically. In the 2006 election cycle, Fannie Mae was giving 53 percent of its total $1.3 million in contributions to Republicans, who controlled Congress at that time. This cycle, with Democrats in control, they've reversed course, giving the party 56 percent of their total $1.1 million in contributions. Similarly, Freddie Mac has given 53 percent of its $555,700 in contributions to Democrats this cycle, compared to the 44 percent it gave during 2006."
Fannie Mae and Freddie Mac CEOs to get golden parachutes Daniel Mudd and Richard Syron, who are stepping down, have already made millions at the troubled mortgage giants and are expected to take away millions more.
Shareholders in Fannie Mae and Freddie Mac saw the value of their stock nearly disappear Monday after the mortgage giants had been taken over by the federal government, but the companies' chief executives will leave after banking millions and taking millions more on the way out the door.
of the world get hundreds. As far as regualtion / deregulation is concerned the blind faith of the
Right in both "the market will work itself out" and in their religion have doomed this country.
20 - 30 years from now we will all look back and see how harmful the Reagan/Gingrich/Bush
deregulation was. Time to find another country to move to. Looks like the "Maverick" may end
up winning this election.........
Who out there has 3 monthes cash put aside = no house payment = no car payment = save regularly = and give to charity regularly???
Who out there is in so much dept they are using their credit card to pay their monthly bills???
Our government has just added 7 trillion dollars to their credit card - our government will shortly be adding all the banks - another 7 trillion dollars to that same credit card , and since we are stuck in Iraq/Afghan another 7 trillion over the next 4 years = bankrupt and no where to go.
Sad but true = the depression of the 30's will be considered a time of prosperity soon.
Show us your real socialist roots Mr. Obama.
My God; the people on this site are the stupid peasants that you have been looking for to go all the way to the commune.
The reason a business has to be bailed out is because it's too big to let fail. That should never be.
Banking regulation was changed by fat cats buying both parties. To give cheep loans to poor people to buy a home is just too tempting for a politician especially backed with tax payer money.
In economics; economies of scale leads to efficiency of production (bigger is better). However, the sizes of todays companies leads to efficiency of corruption. Oh. let's have the government own everything cause that will stop corruption. Stupid, Stupid, Stupid.
Any group, government, union or mob that gets so big that it thinks it can circumvent the basics of economics should be broken down to size.
Companies should be "anti-trusted" down smaller and financial companies regulated as to percent of reserves / loans. That's it.
Let the stupid companies fail so the rest can have a TEACHING MOMENT.
Stupid is as stupid does.
The facts don't really matter.
The spin is in the air.
Guess what, The US is broke and about to declare bankruptcy.
Ask any economist and he will tell you the truth if he has any desire to be truthful.
Did you know why the US didn't buy all the mortgages during the great depression - they couldn't afford to.
Did you know why the US didn't tell people their money wasn't safe in banks - it wasn't.
There is a limited supply of money - if 1/3 of America went to the bank and cashed their paychecks instead of depositing them there would be a big surprise - oops - no money!!!!!
You see the treasury cannot print and distribute that much money - never has and simply cannot.
All those mortgages - worthless - so you can hand over that 7 trillion dollars to the folks who invested in those worthless pieces of paper now since Bush agreed to back those worthless pieces of paper.
The bust has come and the government is bankrupt - they don't have the money and people are being put on the street daily.
Sad don't you think.
This once great country - the military trashed - the economic back broken - and the people blissfully going about their business without a care in the world - sounds like the "good times" just before the stock market bottomed out.