Little Orphan Fannie

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.

Comments

[orangepetal]

Obama teachable in like Rezko property for poor families in Chicago. Was not so successful as far as I have heard. Goverment closures, non desirable living conditions and millions of dollars of the publics money in the form of grants squandered.

[Aaror]

At least Obama wasn't indicted for using his position to help a corporation in exchange for contributions like McCain was. Keating scandal anyone?
Maybe he was for it before he was against it, like Palin and the bridge to nowhere (she still took the money for that project from the federal government and spent it).

[wolfgangmo]

WTF are all these trolls coming from?

Tell us, did Rush or that male barbie at Faux Noobs tell you to post here? Way to be an independent thinker.

[lwaxanatroi]

I just used the words "teachable moment" in another post, so of course I agree wholeheartedly. This issue is so easy to understand compared to many others on the table, and it hits at pocketbook issues for millions of Americans. So how come you can boil it down to something clear, understandable, and hard-hitting, while Obama of the golden tongue sounds like a wonk crunching numbers, numbers that have nothing to do with average Americans and their prosperity? Bring the issue home, Dems, use words of one syllable and tell the people the whole truth about why their brother lost his house, and do it NOW. Include the Dems, let people know the entire political class failed them, and then explain how easily fixable it is. This is a great way to show voters that, contrary to right-wing opinion, a government­-sponsored program benefited millions of homeowners and only failed when it became a fertile feeding ground for unregulated speculation. I know, Obama actually said something almost like that, but he said it in such a highflown way, with abstractions instead of human stories, that most voters won't actually understand what he was talking about. Where is FDR when we need him? It's fireside chat time. Chat with us, Barack, don't teach or preach.

[cmhmd]

The days of fireside chats are past, this is the day of the infomercial.

I think Obama should put together a 30 minute infomercial and refute, repudiate, ridicule the republicans from now until election day. Show them more than 10 minute abs and billy mays and proactive together.

Cheers,

[Henry]

I agree with you. Barack needs some pungency points that are brief, to the point,
and expose the pretense & hypocricy of the right wing.
He could attack the "ownership society" of little George as being "not well" thought out...sort of like the invasion of Iraq. He could even compliment Republicans by reminding them that "conservative" loans are the best loans in a free market economy! And he could smile.
The subprime mortgage loans securitization crisis has been in the making for some time. It sort of reminds you of little Geo flying over the devastation of Katrina three days afterwards.

[StupidPeasant]

Ownership gives you freedom. Socialist fool.
Yes conservative loans are the best; but then the stupid peasants can't get a loan. So they should work hard and save.. there's that conservative thing again.

BTW. Republicans don't think Bush is conservative at all.

[tc399]

The Obama campaign is starting to fade because Barack, the champion of 'grassroots change' seems to have become tentative.

He cannot fire people up by moving to the political center in an effort to win voters who will never vote for him. And while McCain has no message at all, Obama can't articulate his anymore.

You are absolutely correct. Vanilla press releases which say nothing will lose Obama the initiative and the election.

[wolfgangmo]

Are we better off now than when the Republican Revolution began? Are we better off now than we were in 2001?

There are a lot of pissed off middle class people in America. A lot of us are wondering if we will be in our houses next year. My family is one emergency away from being homeless. If one of us gets sick or in a car accident then we will lose everything.

Lot's of people are in the same position.

He needs to tap into that, but I think he will. I think he is giving McHouses and Caribou Barbie enough rope to hang themselves. I am waiting for the debates.

And in the meantime I am volunteering for my local, state, and federal candidates. We need to get Obama in AND we need to give him the house and senate as well as most of the states and local assembies as possible. I am working hard to make sure that the better candidates get into office.

I hope you are joining me.