Monday, July 14, 2008

Fannie & Freddie: to bail or not to bail

Wall Street apparently didn't think much of the government's plan to prop up Fannie Mae and Freddie Mac. As for me, I'm not too pleased with it either -- needless to say, for completely different reasons.

Investors in the two companies raked in enormous profits all through the housing bubble, and the companies' executives did even better. Thanks to the pervasive anti-regulatory ideology of the past few decades and the powerful influence of Fannie and Freddie's lobbyists, those profiteering executives were able to indulge in all the greed-driven maneuvers that created the current economic crisis.

What portions of the mortgages Fannie and Freddie either hold or insure are less than secure? Given the lack of oversight, nobody knows, of course. Oversight, after all, is an insult to the miracle of the free market. Yes, Bernanke and the Fed drew up some new rules today -- truly onerous regulations like "before it lends a guy half a million dollars, a bank really ought to check whether or not he has a job paying more than minimum wage." So as not to upset the mortgage industry too much, though, that regulation won't take effect until October of next year.

In the meanwhile, the Treasury will be expanding Fannie and Freddie's lines of credit, and the Fed will open the discount window to the two privately held companies. To wit: in keeping with the rules of modern capitalism, the risks are socialized while the profits remain private. The profiteers get to keep everything they raked in while the housing bubble was still inflating -- but now that the bubble has burst, taxpayers get to absorb the losses.

Fannie Mae and Freddie Mac, if they can't make it on their own, don't deserve government bailouts beyond the relatively small two-and-a-half billion already written into law. It's true, though, that the housing market depends on the two huge companies, so they can't be allowed to die -- but government and the taxpayers it represents should not be taking on more risk and more debt without getting something in return.

Government should not "bail out" Sallie and Freddie. If share prices continue to drop, it would make more sense to use the bailout funds to buy one or both companies outright. Yes, that's right -- a total government takeover. Nationalization. With proper regulation and oversight, both companies will be profitable again someday, and the government of the United States can apply those profits to affordable housing for the poor, or universal health care, or maybe just balancing the budget. Why send the country deeper into debt just so the private sector eventually can reap the rewards?

Once again, I ask my eternal economic question: why is it that no government enterprise ever is allowed to turn a profit? Why is it that everything that earns money is privatized, and everything that loses money is socialized? If people really want more government services and lower taxes, the only way to do it is to give government a chance to turn a profit once in a while. A buyout of Sallie and Freddie at bargain basement prices presents an excellent opportunity to do just that.

Yes, I know that not every investor in Sallie and Freddie is a fat cat -- I'm pretty sure that both my pension fund and my mutual fund hold shares of one or both companies, but I'm also pretty sure that both funds are selling out as fast as they can. Just like most other Fannie/Freddie stockholders, I presume they recognize that companies which buy, insure, and repackage mortgage debt can't possibly be doing too well right now -- and that the finance sector as a whole is in a downward spiral worse than any it's encountered since the Great Depression.

Along with crisis, though, comes opportunity. The opportunity I see is for a basic reorganization of American government and economics. Mind you, I don't expect any of our short-sighted, ideologically blinded leaders to take advantage of that opportunity -- at least not in the short term -- but if things get bad enough, who knows? Maybe if the tunnel gets really dark, there could be some really bright light at its end.

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