Spaning Fannie
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Being surprised is difficult. In San Francisco we are accustomed to what the outside world would considered oddities, and we elect many of them to office.
The fact that a pair of FDR mistakes have failed financially causes no surprise either.
Ignoring the imbecilic notion that any organization is “too large to fail” we witness this past week the bust of Fannie Mae and Freddie Mac. These ugly twins were sired by FDR as part of his infamous and borderline fascist Nuts Running America program. These agencies were originally federally owned and in one fell swoops replaced most of the secondary mortgage industry in America (strike one). After 30 years of screwing up and making most mortgages a government project, Congress (strike two) decided to semi-privatize the institutes. This created the worst of all models where profits were in the private sector and the risk was loaded onto the public (strike three).
And now that Fannie and Freddie and flopping, guess who is getting stuck with the bill?
The current mortgage market meltdown is almost completely the responsibility of the government and by proxy Fannie and Freddie. FDR thought it a grand idea to pump inflated currency into housing so people without jobs could own homes. During the past few decades they continued to push money into mortgage markets. Since FDR created these near-monopolies there was little distribution of risk and together Fannie and Freddie assumed nearly half of all mortgages.
Thus, the companies “too big to fail” are failing in a spectacular way.
This logic failure was accelerated during the recent housing bubble. To finance various wars, the government was out of necessity going into (more) debt. To balance the negative effect on the economy the Federal Reserve kept interest rates artificially low. Cheap government money was all Freddie and Fannie needed to indirectly loan money to a lot of people who lacked credit worthiness in order to buy properties with inflated values.
And yet nobody in government — including the quasi-governmental Freddie and Fannie — saw a problem with this.
Life is a risk vs. reward proposition. The lower the risk, the better any reward looks (this explains most petty street crime which today carries very little risk). Government lowered the risk in backing mortgages which in turn caused lenders to take ever bigger gambles. Had lenders been playing with purely private equity, the latest housing run-up would not have happened … and neither would have the current meltdown.
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