Tuesday, September 09, 2008

Bailout of Federal Mortgage Agencies "More Communist than China"

So said an investor. He also called it "socialism for the rich." It's hard to disagree.

The Federal National Mortgage Association glommed on to the nickname Fannie Mae, playing off the candy company Fannie May and adopting a nice, folksy identity. A related agency, the Federal Home Loan Mortgage Corporation, peddled Freddie Mac as its cozy handle.

Warren Buffett started unloading his Fannie and Freddie shares 7 years ago, and announced recently that he had declined invitations from the two agencies to reinvest in them.

Fannie was started in 1938 as part of the New Deal. Freddie was started in 1970 to supplement Fannie. The idea is to foster home buying. They are called government-sponsored enterprises with private shareholders and government "involvement."

The problem is that they have been too much "government" and not enough "enterprise." Fannie and Freddie have been in the middle of the push to finance home loans for people who were high risks, which produced the home mortgage crisis that is rattling our entire financial system.

And so now the "too big to fail" mantra is being intoned. Basically the national debt is being doubled to cover the losses produced by a government-knows-best approach to the private housing market.

For capitalism to work, there must be consequences for bad decisions. You can't be capitalist in making deals, but then socialist in cleaning up the messes from the bad ones. Trying to block the pain guarantees similar decisions in the future and huge financial burdens for taxpayers.

1 comment:

OmaSteak said...

While I agree 100% that the government...at all levels...should not be involved in anything not specifically required by the constitution, this situation was really a situation where failure to act would likely have collapsed our banking system taking the US dollar along with it. The US Treasury stepped in because a large percentage of US banks...and lots of foreign central banks...had large holdings of Fannie/Freddie's preferred stock. Current banking and accounting rules/regulations let banks classify these holdings as capital on their balance sheets not as investments. Banks ability to make loans is governed by their capital, hence this sudden disappearance of hundreds of billioins of such preferred stock would have likely caused a huge number of bank failures even those without large exposures to high risk subprime mortgages. By creating Fannie/Freddie, the Feds almost guaranteed these very political companies would fail somehow, some way in the future...and that future is here. The solution? Term limits, Fair Tax and a constitutional amendment requiring a balanced budget. Probability of that happening...almost zero. I used to think the "sky is falling gold bugs were all crazy", while they are on the fringe for sure...they ain't crazy. Moving assets offshore and into other currencies/metals/commodities isn't a bad idea anymore.