Freddie Mac Needs More Taxpayer Money

Freddie Mac Needs More Taxpayer Money
"Government-controlled mortgage giant Freddie Mac is requesting $19 million in additional federal aid after posting a loss for the first quarter of this year." ( Washington Post)

Really, this story is getting old.

Perspective
Bailing Out Statism
The Collapse of Fannie and Freddie Is Government Social Engineering Gone Bad
Sheldon Richman
December 2008 • Volume: 58 • Issue: 10 •

The key to understanding the saga of Fannie Mae and Freddie Mac -- the newly nationalized twin government-sponsored enterprises (GSEs) that dominate home financing -- is this:

They were created -- intentionally -- to distort the housing and mortgage markets. That is, government planners were not content to let voluntary exchange and spontaneous market forces configure those industries unmolested. So -- holding the taxpayers hostage -- they intervened.

Make no mistake: The collapse of Fannie and Freddie is government social engineering predictably gone bad.

In a free society supply and demand would govern markets. The demand for houses would be determined by people's preferences and the wealth and income at their disposal. Supply would be determined by relative profit expectations, which is to say, by the demand for housing and the competing demand for the required inputs.

A distortion occurs when government planners and rent-seeking corporate allies, under cover of humanitarian social policy, engineer a deviation from natural market outcomes. (Rent-seeking here refers to the quest for politically derived as opposed to market-derived profits.) Dressed up as promotion of the American Dream through homeownership, the planners used the political means­ultimately, the threat to imprison uncooperative taxpayers -- to channel wealth to the construction, real-estate, and financial industries. The primary instruments of this social engineering were Fannie Mae, created as a government agency during the New Deal and -- cough -- "privatized" in 1968 to get it off-budget, and Freddie Mac, created as a "private" GSE in 1970.

The GSEs don't make mortgage loans. Rather, using borrowed money, they buy mortgages from original lenders, encouraging banks to make more loans and immediately pass them on to others. Pooling lots of mortgages together, the GSEs create mortgage-backed securities (MBS) and either sell them or (more frequently) keep them, assuming the risk of default. In fact Freddie and Fannie created the secondary mortgage market that has come in for criticism since the subprime problem developed.

Freddie's and Fannie's activities were designed to channel money to mortgage lenders so that they could loan widely, especially to people who might have been priced out of a fully private mortgage market. The system inevitably lowered lending standards and interest rates. If these activities had been performed not by GSEs but by real private companies, they would have been subject to market checks. But they were not. They're not called government-sponsored enterprises for nothing. As such they have special advantages over real private companies, permitting them to do things on a scale larger than would have occurred in a free market. The advantages include tax exemption, government loans, an implicit bailout promise, and lower capital requirements.

The result was a far more concentrated lending market and hence greater vulnerability to changing conditions. Fan and Fred hold or insure $5.4 trillion in mortgage debt­half the national total­making the taxpayers ultimately responsible now that the GSEs are under federal conservatorship. Three-quarters of new mortgages are GSE-backed. So the government has just become the country's major mortgagee.

The GSEs have lost well over $10 billion since the mortgage meltdown occurred, and they were getting close to being unable to borrow enough money to roll over their debt. This and fear of a more general economic meltdown are what prompted the government to step in, exposing the taxpayers dramatically. The bailout will begin with a billion-dollar infusion. Then the government will start buying shaky Freddie- or Fannie-backed mortgage securities in the marketplace. A $5 billion purchase will get things going, but up to $200 billion has been promised. It will no doubt be more.

Where will this money come from: taxation, borrowing, or the printing press? What will that do to our economic well-being?

The New York Times is wrong. This is not "an extraordinary federal intervention in private enterprise." It is the state bailing out statism. Let's hear no more about the "laissez-faire" Republicans. That myth serves only to protect advocates of state intervention regardless of party.

It is with deep sadness that I note the death in October of our long-time contributing editor Norman Barry after a long illness. Over the years Norman kept Freeman readers informed about free-market and statist developments in Europe and elsewhere, always with optimism about the future of liberty. He was a professor of social and political theory at the University in Buckingham, which, he proudly noted, is the United Kingdom's only private university. Among his many Freeman articles, my favorite is "Freedom and Morality in the Plays of Tom Stoppard" (August 1999, http://tinyurl.com/6h9s5s). He was a gentleman, a prolific scholar, and a pure pleasure to work with.

---

http://www.thefreemanonline.org/columns/perspective-bailing-out-statism/