Fannie-Freddie monopolies

Fannie-Freddie monopolies

Posted: Monday, July 28, 2008 10:58 pm
By: Douglas Cohn and Eleanor Clift

By DOUGLAS COHN and ELEANOR CLIFT WASHINGTON — Too big to fail, that’s the theory behind the government’s latest financial bailout plan. Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), the nation’s largest major mortgage lenders, are the latest casualties of the downturn in the housing market. Their inability to sustain mounting losses could freeze mortgage lending and send the economy into a further downward spiral. Treasury Secretary Henry Paulson working with Federal Reserve Chairman Ben Bernanke announced over the weekend plans for the government to step in and avert the looming crisis A government takeover of private institutions is not what a Republican administration wants as its legacy. But the steps announced by Paulson on Sunday have all the earmarks of a federal takeover — and properly so. Some functions should not be privatized. A government-backed mortgage security is one of them. Social Security is another, a lesson that will be driven home to Sen. John McCain, R-Ariz., on the campaign trail, if it hasn’t already. The confusion about the role Fannie and Freddie play goes back to their creation as quasi-governmental entities. Freddie was established by an act of Congress in 1970 to provide more liquidity, i.e. money, to the mortgage market using private capital. Fannie was chartered in 1938 and in 1949 began buying and selling loans guaranteed by the Veterans Administration. Fannie fueled much of the boom in home ownership that followed World War II and spurred the expansion of the middle class. These are valuable and needed institutions, but they function as private monopolies, controlling at latest count $5.3 trillion in mortgage debt, roughly half of all U.S. mortgages. Both have been in the news in recent months because of mismanagement, including excessive salaries paid to top executives. Everyone agrees we don’t want government monopolies. A capitalist economy thrives on choice and competition. But there is one thing worse than the heavy hand of government and that is the unfettered, unquestioned and unsupervised dominance of a private monopoly such as Fannie and Freddie have enjoyed. The government’s hand has been forced by an impending financial collapse. There isn’t time to take the road less traveled, which would be the legal dissolution of these two mortgage giants to foster competition, much the way the breakup of A T & T was handled a generation ago (Remember how high long distance calls were when AT&T was the lone provider). No one would have predicted the Bush administration would be in the forefront of government intervention in private markets. Ideology becomes less relevant when the broader economic interests of the nation are at stake. The Fannie-Freddie bailout plan was made public Sunday with the goal of quieting the fears of Wall Street before the New York Stock Exchange opened on Monday. Stocks rose at first, then dipped down amidst worries the government action is too little, too late. The three-part plan proposed by Paulsen needs approval by Congress, but it would essentially put the full faith and credit of the U.S. Treasury behind Fannie and Freddie, making explicit a guarantee that has been implicit. The Treasury Department would actually buy stock in the two troubled mortgage lenders and give them a virtually unlimited line of credit. Paulsen made it clear that meant there would be government-imposed standards in setting capital requirements and in other areas where their status as private institutions had led them to over-reach. The real question is why Fannie and Freddie were organized as private institutions in the first place. They don’t have and cannot have the resources to carry them through the kind of downturn we’re seeing, a downturn that is likely to worsen. They buy mortgages from banks, then resell and re-package these loans as mortgage-backed securities. The government has always been there to prop them up. That’s a good thing, and it’s long past time for the free-marketers in name only to admit there are things only government can and should do. Published in The Messenger 7.28.08

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