Facing folly of Fannie, Freddie

As conservatives preen over the sudden celebrity of Sarah Palin and liberals twitter over the development, socialism’s creep accelerates toward full gallop. The impetus this time takes the form of a $200 billion federal bailout of mortgage behemoths Fannie Mae and Freddie Mac. Sought with dogged persistence by the Bush administration and advocated with equal fervor by Republicans and Democrats, the rescue of the twin GSEs, or government-sponsored enterprises, is the necessary product of an extraordinarily vapid idea. If wobbling Fannie and Freddie topple, the housing market and economy will follow with dramatic thuds.
Though owned privately by stockholders, Fannie and Freddie as GSEs function in a realm relatively free from regulation and one shielded by government’s reservoir of guaranteed revenue, a realm, in other words, radically different from that occupied by private lenders. Unfettered by the restraints of prudence, Fannie and Freddie have compiled almost $5 trillion in mortgage-backed securities, almost half of all of America’s mortgage debt spread in a thick layer to banks across the country and around the world.
Combine this with a want of capital, and a problem emerges to the point of crisis, for Fannie and Freddie and the larger behemoth that backs them. The obligations of Fan and Fred are the government’s and thus the taxpayers’. So come the black knights, otherwise known as Bush and Congress, on their white horses offering salvation in the form of another federal bailout.
But who will rescue the rest of us from Congress? At every turn, lawmakers in recent years shunned reform, rejecting calls for Fan and Fred to reduce their high-risk securities portfolios, tighten lending restrictions and improve the quality of taxpayer-backed investments.
Treasury Secretary Henry Paulson has taken some steps to quell the madness. Under a newly established federal conservatorship, regulators will gain some control over the GSEs. In 2010, Fan and Fred will be required to pare their mortgage securities portfolios by 10 percent annually to $250 billion and they will begin paying fees to the government in exchange for the bailout. But this stops short of what is badly needed: government’s withdrawal from the mortgage business and from the bad business of GSEs.
Fan and Fred long have been what they were bound to become, a tool for lawmakers to curry favor with constituents. Frank and others lobbied for mortgages for low-income borrowers. Elsewhere, these are called subprime mortgages, the same sort of which plunged private lenders into near financial ruin and sparked feigned indignation from both sides of the aisle. Lawmakers also skimmed from Fan and Fred profits, and then poured millions of dollars into special-interest troughs. The Federal Reserve and a few lonely voices in Congress warned of the dangers and were summarily dismissed as alarmist.
So-called conservatives, the current commander-in-chief among them, have participated and acquiesced. The bailout of Fan and Fred and of Bear Stearns has been necessary, Bush tells us, because of the inherent hazards of allowing these institutions to fail. Instead, the government must wrest the economy from the hands of free enterprise and steer it toward prosperity. Gee, that’s worked well so far. Some people might call this socialism.
Now, were a leader to awaken to this reality and be moved to transform it, he or she would first be required to navigate a path out of the mire into which Fan and Fred have pulled us. There is a clear course, still. Impose stiff restrictions on Fan and Fred, put people who know finance rather than those who know politicians in charge and plan to privatize when light pierces the housing market’s darkness. Taxpayers should not bear the burden of government-sponsored folly. That hasn’t worked in Russia, and it won’t here.