Fannie's Scandalized, Freddie's Dead -- and the Next Financial Meltdown May Have Already Started

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Richard (RJ) Eskow

Fannie's Scandalized, Freddie's Dead -- and the Next Financial Meltdown May Have Already Started

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The FCIC's recent report illustrated an important lesson from the economic meltdown: Privatization, not big government, ruined Fannie Mae and Freddie Mac. Running a government program like a private corporation leads to the worst excesses of executive self-indulgence. Fannie and Freddie didn't bring down the economy, as some have claimed, but they were destroyed by the same privatize-and-deregulate philosophy that led to the crisis.

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Fannie Mae and Freddie Mac are going to die, at least in their present form, as victims of over-indulgence. But they didn't start that way. Fannie Mae was created in 1938 and functioned smoothly for thirty years, all through the postwar housing boom. It was turned into a separate government-sponsored enterprise in 1968 in order to take its large debts off the Federal balance sheet, and Freddie Mac was created shortly afterward (to create "competition"). They're creatures of privatization, and they were encouraged to bring "free market" aggression to their mission.

And man, did they. As FCIC testimony revealed, "The "Fannie and Freddie political machine resisted any meaningful regulation using highly improper tactics... OFHEO (their regulatory overseer) was constantly subjected to malicious political attacks and efforts of intimidation."

The companies faced a turning point in 2005, when the greed-addled private market was rushing into subprime mortgages and other high-risk loans. A government-sponsored corporation that was true to its mission wouldn't have followed the lemmings, but privatization fever had taken hold. As a Fannie Mae executive told his colleagues back then: "We face two stark choices: stay the course meet the market where the market is." Ill-advised by architects of calamity like Citibank, they jumped in with both feet despite dire warnings from people inside the organization.

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Jim Tankersley

Treasury to Punt on Fannie and Freddie Plan

In his options for scrapping the rescued mortgage companies, Obama deflects political heat--with some risk.

There are two smart political play calls in the Obama administration's forthcoming proposals to tame the mortgage mess at Fannie Mae and Freddie Mac. There's also an obvious opportunity cost, policy-wise, and a risk to the domestic economy that is bigger than any election cycle.

The three options the Treasury Department will recommend to Congress on Friday, as described by an administration official speaking on condition of anonymity, will all phase out Fannie and Freddie as we know them. That's smart call No. 1. Because they saddled taxpayers with an estimated $142 billion to $259 billion in bad loans when the government took control of them during the financial crisis, Fannie and Freddie have become magnets for criticism from tea party activists and Republican lawmakers. President Obama's leading argument to Congress is, let's get rid of them.

Smart call No. 2 is the three-item menu the administration is offering Congress for mortgage-market life after Freddie and Fannie. One of the choices would remove government entirely from the business of backstopping home loans. The middle choice is a limited government guarantee, which lawmakers could broaden in the event of another housing collapse. Option Three amounts to a full government mortgage guarantee.

By offering choices, and not a single, preferred policy, the administration avoids tying itself to a "Big Government" plan that could upset fiscally conservative swing voters, or to a "no government" plan that angers Obama's base. More importantly, it pits the tea party and free-market-think-tank wing of the Republican Party, which opposes government guarantees, against some traditionally big GOP donors in the housing industry, Realtors and home-builders, who could have a lot of money riding on guarantees or a lack thereof.

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