The Fannie and Freddie Question

In a previous post, I mentioned that Fannie and Freddie were costing taxpayers about $7 billion dollars per month. Is it time for them to go? A good case can be made for it:

Say Goodbye to Fannie and Freddie

[...] Fannie and Freddie had a license to print money. They could borrow at an interest rate only a bit over the Treasury rate and then accumulate large portfolios of mortgages and mortgage-backed securities earning the market rate. What a deal — borrow at the low rate, invest at a higher one, hold little capital and let the federal government bear the risk! Investors enjoyed high returns, and management enjoyed high salaries. Incidentally, politicians also got a steady flow of campaign contributions from the companies’ executives.

Fannie and Freddie’s risky policies led to their near collapse; in September 2008, the federal government brought them under federal conservatorship. Fannie and Freddie have cost taxpayers about $150 billion so far.

On Tuesday, the Obama administration plans to hold a conference to address the question of what to do with the two companies. Clearly, it would be an inexcusable mistake to reconstitute them as private companies in anything close to their prior form. Some people have suggested recasting them as a single new “Fan-Fred agency” that would continue to securitize and guarantee home mortgages. It’s true that Fannie and Freddie played an important role in developing the market for mortgage-backed securities. But they have completed that work, and they should not be preserved in any form. They should be thanked for their successes and gracefully retired.

Can the home mortgage market stand on its own, without support from federally sponsored mortgage companies? Experience tells us that the answer is an unambiguous yes. [...]

Read the whole thing for the nitty gritty details. There are many reasons why they should not continue, but this administration has been supporting a lot of things that should have died a natural death. We shall have to wait until Tuesday to see what they will do. Since Fannie and Freddie are government creations, and Big Government is growing not shrinking, I'm not confident that they will be retired. If they are kept, the question will be: "At what cost?"
     

Financial Crisis: a free-market solution?

Government has a role in "steering" the economy, but when it interferes directly it often causes more problems than it solves. A trillion dollar bailout is wrong in so many ways. So what, if anything, should the government do? Here is some ideas from Edwin Feulner at RealClearPolitics.com:

A Free-Market Fix

[...] Let’s begin by noting that there is a legitimate federal role in extraordinary circumstances. There are things Washington needs to do to keep our economy functioning. For example, it was a smart move for the Federal Reserve to pour $150 billion into the system. The Fed exists, after all, to make sure money keeps moving and credit remains available.

But as lawmakers debate buying up hundreds of billions in assets, they should realize that the government’s aggressive meddling in financial decision-making is what got our economy into this mess in the first place. The long-term answer isn’t more federal control, it’s a return to free-market principles.

One way to do so is to make sure that any bailouts are as limited as possible. If a private firm is so integral to the financial operations of the economy that it requires assistance, so be it. But in that case, the taxpayers’ should be investing as little as possible, and company employees and stockholders should suffer the consequences of their bad investments.

Also, lawmakers should avoid turning the rescue package into a Christmas tree, loaded up with goodies for special interests. One proposal in a Senate bill would require 20 percent of any profitable transaction to be deposited into a special fund that pays for low-income housing. That’s a silly idea that would, in the long run, only serve to make things worse. [...]

(bold emphasis mine) It goes on to demonstrate some "silly ideas" and shenanigans that have gotten us to this point, and allowed this to happen. If the government has a role to play at all, it should be watching out for the interests of taxpayers, not saving corrupt institutions at taxpayers expense.

We keep hearing about the projected costs of a bailout. What about the projected cost of no bailout? How can you make a rational judgement about the answer to the one question without also knowing the answer to the other?

What about a third option; a limited bail-out, that does some damage control, but does not protect the unscrupulous? We have more options than just a choice between a trillion dollar bailout, or nothing.
     

Our Democrat-Created Crisis: They blocked a Reform bill co-sponsored by John McCain

This financial crisis was preventable, but Democrats lead us into it by blocking a bill passed by the Senate Banking Committee that would have prevented it. From Nealz Nuze:

THE DEMOCRATS AND THE FINANCIAL CRISIS

[...] Out of all of the stories I brought you yesterday, this one was the most requested. An article on Bloomberg.com called How the Democrats Created the Financial Crisis by Kevin Hassett. Here's the set up ... back in 2005, Alan Greenspan warned that Fannie and Freddie were on the path to putting our entire financial system at substantial risk. For the first time, a Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill was co-sponsored, by the way, by none other than John McCain. The bill would have required Fannie and Freddie to eliminate their investments in "risky assets" and it would have given a regulator the power to say "no way."

Here's the rest of the story from Bloomberg ...

"If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter."

Now how does Barack Obama fit into this picture?
Do the words Community Reinvestment Act and ACORN come to mind? How about the fact that Obama worked as a community organizer for ACORN. Yesterday I read you some quotes from leaders of so-called community groups bragging about their harassment tactics on banks aimed at getting them to make more loans to unqualified buyers. I'm sitting here waiting for some reporter to ask Obama is he was ever a part of any effort to force a bank to make loans to marginal homebuyers. I'm going to be waiting a long time ... 'cause it ain't gonna happen. Such a question would be clearly anti-Obama. Maybe even racist!

(bold emphasis mine) Once again, hindsight has proven Mac to be right in his judgments. More proof that we need John McCain as POTUS.
     

The Mortgage Crisis Bailout: a Necessary Evil?

I've posted plenty about my opposition to the mortgage crisis bailout. But could it be unavoidable, because letting Fannie and Freddie fail could cause damage to stock markets world-wide, and push us all into a full-blown global recession? And will US taxpayers benefit, more than they would if the bailout did not occur? John McCain addressed this recently.

McCain: Aides may work for $1 a year
Never mind the headline (you can read the rest for that), but it was this particular part that was interesting to me:

[...] Schieffer also asked McCain about the administration’s plan for a takeover of the mortgage giants Fannie Mae and Freddie Mac, to be announced Sunday afternoon.

“I think it has to be done, Bob,” McCain replied. “I think that we’ve got to keep people in their homes. There’s got to be restructuring, there’s got to be reorganization, and there’s got to be some confidence that we’ve stopped this downward spiral. It’s hard, it’s tough, but it’s also the classic example of why we need change in Washington. It’s an example of cronyism, special interest, lobbyists, a quasi-governmental organization where the executives were making hundreds of — some, [a] billion dollars a year while things were going downhill, going to hell in a handbasket.

“This is the kind of cronyism, corruption, that‘s made people so justifiably angry. I did have a long conversation with [Treasury] Secretary [Henry] Paulson — a man I admire and respect — and he did say that when the housing market starts back up, and it will, it will in America — then the taxpayers are going to be the first to be paid off. They’re the ones that are going to be reimbursed when the values of their homes start, hit bottom and start back up, and they start getting more money back in. And that has to be in it, a vital part of it. And again, this is a system that cries out for reform.”

Of course, Fannie and Freddie are government entities that should never have been created in the first place. But the Democrats insisted on giving loans to people who were not qualified. Now we HAVE TO clean up their mess, the problem they created, to keep things from getting worse. Government should not be in the mortgage business. Why? Follow this link:

Fred Thompson on Freddie Mac and Fannie Mae

Pat gives us the most relevant quotes in the above link. I agree with Pat: Let's hope Mac has plans for Fred in his cabinet - as well as Phil Gramm.
     

Mortgage bailout = wealth redistribution

When we bought our first house in San Francisco 14 years ago, we bought a small fixer-upper, with a multitude of problems. We could have gotten a mortgage for a better house, but the payments would have been higher, and money would have been too tight if anything changed in our financial situation.

Well we were smart to go with the fixer. Not long after we got the house, Pat was laid off when the hospital he worked for made cutbacks, and a few months later, I was given six months notice that my job at a Law firm was going to be eliminated. If we had bought a more expensive house, we would have lost it.

In the current national situation, we have a small bunch of people (homes in foreclosure are less than 2%), who made bad choices, and now want "the government" to bail them out. "The government" means tax payers like us, home owner's who chose not to live beyond their means, and renters (32% of households) who have also chosen to be careful, and who are often saving up to buy a house that they can afford. Why should WE all be punished for other people's mistakes?



Losing a house to foreclosure is a hard lesson to learn. But hard lessons also have the benefit of teaching people not to repeat the same mistakes again.

Conversely, bailing people out from the consequences of their mistakes, only teaches them that they do not have to consider the consequences of their actions, because "the government", Big Daddy, is going to step in and fix it for them.

And if the government does it even once, it sets a precedent. If they did it last time, why shouldn't they do it again? And again? And again? After all, they did it the LAST time.

How is this fair to the rest of us who were smarter? Since when is it the roll of government to subsidize foolishness? How is it wise to reward the consequences of bad decision making?

And let's not forget that is was the Democrats who pushed and pushed to have bank mortgages made available to people who couldn't otherwise get them, in the name of "fairness". Now those loans have defaulted, and we who were smarter with our money have to subsidize those who weren't? How is that "fair"?

Once again, the Democrats create a problem, then offer themselves as the solution for the problem they created, using our tax dollars, taking money away from people who earn it and spend it wisely, and giving to people who did neither. It's something to remember, when you vote in November.

H.T. to It’s about time: AngryRenter.com