Think Twice Finance

Fannie and Freddie – Is the Public Itself in Denial?

Evan Newmark points out (WSJ, Aug 15, 2008) the fundamental facts of Fannie Mae and Freddie Mac’s (henceforth F&F) existence. None of them are news but his conclusion, that F&F should be closed, is news of a sort. I have not seen this conclusion before in the popular press, although it’s been my position and that of many other experts since F&F were created as entities separate from the Treasury in 1967. Since the decision to close is so obviously appropriate, I thought it would be useful to list the reasons. The purpose is to make what I think is an important point. F&F are the emperor’s new clothes – a situation so obviously inappropriate, yet so embarrassing for the public that it does not want to acknowledge it. We need some callow youth to jump out of his chair and say, “Look! F&F have no redeeming social value.” Barak Obama comes to mind.

OK, so what’s wrong with F&F?

1. F&F were chased off the Treasury’s debt roles in 1967 to perpetrate a fraud upon the American public. The taxpayer was to believe he was not bearing the burden of the agencies’ debt. As recent events have made indisputable, that belief is and always has been a corrupt deception.

2. F&F perform an undesirable function. To provide cash for mortgages that banks can buy without concern for the willingness or ability of the ultimate homeowner to pay the mortgage back is a dangerous policy. The danger is, of course, that very risky homeowners will ultimately do the borrowing. Recent events have taken that risk out of the realm of possibility and made it certainty.

3. There is no control on the size of these agencies. As a result, they now cover half the country’s private housing debt. The amount doubles the size of the Federal Deficit.

4. They are a corrupting influence. Entrepreneurs think “If we can get away with this, what can’t we get away with?” The answer, for Mortgage Sellers, Most Large US and European Banks and some Investment Banks has been, “Almost Nothing.”

5. Perpetration of corruption is among the duties of the Secretary of the Treasury and the Chairman of the Federal Reserve. Paulson understands this; Bernanke is in apparent denial.

6. The new “reform” law perpetrates the status quo. It leaves the fraudulent agencies in place, encourages them to get on with their job of subsidizing bad mortgage practices, and provides further assurance that the Treasury will bail them out. (But Secretary Paulson has hired a Goldman Sachs guy to reform all this some years from now. So all our worries are over.)

I have one question. Which of these six points is the public not capable of understanding? My answer is “None of them.” Yes, the public is fed a lot of s— and kept in the dark as though they were mushrooms. But the public is used to this. They figured out they were being treated like that in foreign policy, didn’t they? The public figured that out in health insurance, haven’t they? I think they’ve figured it out here too. F&F are going away. I just hope many, many senators and congressmen are going down with them. But America, triage is best done quickly.