The problem I have with the Fannie and Freddie debacle is not so much the quick-fix, economic rescue of these massive, government-backed organizations announced this weekend, using billions of dollars of our tax money to bail them out. I believe that was inevitable given the structure of how they were setup to begin with and the level of the housing market they hold. But rather the root problem for me lies in the fact that they were ever created to start with. Their rescue was simply the place this whole thing had to end up.
Here is some background on all of this. According to an article at Time.com (cited at the end of this entry), Fannie Mae was established 70 years ago in 1938, during the Great Depression, by Franklin D. Roosevelt, who himself was a strong proponent of the “new liberalism” that had abandoned its historic roots associated with free, unfettered markets (the ideology of classical liberalism). He established the company, with government money and promised backing, to rescue those during the Great Depression who had defaulted on their loans, thus paving the way for low to middle-income home buyers to obtain a house.
Now, to be honest, there is a lot of short-term good this did (and maybe even some long-term good): it made it possible for people who otherwise couldn’t get a home to now become home-owners. But as with most socialist-type, government-intervening schemes, such as this, they work well in the short-term at patching a problem and yet neglect the long-term effects, creating a bigger problem. It works much in the same way pain killers do by only keeping the pain at bay, without addressing the cause of the pain (which could be a fatal move).
Eventually, over time, the Vietnam War came, and Fannie Mae had grown so large and had become such a strain on the government budget that it was turned into a publicly traded company. Then Freddie Mac was born so Fannie wasn’t a monopoly (creating what would become a double problem, from a free market perspective). So now there were not one, but two government-backed organizations in control of a great amount of the mortgage market.
Over time, these organizations came to dominate the mortgage market in ways not one anticipated. Eventually, the housing market was run up into a bubble, in our present day, and as everyone knows in even basic economics, nothing lasts forever and corrections are inevitable. The bubble burst and people are now hurting.
However, the difference this time more than with other economic bubbles bursting in the housing market is that homeowners and financiers alike all unwisely bit off more than they could chew. Homeowners bought too much house for what they could afford with adjustable-rate mortgages and mortgage companies unethically handed out loans to people they knew shouldn’t be getting them to start with. Needless to say, it caught up with everyone. Even those of us who weren’t directly involved in these mortgages.
With Fannie and Freddie taking up a majority of the mortgage market, the inevitable meltdown meant disaster for the entire housing market. With so much mortgage debt tied into these two companies, which is a very bad thing, the only logical, (I believe) inevitable solution to keep them afloat (which would keep the housing market afloat, which then affects other markets domestically and internationally that are now systemically intertwined with all other markets … (deep breath) was to bail them out. This bail out unfortunately had to be done to keep world markets from beginning a domino-effect tailspin into economic oblivion (or at least another economic depression possibly on the scale of the 1930’s).
So what happens now? Hopefully, with these two companies in the control of the Feds, they will be reorg’ed and gradually sold off to private firms. This seems to be the best option to return this largely government-owned market back to the private sector, thus getting the government out of the middle of private markets, something that should have never started to begin with, no thanks to FDR’s “new liberalism”.
This is what happens when the government meddles too much in privatized markets (even when it’s hard): people eventually wind up getting hurt in the long run. And it’s not just those who signed on to the mortgages either, it’s everyone else in the nation who has been affected by others’ poor decisions. That’s the way socialism works: everyone either wins (like in China’s economic boom right now), or everyone gets to take a bite of the bitter herb that was sown (like in the former USSR, Cuba, North Korea, Venezuela, et al.).
This is a case in point study for a macro economics text book of why socialism, even democratic forms of it (supported by none other than Barack Obama) just don’t work in creating wealth for economies. Only free, unfettered, democratic capitalism has proven to be the best solution for creating the wealth of nations.
The foundations for this bail out were laid several decades ago in the very creation of this government-owned organization that had a large stake in the housing market. It just simply should have never happened. What should FDR have done? Honestly, I’m not historically knowledgable enough to answer. Maybe he could have temporarily set it up and later on had it moved back into the private sector. That may have been do-able in the short-term to resolve their economic woes. However, not only did that not happen, but they were allowed to get gigantic.
Therefore, this whole thing should serve as a cautionary tale for us in the present day in who we select for President, the choices we make in the coming years, and for future generations in the choices they make.
Historical information taken from this article at Time.com: