September 08, 2008

One amusing aspect of the New York Times‘s coverage of the government takeovers of Freddie Mac and Fannie Mae is that throughout the Gray Lady’s 2000-word lead essay, it’s never once mentioned that the two lending institutions have, well, already been federal organizations for the past 70 years (!). The latest “€œnationalization”€ is not too different from the government deciding to step in and take over public education or the forest service.

Both Freddie and Fannie were New Deal projects meant to subsidize homeownership. The only reason that the Times, or anyone else, thinks that the pair are independent businesses is that LBJ enacted a sham “€œprivatization”€ around 40 years ago. In practice, the government became Freddie’s and Fannie’s guarantor”€”the boards could take home or reinvest all the gains, but then they still had access to the Federal Treasury and basically operated under the assumption that the government would cover any major debts. Profits were privatized, losses socialized. And in the wake of the “€œprivatization,”€ LBJ created yet another public lending organization, “€œGinnie Mae,”€ to replace Freddie and Fannie. (Is there some federal law that all government mortgage houses must have cutesy names that make them sound like genteel Southern realtors?)  

With the latest takeover, we”€™ve of course heard that Washington is moving away from the chaos of the wicked free-market. Few are pointing out, however, that Fannie and Freddie made terrible financial decisions, and helped blow up the subprime bubble, precisely because the higher-ups knew that if investments went south, Washington would be there to pick up the tab. And then there’s Freddie and Fannie disastrous involvement in “€œdiversity”€ quotas for lending, which Steve Sailer wrote about here not too long ago. Put simply, the whole “€œsemi-private”€ arrangement proved, in many ways, worse than the out-in-the-open socialism of federal lending during the New Deal era.     

Anyway, the fact that the Times isn”€™t interested in even acknowledging this history lends a certain ironic caste to its reporting: 

Take for instance:  

The seizure of Fannie and Freddie is all the more surprising because, as recently as late March, Washington viewed the companies as saviors of the housing market and the economy, rather than as risks to them. Instead of requiring Fannie and Freddie to scale back, regulators gave them a green light to buy and guarantee more and bigger mortgages.

Being that the whole bloody point of the programs was to flush the housing market with credit, I don”€™t know how anyone could be “€œsurprised”€ that regulators would be pushing for more risky loans to “€œsave”€ an industry whose bubble was about to burst.  

Mr. Paulson added a mantra of his own: he privately said he didn”€™t want to “€˜kick the can down the road and leave the problems for a future administration and Congress to solve. […]

As possibilities were debated, Treasury officials eventually concluded that if they had to act, the best choice was a conservatorship “€” a takeover that would make government backing of the companies”€™ debts and obligations explicit but would remove the companies”€™ leadership while still keeping them operating.

‘They called it “sticking the companies in a timeout,”’ said one person with firsthand knowledge of the conversations. “€˜It protects the safety and soundness of the economy but also gives everyone breathing space.”€™

All these kindergarten metaphors are pretty cloying”€”but then also apt. In giving Freddie and Fannie a little nationalization “€œtimeout,”€ the government is basically allowing the misbehavin”€™ pair not to suffer the consequences of its actions. Most moms can tell you what happens when you reward bad behavior.     


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