Wednesday, September 17, 2008


The biggest "scandal" of Fannie Mae and Freddie Mac is that they exist. Now that it's official that you and I "own" them, let's break them up, and sell them off to private firms, over the next few years. These corporations were "tools" for the government, to provide "liquidity" and "stability" in the housing markets. If you don't know it, these two objectives were at odds with each other, when housing prices "crashed." "Liquidity" means that if you want to sell a house, you should be able to find a buyer fairly quickly. "Stability" means that if you want to buy a house, it is going to be a good investment, over the long term. Fannie and Freddie have proved to be a failure at both of these policy objectives.They serve no purpose, other than political power over a large piece of the economy, for their political patrons.

Because they had the implicit backing of the US taxpayer, they were allowed to grow larger than they should have, and to gain political and bureaucratic influence greater than any normal publicly-traded private corporation had. While their support in congress was somewhat bipartisan, any quick look at their corporate leadership shows mostly Democrat names involved in their many scandals. Fraklin Raines, Clinton's former budget director, resigned in shame from Fannie, and Jamie Gorelick, contributor to the Reno Justice Dept's "wall between intelligence gathering and law enforcement" (who later minimized her role in that policy, when sitting on the 9/11 commission), was vice chair of Fannie from 1998-2003. Both of these individuals are millionaires, thanks to altering Fannie's books to give them larger bonuses.

Fannie's original mandate was to loan money to banks, for mortgages. Freddie was created by the US government after Fannie was "privatized," to provide "competition." David Frum has an excellent piece from July of this year, which gives a brief history of these institutions, and even predicts "the voters will likely exact a political price for the debacle from John McCain and the Republicans - even though the party most tainted by the failure ought to have been the Democrats." This is why, when Fannie and Freddie did get bailed out, Obama outright blamed it on the GOP; he's following a script written a long time ago. I don't think it will wash with the voters, this time.

Look at the government bailout of AIG insurance company. It's being loaned $85 billion, as it sells itself off to other companies. The government is hoping to make back the $85 billion from the sale, but the important thing is that AIG customers still have insurance. Fannie and Freddie should be treated the same. It's a bigger "hit" on the budget than AIG will be, but it's worth it to get rid of these corrupt bureaucracies, and the political poison they've spread in our economy. The difference between Fannie/Freddie and AIG is who their customers are.

Who are Fannie and Freddie's "customers?" Banks. Some try to claim that "poor people, trying to stay in their homes" are Fan/Fred's real customers, or that "we all" are dependent on these institutions, in some way that is beyond our ken. I understand exactly how the default of these entities would affect the world economy, not just ours. They can not be allowed to wreak havok on the economy, because each time they do, it seems exponentially worse.

The modern world has surpassed the efficiencies these companies provided, decades ago. Liquidity has been improved by technology, and stability was sacrificed by low interest rates, as housing prices drastically increased. Their (Fan/Fred's) accumulated debt now has been added to our government's balance sheet, but there is no political will to sell them off as soon as possible, and wash our hands of them. Why? Because of the money they pump into our elected representatives.

I don't hold the Dems solely responsible for this scandal. John McCain was in the top 20 recipients of their political donations, over the last few decades. I just find it interesting that Barack Obama was the second highest beneficiary of their political favor, second only to Chris Dodd. Now, McCain and Dodd have been senators for a LONG time, and Obama has only been a senator for a few years. How did he end up in the number two spot on this list, and why does that make me think that "he doth protest too much," when he blames Fannie and Freddie's failure on the GOP?

Fannie/Freddie are long overdue for a "special investigation," as long as it is of a criminal nature. These corrupt enterprises need to be stripped of their political cover. I was aggravated that Bush didn't do this in 2003, but understand that he was using all of his "political captal" on Iraq at the time. Now, it's up to McCain to take the point on this, because Obama surely won't.

This issue ought to be "front and center" in the election debate. Fannie and Freddie have been plagued with scandals, and it would be interesting to see exactly who promoted giving "sub-prime" mortgages to people who couldn't afford a house, and relaxing the "regulations" on getting mortgages "without a credit check." Was it all done by the Bush administration, and the GOP? -Or was there signifigant support from the Dems, particularly Sen. Obama? Let the truth come out, and all of the players come to light, regardless of party affiliation.

Hat tip to Rob Port, of Say Anything, and Michelle Malkin.

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