(Image: Bucktheslump.com)
So much for the invisible hand of the free market. The Fed’s hairy, gnarled fists will soon spread open to stop Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac from falling into a financial black hole.
From the Globe and Mail:
The Treasury plan means that for all practical purposes, Fannie Mae and Freddie Mac “are being nationalized,” William Poole, a former governor at the Federal Reserve, told Dow Jones news agency in an interview. “The obligations of Fannie Mae and Freddie Mac are now full faith and credit obligations of the U.S. government.”
Wasn’t Fannie Mae a national agency to begin with? During the New Deal era, the enterprise was designed to create mortgage market liquidity to help “average” (read: not affluent) people buy homes. It operated as a national savings and loan supplier until the Vietnam War, when Lyndon B. Johnson privatized it in order to remove it from the government’s balance sheets.
Only during the past three decades have Fannie Mae and Freddie Mac become huge, inefficient, lucrative lending machines. Note that their fortunes come not only from stockholders, but from implied government backing, tax-exempt status, lack of oversight, and injections of foreign money enabling them to sell loans at a discount. Both companies are on the Fortune 500, but aren’t required to tell the public a thing about their operations.
Now, stockholders are offloading company shares, and it looks like Fannie and Freddie will go bankrupt without federal assistance. To this, I say: So what? Fannie was formed as a government agency; both Fannie and Freddie essentially grew up in incubators, and now a financial crisis has exposed them to open air.
Bernake is right. The economy is under considerable stress. The Feds need to step in. Afterwards, they need to restructure both agencies in a way that begets transparency and efficiency while encouraging private investment. It’s a fine balance to strike; I don’t envy the policymakers who have to come up with good solutions.
Decrying nationalization even as a temporary plug has serious flaws. I don’t advocate it as a blanket policy, but I also don’t think the American market is a “free” one (black markets, such as the drug trade, are the closest thing to free markets people have come up with). So the “market will right itself” arguments are pretty much moot in a case involving two highly-supported pet entities like Freddie and Fannie.
What do you think?
I also found the following resources interesting:
LA Times commenters have good points on both sides of the nationalization argument.
Curbed LA displays the downside of federal intervention: Paranoid customers meet private-bank vultures, start fights, and call another corrupt institution for help.
Holman W. Jenkins, Jr. has a good opinion piece on the topic in the Wall Street Journal.
I agree. The government needs to step in and take control of the mess within our economy. The “invisible hand” and what have you are illusions. We already have regulations in our economy, and we need more. Look at Japan’s post WWII success. Obviously we cannot become a developmental economy because we are already developed. What I do believe is the most important issue is the nationalization of oil. I believe this is imperative to the well-being of our economy. The government should provide cheap, affordable oil and natural gas, obtained from this country or atleast this continent, until we can go green. Even then, certain aspects such as nuclear should be in the hands of government. If power is shifted from corporations to actual elected public officials, that will change everything.