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Fannie and Freddie: Can We Finally Admit the New Deal Failed?
From The Daily Capitalist
The Federal National Mortgage Association, fondly known as Fannie Mae, lost another $11.5 billion in the first quarter, its twelfth quarterly loss in a row, and is asking the taxpayers for another $8.4 billion to bail it out. According to the Wall Street Journal article, the company has lost $148 billion or about double the profits it has made in the last 35 years. This cute couple, Fannie Mae and Freddie Mac (the Federal Home Loan Mortgage Corporation), have cost taxpayers about $145 billion from the collapse of the housing bubble.
As you know the government has agreed to backstop these companies by guaranteeing their losses. What were quasi-governmental entities are now clearly labeled as government enterprises which is what they always were. Fannie, Freddie, and the Federal Housing Administration, which isn't given a cute nickname, guaranteed 96.4% of all mortgages made in America in Q1 2010. Fannie and Freddie have about $5.5 trillion in mortgage assets.
Despite their losses, the firms are helping to stabilize the housing market. ... The companies also play a central role in the Obama administration's loan-modification effort designed to avert foreclosures.
But, as the Bloomberg article on this story points out, foreclosures have increased:
Even with the assistance, Fannie Mae increased foreclosures to almost 62,000 homes from about 47,000 in the prior quarter, according to the filing. The company’s foreclosure rate increased and its inventory of homes grew from $8.5 billion to $11.4 billion during the first quarter.
Please see my earlier article today on "Mortgage Problems Remain High" which shows the latest foreclosure related data. It remains high and is growing. The government's attempts to "stabilize" the housing market have failed and taxpayers will be stuck with the bill. Both companies are in "conservatorship" with the new Federal Housing Finance Agency (FHFA) which essentially means "nationalization."
Is it not clear that these government programs have been a colossal failure.
Understand that the operative word in the failure of these government sponsored agencies is the "Federal" part of their names.
Fannie, Freddie, and the FHA were all formed in 1938 as a part of Roosevelt's New Deal programs to stabilize the housing market by creating liquidity in the mortgage financing system. Recall that in 1937 the economy had collapsed again, and FDR's Brain Trusters were casting about for a new programs to replace the ones that failed or were struck down as being unconstitutional. Many of these Brain Trusters were inspired by Stalin and especially Mussolini. In the 1920s and 1930s these dictators were considered by some as forward looking and worthy of emulation.
Progress, it was thought, resulted from active federal intervention into almost every phase of American life. A bunch of smart young "experts" trained at our finest eastern universities would come up with "new" "progressive" solutions for outdated capitalism. FDR clearly sought to expand the power of the central government. As he said in 1934:
The tremendous power of organization has combined great aggregations of capital in enormous industrial establishments... so great in the mass that each individual concerned in them is quite helpless by himself.... The old reliance upon the free action of individual wills appears quite inadequate.... The intervention of that organized control we call government seems necessary.... Men may differ as to the particular form of governmental activity with respect to industry or business, but nearly all are agreed that private enterprise in times such as these cannot be left without assistance and without reasonable safeguards lest it destroy not only itself but also our process of civilization.
Sound familiar? It didn't work then and it's not working now. In fact the exact opposite of their policy goals have occurred.
There is so much misinformation about the Great Depression and the New Deal that it requires several books to straighten it out. The bottom line is that Hoover and Roosevelt turned a garden variety market crash into the worst economic depression of modern times. The very policies they implemented actually caused the depression and delayed recovery for 20 years. You will recall that the DJIA didn't recover to pre-1929 levels until 1954. The market crash of 1920 was deeper (initially), resulted in a recession that had higher initial unemployment, yet it recovered in 18 months because the government (the unfairly ridiculed Harding Administration) did essentially nothing.
I will further assert that one of the major causes of our economic crisis was due to the financial guarantees that Fannie and Freddie gave to the housing market. These guarantees allowed huge amounts of fiat money created by the Fed to be funneled into the housing market. Without these guarantees, the housing market would not have had the boom that it did. Regardless of the fact that these mortgages were packaged up into vehicles that were improperly evaluated for risk, no one in their right minds would have lent money to a borrower with a credit score of 500, less than a 5% down payment, and liar loan documents. Yet they did thanks to Freddie and Fannie.
The government is doing everything they can to reflate the housing market and start the boom-bust cycle all over again. Now is the time to allow the free market in housing to function without the boom-bust causing interference of the government. Both Fannie, Freddie and the FHA should be abolished and let the market find the correct mortgage lending standards. Let the market take the risk of lending, not the taxpayer.
For reasons related to a lack of understanding of economics, these relics of the New Deal still persist because of the belief of many in government that they actually serve a valid economic function. It seems that the market can provide us with enough cars, computers, and hamburgers at reasonable prices through competition without government intervention, so it can with housing.
The consequences of continued interference in the housing market will only continue the vicious boom-bust housing cycles that have so harmed our citizens.
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> Fannie, Freddie, and the FHA were all formed in 1938 as a part of Roosevelt's New Deal programs
Correction to the above: Freddie was formed in 1970.
That's when these GSAs were privatized.
I though Fannie was privatized in 1968, but Freddie didn't even exist until 1970. Freddie was created in part so that the newly privatized Fannie would have some market competition.
While we're at it, isn't it time to fess up about the Reformation too.
Speaking of that morally, intellectually AND physically crippled Roosevelt, isn't it funny how all the American presidents that we are taught to admire and worship in (government) schools --- presidents such as Lincoln, Wilson, and Roosevelt --- are the very ones who amassed new and unprecedentedly larger power to the federal government?
In my view, these three were the most insidious and evil of all American presidents. And as much as I loathe that elitist crypto-fascist Roosevelt, I have to consider Lincoln the single most disastrous and evil president, for instigating an unnecessary civil war and the associated, largest ever expansion of the federal government.
Bing-fxxking-O!
10 extra food rations for akak.
It is the deification of the State, it's priests, and it's martyrs.
Someone's been reading their DiLorenzo.
Indeed, I do have his book "Liincoln Unmasked" on my shelf, but I haven't started it yet. I was waiting for an appropriate rainy day, or maybe the day the market crashes for good and the power goes off in short order --- I will be absolutely despondent without all the pump-monkeys on CNBC to shoot rubber darts at!
Great essay Econophile, but one nit; wasn't Freedie Mac created in the late 60's/early 70's?
Other than that, right on!
That's when these GSAs were privatized.
Just give them a blanc check and get it over with.
Aready gave them not one, but a pile of blanc checks.
We're just observing the drawdowns each quarter.
How do you loose 11.5 and only need 8.4??? Saving some for next time?
There was no deal. There was a scam.
Posted many times on this issue - the book of business starting in 2009 is very clean and will be profitable (760 fico/70 ltv). The mandate to expand home ownership at any price caused was the problem. The issue of tomorrow is FHA. If they PV the book of business with reasonable loss assumptions, they are in the red by 100bb- on a book of biz ONE FITTH the size of the GSEs. WHERE IS CARL LEVIN on this FRAUD
ohhh he's too busy voting against the full fed audit...
You all need to get up to speed to think that "failure" exists anymore.
Where have you been these last 3 years?
Point to one "failure"?
Go ahead. Name one.
Exactly.
Everybody is equal
=> Everbody's opinion is equal
=> Every opinion has at least some truth to it
=> Nobody is totally wrong
=> Failure does not exist.
If only high credit scores allow anyone to buy a house, then the housing market goes no where, but down, from here. Why? Because the banks have screwed the credit of almost every consumer in the country. How?
A credit card RATE SCAM, running up card holders rates on one late payment. Card holder says, Kiss my Butt, take your card and cram it & there goes their credit score. Now who can buy a house?
How did the credit card companies get acquired the banks? GUESS?
Who got the most money from credit card companies before they were acquired by the banks and who changed the bankruptcy laws?
This has been a property grab, plan and simple. By WHO? THE BANKS
Run Banksters!!!! Run!!!
Where is the next crash? Imagine an R.E. Boom Now.
http://bit.ly/1ax9Pw
yes i admit that the new deal was a colossal failure. it was a totalitarian scheme to put banksters in charge of the country much as bernard baruch wanted it....
murray rothbard has definitively dismantled the philsophical lies and economic voodoo upholding that swindle as the balm in gilead.
hoover was the carteresque technocrat who started the fraud while fdr was the fratboy who took it to new heights. morganthau's assessment was pointed and accurate when he observed that the new deal had failed in its objectives.
indonesian citizen obama fancies himself as both hoover and fdr rolled into one giant poobah of economic literacy and hokum as he does the rockefellers' bidding while acting like a 3d world dictator running his mouth at twice the speed of fraud.....
If we are really in need of a cute name for FHA, why don't we call it "Fay"? I realise that is pretty pedestrian, but Fa, FooHa, and Falluja just don't seem to cut it.
As to stabilising the housing market, with stability like that who needs poverty.
We may as well call it the Obama Road to Government Arranged Serfdom Machine. I'll let you work out the acronym for that, suffice it to say our politicians are using these agencies intensively and seemed to be quite pleased with themselves.
The ultimate partisan issue. The New Deal goes to the heart of the philosophical divide between Right and Left. Not that supposedly Right-leaning politicians can be depended upon to get it right. As human beings they are every bit as subject to corruption and just plain bad ideas as anyone. Then there is the problem paradox of small government, in that it must be enacted by those willing to place severe limits on their own power. A difficult thing for the sort of personality capable of winning high office.
The New Deal brought us so many bad ideas and opened the way for so many more. And those bad ideas will keep becoming bad choices and bad laws so long as FDR remains beatified for so many.
"The ultimate partisan issue."
+1.