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.