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Comments and observations on social and political trends and events.

Monday, July 14, 2008

Freddie Mac and Fannie Mae: The New Deal Legacy Comes Home to Roost

With the Fed pondering what to do to stave off the collapse of Freddie Mac and Fannie Mae it’s only a matter of time before the pundits start intoning about yet another alleged failure of the market. The Von Mises Foundation has posted several good articles explaining the history of these institutions and their impact on the financial markets.

Freddie, Fannie, and Curses on FDR

Ludwig von Mises had a theory about interventionism:

It doesn't accomplish its stated ends. Instead it distorts the market. That distortion cries out for a fix. The fix can consist in pulling back and freeing the market or taking further steps toward intervention. The State nearly always chooses the latter course, unless forced to do otherwise. The result is more distortion, leading eventually, by small steps, toward ever more nationalization and its attendant stagnation and bankruptcy.

Government intervention is like a vial of mutating poison in the water supply. We can get by for a long time and no one seems really worse off. One day we wake up and everyone is desperately ill, and blaming not the poison but the water itself. So it is with the housing crisis. Lenders are being blamed for the entire fiasco, and capitalism is going to be subjected to a beating as usual, since Freddie and Fannie are traded in public markets. But the fact remains that there is only one reason that this went on as long as it did and became as bad as it is. It was that vial of government poison.

Freddie Mac: A Mercantilist Enterprise

While these institutions have been privatized to a degree, they still remain tied to the federal government in some important respects. In fact, Fannie Mae and Freddie Mac have access to a guaranteed line of credit of $2.25 billion with the U.S. treasury. This guarantee, coupled by the perception that federal money would be used beyond the extent of the credit limit, allows both companies to maintain lower borrowing costs than would otherwise be the case. In many cases, the companies are able to sell bonds yielding only a few dozen basis points above U.S. treasury benchmarks. If the government's guarantee disappeared, the borrowing spreads for both companies would widen. Beyond the government's line of credit, these companies are also exempt from state and local income taxation and are exempt from SEC filings. Moreover, their securities are listed as government securities and can be held by banks and thrifts as low-risk bonds. These benefits provide a significant advantage since such privileges are not offered to other financial institutions.

Fannie Mae: Another New Deal Monstrosity

Fannie Mae is not a free-market entity, nor is it a private body that must compete on the same playing field as its competitors. Fannie Mae is representative of all that's wrong with central planning institutions: it is a government-created conduit for carefully crafted financial and market socialism that the bureaucrats uphold for the purpose of propping up their fantasies for pandemic social engineering.

There's nothing "American" about this dream. In the eyes of the Republic's visionaries, this particular dream has turned into a nightmare.


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