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Are you confused by the Fannie Mae/Freddie Mac crisis?


Fred Thompson recently wrote a terrific overview of what this crisis is, the root cause of it, and why the entire thing is dangerous.

Here is his article, in its entirety:

The Danger of Government Guarantees

I'll bet it came as a surprise to most folks that the financial stability of the world as we know it depends upon the survival of a couple of outfits called Fannie Mae and Freddie Mac. Yet that's what the so-called experts are telling us. Moreover, we taxpayers are now being asked to guarantee Fannie and Freddie's tab, one that could make the $124 billion S&L bailout of the late 1980s look cheap.

So how did we get stuck with this bill? Well, Congress wanted to "do something" about what it saw as a "housing problem." To them that meant that they should create an even bigger problem.

So Congress passed laws that made it easier for hopeful home-buyers to buy houses ... even when they couldn't afford them. Then the Fed and other regulators helped, in the form of easy money and loose credit standards for mortgages.

Not surprisingly demand for houses grew, home prices rose, lenders financed additional questionable mortgages, fueling even higher prices and so on. You get the picture. This is called a bubble.

Then an amazing thing happened - apparently impossible to foresee. Home prices did not continue to rise forever! Home prices came down and easy money dried up, causing the above mentioned cycle to reverse. In other words, the bubble burst.

So you'd think the in-over-their-heads homebuyers and the mortgage bankers would take the hit, and the market would right itself. No reason for an international meltdown here, right?

Not so fast my friends. Years earlier Congress established Fannie and Freddie as purchasers of these mortgages, which they could bundle up, repackage and sell to investors, freeing up more mortgage money. As government creations tend to do, the two companies grew until they either owned or guaranteed about half the nation's $12 trillion dollars in mortgages.

Fannie and Fred were "government sponsored enterprises" which means heads they win, tails you lose. If they make money stockholders, creditors and Fannie and Freddie employees - some making millions annually - get the benefit. But now that mortgages have hit the skids, with mounting losses, the taxpayers potentially face trillions in exposure. This is because there is an "implicit" (read "actual") government guarantee of Fannie and Freddie's obligations and both are now too big to be allowed to fail. This is called the "bailout phase," which will probably lead to a bigger bubble in the future.

Lost in this immense, complex mess is the root problem most people are missing: the government is gradually becoming the guarantor of seemingly every important aspect of American secular life, creating incentives and bureaucracies that cause failure and invite fraud.

In Fan and Fred's case, it was in no one's interest to turn off the bubble machine. Just the opposite. The system induced borrowers to take on financial obligations they could not afford and lenders to lower lending standards. Fannie and Freddie went along because their managers' compensation depended on the firms' short term financial performance. And investors continued to buy complex security packages they didn't understand, because the securities were viewed as government-backed.

Heavy campaign contributions by those benefiting from this scheme induced Members of Congress to avert their gaze from the ugly mess that was unfolding.

You'd think we'd have learned by now: when the backstop of the federal treasury makes it easier for politicians, lenders, borrowers, welfare recipients, government contractors, or anyone else, to serve their own self interest at the expense of the taxpayer, many will do just that.

That is why we continue to see self-dealing, moral lapses, outright fraud and lack of management and oversight in a wide array of programs and government-sponsored entities, from housing to Medicare, education and the Small Business Administration, all costing taxpayers billions, even trillions of dollars.

Our Founding Fathers knew more than a little bit about human nature. It is one reason why in the Constitution, the federal government was given certain delineated powers and no others. I hate to burst another bubble, but our government simply doesn't have the authority or the capability to be the guarantor or insurer of our every need or desire. Isn't it time we started sending that message loud and clear to the big enablers in Washington?


Entry #446


jarasanComment by jarasan - September 16, 2008, 5:28 pm
Where in the world is Chuck (Rat Killer) Schumer the senator from New York? He started the run on Indy Bank, on the other side of the country, but why not rat out Lehman, Merrill, AIG, Fannie or Freddie?

I want investigations now!

If you think the economic fundamentals of this country are so bad, why did the markets end up today? Since we are in a depression where did they get the money?

The main stream media disgusts me, Barney Frank, Chris Dodd, Rangell, all of em' need to go, these are the guys which set this scenario up and are blaming everybody but themselves.

Barack Obama needs a teleprompter at a rodeo?

They are hyping this to no end, don't be fooled. We have the lowest unemployment rate in the world, and the greatest GDP in the world. Fannie and Freddie should be divided among solvent mortgage companies and just go away.

95% of Americans pay their mortgages on time, and 95% of Americans are employed.

And tell me if things are so bad how can these Hollywood jerkies afford to give $30K apiece for tickets to go see BS Barbara Streisand sing at a Barry O benefit?
ToddComment by Todd - September 16, 2008, 6:00 pm
I saw that story about Obama needing a tele prompter at a rodeo -- too funny!!!

jarasanComment by jarasan - September 16, 2008, 10:06 pm
Another interesting fact is that before 9/11 and soon after W got to work, they (the repubs) were crafting legislation to reign in the out of control Fannie and Freddie sub-prime- below-prime lending, so this would have never happened. They did get to have some hearings in 2005, but the Barney Frank and the Chris Dodd, and several other banking commitee members(Dems) swept this under the carpet, by claiming the fiscal conservatives (repubs and a couple dems) were trying to shut out the little people from affordable housing, and that there were no problems.

Affordable housing is housing you can take a mortgage out on, but can't afford to pay the mortgage because the (govt. backed) lenders were legislated (forced) to make the loans to everybody (including the riskiest of borrowers) so they weren't afraid to take the risk since taxpayers were to bear the burden. Govt. legislated housing, the communist American dream. Don't you get it? All these loans are guaranteed by the govt., where do they get the money? TAXES! TAXES!TAXES! We floated this pile of money right into the pockets of the likes of Franklin Raines (an Obama advisor!) former ethics troubled director of Fannie Mae! And of course every other GD executive crony in the chain of this scam. They should all be brought out and made to pay it back, how on Earth does someone at a govt. backed organization get a one hundred million dollar bonus, and not be made to account for it in front of a hearing? And this is only one thief!

Soon all affordable housing will be govt. housing (projects) they work out great don't they?

Only once people start taking personal responsibilty seriously and understand that anything the govt. gives you or gets involved with is trouble, will the country get back on track.

If the country falls into this whirlpool of the govt. incrementally taking control of chunks of the economy/society/rights we are cooked. Look at Venezuela, I know people there, middle class, here is how Hugo's economy/society works now: store shelves nearly empty, all the basics hard or impossible to obtain, no reliable infrastructure, high unemployment, govt. run banks, govt. run media, disappearing people, military spending run amok for no other purpose other than fomenting instability, (and securing drug shipments) etc. get it? Hugo likes to chew the coca!

Only the Venezuela govt. big shots are benefiting from this system.

The epitome of insult to injury is the jerky Charles Rangell of New York, he is responsible for IRS oversight, he doesn't pay taxes on rental income for years (you try that), has a cadillac on your dime, has a +120K salary, has full pension, med. benefits, has four apartments, all paid for by you! Yeah keep voting for these jerks. Blatent abuse and he is still on commitee, I say forfeit all, he is not looking out for us, he is DEFINITELY in it for himself, sickening.
jarasanComment by jarasan - September 16, 2008, 10:19 pm
Oh yeah Fred Thompson is spot on! I worked at Fannie as a contractor in the mid 80's thru to the late nineties and my folks live a couple blocks away from 3900 Wisc. Ave.. I had an idea what they did but never thought it would get to where it is today. They had what appeared to be endless PO's.
ToddComment by Todd - September 17, 2008, 9:38 am
@jarasan: great comments, very insightful, thanks!

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