Sunday, September 14, 2008
Fannie & Freddie
The recent receivership of Fannie Mae and Freddie Mac are perhaps the most important financial stories of the decade. Enron? WorldCom? Pikers, by an stretch of the imagination. With the receivership, the federal government has taken on not billions, but trillions of dollars of liability. In short, Fannie and Freddie are a collapse of proportions we have not seen in years. If a year or two ago, someone said that the GSEs would be in receivership, I would have said you were insane or pulled out a cyanide capsule. The fact that the media has treated this as a non-story is both telling and deeply, deeply troubling.
Mickey Kaus recently suggested that the Fannie/Freddie collapse would be a great issue for Barack 0bama to take on. With all due respect to Mr. Kaus, I think the right camp to own this issue would be John McCain and Sarah Palin. You see, the operations of Fannie Mae and Freddie Mac never had anything to do in the least bit with the free market. Instead, they are a case study in how government intervention in the free market fundamentally betrays the the American people.
Fannie Mae and Freddie Mac were never free market enterprises. They were creatures created by the government with an implicit guarantee from the government. Because of this, they could borrow at rates vastly lower than their free market competitors. This, in turn, created what they viewed as an arbitrage. They could buy their own mortgage paper and recognize the spread between the paper and their borrowing costs. As a result, so long as the paper remained strong, Fannie and Freddie were money machines.
And the Democrats took advantage of this money machine in spades. The GSEs were long recognized as Democratic sinecures. Franklin Raines, the long-time CEO of Fannie was an assistant to Walter Mondale in the Carter administration. Jim Johnson, another long-time Fannie CEO, was also influential both in the Carther administration and the campaign of presidential hopeful Barack 0bama. Jamie Gorelick, the long-term counsel of Fannie, was....well...we all have learned about Jamie. Conservative Republicans, on the other hand were long recognized as lunatic critics of Fannie and Freddie. Now, all of a sudden, their criticism isn't looking so looney.
In short, the GSEs are perfect target for a conservative populist revolt. Barack 0bama has already made clear that he envisions returning them to their previous status. Campaigning against the corruption that these organizations represented could do a lot to reinforce the McCain campaign's status as reformers. The American people have a right to expect their political leaders to not use the public trust to enrich their allies.
The recent receivership of Fannie Mae and Freddie Mac are perhaps the most important financial stories of the decade. Enron? WorldCom? Pikers, by an stretch of the imagination. With the receivership, the federal government has taken on not billions, but trillions of dollars of liability. In short, Fannie and Freddie are a collapse of proportions we have not seen in years. If a year or two ago, someone said that the GSEs would be in receivership, I would have said you were insane or pulled out a cyanide capsule. The fact that the media has treated this as a non-story is both telling and deeply, deeply troubling.
Mickey Kaus recently suggested that the Fannie/Freddie collapse would be a great issue for Barack 0bama to take on. With all due respect to Mr. Kaus, I think the right camp to own this issue would be John McCain and Sarah Palin. You see, the operations of Fannie Mae and Freddie Mac never had anything to do in the least bit with the free market. Instead, they are a case study in how government intervention in the free market fundamentally betrays the the American people.
Fannie Mae and Freddie Mac were never free market enterprises. They were creatures created by the government with an implicit guarantee from the government. Because of this, they could borrow at rates vastly lower than their free market competitors. This, in turn, created what they viewed as an arbitrage. They could buy their own mortgage paper and recognize the spread between the paper and their borrowing costs. As a result, so long as the paper remained strong, Fannie and Freddie were money machines.
And the Democrats took advantage of this money machine in spades. The GSEs were long recognized as Democratic sinecures. Franklin Raines, the long-time CEO of Fannie was an assistant to Walter Mondale in the Carter administration. Jim Johnson, another long-time Fannie CEO, was also influential both in the Carther administration and the campaign of presidential hopeful Barack 0bama. Jamie Gorelick, the long-term counsel of Fannie, was....well...we all have learned about Jamie. Conservative Republicans, on the other hand were long recognized as lunatic critics of Fannie and Freddie. Now, all of a sudden, their criticism isn't looking so looney.
In short, the GSEs are perfect target for a conservative populist revolt. Barack 0bama has already made clear that he envisions returning them to their previous status. Campaigning against the corruption that these organizations represented could do a lot to reinforce the McCain campaign's status as reformers. The American people have a right to expect their political leaders to not use the public trust to enrich their allies.
