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  • Fannie and Freddie Caused This Crisis and They Must Be Terminated

    The left is slowly beginning to wrap their heads around the fact that it was too mush government intervention in the market, not too little, that caused the current financial crisis. In an article at Slate defending government subsidization of subprime loans, Daniel Gross writes:

    Let’s be honest. Fannie and Freddie, which didn’t make subprime loans but did buy subprime loans made by others, were part of the problem. … There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb-lending virus originated in Greenwich, Conn., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington, D.C. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them—frequently using borrowed capital.

    So Gross is finally willing to admit that Fannie and Freddie were part of the problem, but still wants to lay the lion’s share of the blame on Wall Street greed. As if greed was invented yesterday. As John Steele Gordon documents in today’s Wall Street Journal, our country has a long history of financial break downs, do mostly to bad government regulations enacted to combat greedy bankers. Turning to today’s crisis he writes:

    In the 1990s interstate banking was finally allowed, creating nationwide banks of unprecedented size. But Congress’s attempt to force banks to make home loans to people who had limited creditworthiness, while encouraging Fannie Mae and Freddie Mac to take these dubious loans off their hands so that the banks could make still more of them, created another crisis in the banking system that is now playing out.

    Even George Soros, prolific funder of left-wing causes, writes: “There are four fundamental problems with our current system of mortgage financing. First, the business model of Government Sponsored Entities (GSEs) in which profits accrue to the private sector but risks are underwritten by the public has proven unworkable. … It would be a grave mistake to preserve the GSEs in anything resembling their current form.”

    So who on earth could possibly still want to preserve massive government intervention in the U.S. mortgage market by preserving Fannie and Freddie? The left’s leadership in Congress that’s who. Just last month Senate Banking Committee chair Chris Dodd (D-CT) told The Hill: “I think the burden falls on them to describe what they’re going to put in [Fannie and Freddie's] place. And if their argument is we don’t need anything in its place, then you just dealt a very severe blow to the residential mortgage market and homeownership in this country.”

    That is why the debate over whether or not Fannie or Freddie caused this crisis is so important. The left’s leaders on Capitol Hill still see nothing wrong with maintaining a constant political influence over the residential real estate market through the continued existence of Fannie Mae and Freddie Mac. Defenses of the status quo like Gross’ only make real reform harder.

    Posted in Economics [slideshow_deploy]

    4 Responses to Fannie and Freddie Caused This Crisis and They Must Be Terminated

    1. Fred W. Korkisch, Sa says:

      Could anybody, with a few university semesters in Theroy of Economics, agree to the fact that the current situation was looming for many years in the dark? I remember President Reagan and his Suppy Siders fighting the erratics of the stock market in 1987, and when Bush sen. faced the Loan and Savings crisis in 1989/90.

      A personal experience: The house which I bought in 1966 in SB with a good view to the Pacific Ocean, did cost me then $ 37.000 cash; it is now worth 1 Mio., and I got many offers. But is this sane?

      There are a number of different developments which finally resulted in bad (you could wery well say "devastating") combinations which were affecting the banks, the stock market, the clientel, the Dollar, the credit business, and the manufacturing and service businesses alike.

      There were weak signals and warnings that something could go wrong, but the warnings were certainly there. The warnings were coming from editorials in Business Week, Fortune oder Forbes, and from economic commentators in the newspress – for years! Mr. Greenspan certainly felt uncomfortable when he saw the business data in 2005 and 2006, many based on artificial growth and a GNP which grew neary 4% per annum, without any savings, a huge national debt (but still much smaller than the debts of most European states), and an unhealthy trade deficit in favor of China and the Middle East and other OPEC states.

      What was dicussed behind closed doors in the Oval Office was not communicated to the rest of the nation, but insiders knew that there was always the danger of a collapse – the question was when, and how wide and deep. Remember, we had a lot of bailouts after "9/11", and some more in 2007 without much fanfare.

      In fact, the U.S. Government did the right thing, but it is the American public which made things go the wrong way – by overspending and risking too much indebtnees for things which have a very short life cycle, or non at all. The banks lost their estimates, but how could they present year by year annual repots showing profits?

      Remember the problems of low saving rates and lending practices, which fully contradicted the rules of Basel II, which were demanded by the Treasury and the Federal Reserve, but broken by everybody in the banking business when extra profits seemed possible?

      And there were the other, well known boosting effects which include the oil price, inflation, the somewhat too steep rise of the prime rate, the real-estate boom, the bad habit of a lot of people without much money but investing in high-risk stocks and houses, the fact that US customers bought too many foreign products because (a) they seem to be or are cheaper, and because (b) they aren`t even made anymore in the good old US.

      The growing dependence on imports is destroying not ony manufaturing but skills in the work force as well. There were too many artificial gains and profits, bad management and in a few cases fraud (ENRON, we remember, was just one of many), excessive national debts and lack of oversight in a so-called "regulated" but essential very free market.

      A lot of people simply forgot that true income is mainly based one people who are working for their money, making foremost durable goods, and not selling hambugers. Working and manufacturing is the only chance to keep America`s economy and whereabouts healthy.

      Strangely, this currently collapsing model was copied in Europe and Asia, respectively in all the "miracle Economies" based on petro-$-income and the profitable Asia business. They are now all disappointed – and they will even be more, because the next technology jump is the car which runs on anything but conventional fuel.

      Even Russia is losing quicky what it had won by pressing Europe into its cheap but now politically very expensive oil and gas deals. China is realizing that annual growth rates of 10% do not mean much, and e.g. Venezuela will now have to pay the Russian weapons via taxes.

      By the way: Mr. Chavez is wasting the wealth of this country on promises made to Cuba and other true democracies, and is also spening all extra income on Russian weapons, weapons which his third-class military will not be able to master. Maybe Chavez never reads much and nothing about failed states, and avoids books about the history of socialist government, a quite sad reality, and he never has heard about Soviet GOSPLAN-economy. But this is exactly the way he has chosen…

      Anyway, America will come back. How fast, will probably depend a little bit on the man who will sit in the White House, and maybe also on Congress, but mainly on the general public. It will be either McCain or Obama, but history demonstrated that good men always grow with their job.

    2. Pingback: Jason’s Blog » Blog Archive » Fannie and Freddie Caused This Crisis and They Must Be Terminated

    3. Mark in Houston says:

      Terminate Fannie and Freddie and watch the entire housing market collapse. Every good company needs strong management, and a lack of management (Fannie/Freddie Regulation) will lead to dissarray and collapse. It is absolutely imperative that these organizations are given back the regulation power taken away from then by W. The lack of their ability to regulate caused the collapse.

    4. Pingback: Kalima » Krise und Wirtschaftsnobelpreis

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