[FoRK] Freddie, Fannie, and the Bush Conspiracy?

jbone at place.org jbone at place.org
Tue Feb 24 19:29:51 PST 2004

On the one hand:  I've had substantial disputes with Mitch before 
elsewhere:  he apparently tends to favor large, centralist, lower-left 
solutions a lot more than I am comfortable with.  OTOH, this is an 
interesting spin on an interesting story.



When Fannie and Freddie fry
Category: Economy & Policy | Public Markets

"Congressional Budget Office and other estimates differ, but they come 
to the essentially same conclusion: A substantial portion of these 
[government sponsored entities, or GSEs] implicit subsidy accrues to 
GSE shareholders in the form of increased dividends and stock market 
value. Fannie and Freddie, as you know, have disputed the conclusions 
of many of these studies."

With these words, and those of Bush economic advisor Greg Mankiw, 
Federal Reserve Chairman Alan Greenspan signalled that it open season 
on the most egalitarian source of liquidity in the economy, consumer 
mortgage companies Fannie Mae (quote) and Freddie Mac (quote).

In hearings today before the Senate Committee on Banking, Housing and 
Urban Affairs, Greenspan said, essentially, that the implicit subsidies 
that Fannie Mae and Freddie Mac have because their debt is perceived by 
many investors as being backed by the U.S. government (which, in fact, 
it is not), is ending up in executives' and shareholders' pockets. 
Following calls by Mankiw and U.S. Secretary of Treasury John Snow for 
a "super-regulator" to reign in Fannie and Freddie's advantages in 
attracting mortgage debt by paying originators higher fees, Greenspan 
urged caution but explicitly endorsed the idea that the markets in 
which the companies compete should be reorganized. Said Greenspan:
"World-class regulation, by itself, may not be sufficient and indeed, 
as suggested by Treasury Secretary Snow, may even worsen the situation 
if market participants infer from such regulation that the government 
is all the more likely to back GSE debt. This is the heart of a dilemma 
in designing regulation for the GSEs. On the one hand, if the 
regulation of the GSEs is strengthened, the market may view them even 
more as extensions of the government and view their debt as government 
debt. The result, short of a marked increase in capital, would be to 
expand the implicit subsidy and allow the GSEs to play an even larger 
unconstrained role in the financial markets. On the other hand, if we 
fail to strengthen GSE regulation, the possibility of an actual crisis 
or insolvency is increased."

The call for new regulation is, in part, payback from the Bush 
administration for crackdowns on industries with which the White House 
has close ties, particularly energy, where executives have ended up in 
court after alledgedly stealing billions of dollars from investors and 
partners. The message is: "If you want accountability, we'll give you 

Fannie Mae and Freddie Mac, while they are flawed, are profoundly 
beneficial to the economy as a whole, as they have increased home 
ownership to historically high levels—not just in the United States, 
but globally; no country has ever experienced the United States' home 
ownership levels. Moreover, through the refinancing boom of the past 
three years, Fannie and Freddie have provide much of the liquidity that 
consumers have relied on to prop up spending while corporate investment 
fell steeply.

If there is evidence of wrong-doing at Fannie and Freddie, then people 
should be prosecuted. But the call to make these companies, which were 
founded to increase home ownership, compete for mortgage business on an 
equal footing with companies that don't have increased home ownership 
as a central mission, is an attack on an investment made by Americans 
as a whole. Home ownership is closely equated with lower crime rates, 
higher levels of household investment and myriad other economically and 
socially beneficial results. A certain degree of inefficiency, in this 
case seven basis points, according to Federal Reserve research, is an 
acceptable price to pay for the benefits of millions of families who 
own homes that otherwise would not.

Reduced consumer liquidity because of new limits on Fannie and Freddie 
would be disastrous at this point in an already lagging recovery. 
Indeed, today the Conference Board announced that after five months of 
gains consumer confidence has fallen steeply, to its lowest point since 
October. That news comes on concern about joblessness. But, given 
drastically lower housing starts announced earlier this month and the 
potential for decreasing consumer liquidity because of a tighter 
mortgage market, investors need to pay close attention to the rising 
beat of war drums over Fannie Mae and Freddie Mac.

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