Freddie and Fannie
James Forsyth 8:59am
The ‘conservatorship’ of Freddie Mac and Fannie Mae represents, as Steven Pearlstein notes in the Washington Post, the most direct role for the federal government in the “workings of the financial system” since the great depression. Clive Crook points out that the eventual nationalisation of Freddie Mac and Fannie Mae will bring 25 more times more loans onto the public balance sheet than the nationalisation of Northern Rock did in Britain. It is an illustration of how bad things are that there has been almost no political dissent about the move.
Freddie Mac and Fannie Mae have long stood as examples of how political problems get kicked down the road in Washington because they are too difficult to solve or because their patrons are too powerful to be confronted. Freddie and Fannie had to be rescued because they were ‘too big to fail’, so Washington should not let them grow so big again however tempting it may be to do so. Clive Crook’s conclusion bears repeating:
"The plan calls for the agencies' portfolios to be downsized from 2010, but the next administration should aim beyond that to get the government as far as possible out of the housing market. This means breaking Fannie and Freddie into pieces small enough to fail, and privatising them. If the function they discharged - that of providing liquidity to the mortgage market - cannot be profitably undertaken without an implicit public subsidy, then it should not be undertaken at all."
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lorna
September 8th, 2008 12:23pm Report this commentThe suggestion that Fannie and Freddie be split up echoes a piece a I read by Dan Atkinson yesterday about some of our bigger banks being broken up so as to avoid big risks collecting in one place.
I wonder, too, how much British big banks are suffering from people moving money out because of their headlong embrace of Shariah-compliant products – purely out of greed - as well as because of their shaky share prices.
I know I’m not alone in shifting money out of these institutions and into smaller building societies that don’t do Shariah. I’m surprised it’s not used in advertising yet. Just as people like fat-free milk, so there are plenty of us who like Shariah-free bankers.
What money I did have left in stock market-quoted banks I took out once I saw how many of the shares were being bought up by wealth funds the Middle East and China. I’ve got no intention of going to work for any of these people in any way shape or form whatsoever.
Ian C
September 8th, 2008 1:37pm Report this commentThe bad news is that this is another case of kicking the problem down the road. It can be no moe than a hope that the next president will sort it - Obama won't because it is a Democratic fiefdom and McCain won't be able to because the Dems will control congress for a couple of years at least.
It is more moral hazard relief with taxpayer's money being pumped into the economy. This can only vastly weaken the balance sheet of the USA.
David Lindsay
September 8th, 2008 4:25pm Report this commentThe American federal government has become the guarantor of the entire global banking system.
Bush deserves credit, so to speak, for this. A second term President coming to the end, and whose own party has nominated his archenemy to succeed him, he has not done this out of any motive except to save the homes of enormous numbers of people. Good for him.
But the idea of a “free” market has just died. Right there in the United States of America, at the hands of a Republican President.
Goodbye.
And good riddance.
Craig Strachan
September 8th, 2008 5:35pm Report this commentFraternal greetings from the United Soviets of America.
David Lindsay
September 8th, 2008 6:17pm Report this commentHe did it because it was the conservative thing to do, Craig. Capitalism is not conservative. Evidently.
Augustus
September 8th, 2008 6:25pm Report this commentAlthough these huge mortgage corporations own or guarantee half of the US mortgage market, the subprime mortgage crisis caused almost all other lending sources to pull out of the market, leaving them responsible for more than 80% of new mortgage business. So although Paulson's rescue package is sensible, there is a distinct possibilty that a number of other banking institutions get caught up in further credit crunch write-offs. Then the treasury will have to fork out yet more taxpayers money. This could mean real hardship and a brake on economic growth for years to come.
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