Aiming to stop the bleeding in the tumultuous housing market, the government takeover of Fannie Mae and Freddie Mac has finally seized the public-private chimeras that have stoked global financial havoc.
Stock markets are perking up at the news of the bailout, and if you're eyeing a new mortgage loan, you could benefit in the immediate term from cheaper rates. But in the end, this one's probably gonna cost us. Some analysts predict the public will get saddled with a bill of possibly tens of billions of dollars, though Treasury Secretary Henry Paulson has promised to try to shield taxpayers.
The government conservatorship of Fannie and Freddie is designed to keep them from being hijacked by profit-driven shareholders. But in the long run, lawmakers, and the next president, face the herculean challenge of injecting disipline into a system that appears haywire by design.
The economics blog AngryBear questions the squishy reform ideas rolled out by both presidential candidates:
“John McCain wants Fannie Mae and Freddie Mac to shrink so that their size no longer is a threat. Would he say the same thing about Bear Stearns, albeit it is far smaller? Should Bear Stearns not have been allowed to grow so large? How do we shrink such a massive entities? Remember, they hold over $5 trillion in mortgages.…. Is it big government that is the problem--or big corporations that run the government?“Obama wants Fannie and Freddie out of the profit-making business. Is America ready for nationalizing such institutions? Is Obama? …
“Although the American public is not exactly happy with the economy, it has no idea of the depth of the problems. Most people think the government's check writing ability is infinite.
“Well, the government is broke and broken.”
At EconLog, Arnold Kling sees the feds in a fiercesome pickle :
Winston Churchill said that the appeasers had to choose between war and dishonor, that they chose dishonor, and ultimately they would have war. Similarly, our current political leaders had to choose between a financial meltdown and putting the U.S. government firmly behind risky mortgage debt. They chose to meddle, and thereby they have incurred new obligations that ultimately could lead to a meltdown in which the U.S. government itself loses its credit standing.
Maybe Fannie and Freddie -- as a dangerous marriage of government guarantees and a freewheeling market -- just weren't meant to be. But the New York Times' Paul Krugman argues that historically, it was the privatization of the institutions that subtly distorted their role.
Although most ordinary Americans might be lost in the economic jargon and policy prescriptions glutting today's news, there’s a stunning simplicity to the machinations of the crisis, says Robert Kuttner of the American Prospect:
"Here is the cycle: government invents something virtuous. The private market takes it over, loses hundreds of billions. Government then bails it out. This is best understood as socialized risk, privatized gain. Yes, the shareholders of Fannie Mae will deservedly lose a bundle -- it's always the shareholders who take a hit -- but the insiders who thought up subprime and the executives of Fannie Mae during the roaring '90s already made their pile."“This was all the fruit of ultra free-market ideology, as carried out by an opportunistic Wall Street-Washington axis…
“In competent hands, government can do some things more reliably than Wall Street.”
No one knows for certain whose hands will be steering Fannie and Freddie’s future come next January. But after years of officials and inside players waving off the warning signs, we can be sure that the hands-off approach is no longer an option.
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