As part of FDR’s New Deal, Fannie Mae was created in 1938. Freddie Mae was created in 1970 because the government was concerned that they had created a monopoly. They had, but having two government sponsored semi-private agencies was not the proper fix and the government finally allowed private banks to also provide mortgages again. In other words, both Fannie and Freddie were started at the behest of the government and given special privileges of which most businesses could only dream. They were the only two Fortune 500 companies that may keep their financial difficulties hidden from the public. Thus the government ensured that there was no chance for the free market to work because the free market depends upon open access to information. The government also provided a de facto guarantee that if they ever ran into trouble, the government would bail them out. Finally, based on this government backing, the two entities were able to borrow money at very low rates – rates usually given to governments.
I cannot think of a way to better ensure an eventual disaster than to allow private organizations to run without much supervision, allow them to hide their problems, and to guarantee that bad risks would be covered by Uncle Sam. It is amazing that the system has lasted this long. These two government backed agencies hold more than five trillion dollars in mortgage-backed debt. I am glad that the government is ending this horrible experiment and hope they have learned the right lesson. I also hope that Freddie and Fannie are shortly forbidden from accepting any new mortgages. I am not optimistic about this, but if the government would do so, in 30 years (when the last of the mortgages that they currently own expire), we could close these failed experiments in government run business.
Category: Domestic Politics , Category: Economics , Category: Quests for Change
Amen Brother!