Speaker Pelosi Wants Mortgage Companies Probed
by
The
Freeman on Wednesday, October 6, 2010 at 8:17am
“House Speaker Nancy Pelosi called on the Justice Department on Tuesday
to investigate the nation’s largest mortgage lenders….”
(
Washington Post)
Who investigates
Congress?
Bailing Out Statism
Sheldon Richman
December 2008 • Volume: 58 • Issue: 10 •
The key to understanding the saga of Fannie Mae and Freddie Macthe newly
nationalized twin government-sponsored enterprises (GSEs) that dominate
home financingis this:
They were createdintentionallyto distort the housing and mortgage
markets. That is, government planners were not content to let voluntary
exchange and spontaneous market forces configure those industries
unmolested. Soholding the taxpayers hostagethey intervened.
Make no mistake: The collapse of Fannie and Freddie is government social
engineering predictably gone bad.
In a free society supply and demand would govern markets. The demand for
houses would be determined by people’s preferences and the wealth and
income at their disposal. Supply would be determined by relative profit
expectations, which is to say, by the demand for housing and the
competing demand for the required inputs.
A distortion occurs when government planners and rent-seeking corporate
allies, under cover of humanitarian social policy, engineer a deviation
from natural market outcomes. (Rent-seeking here refers to the quest for
politically derived as opposed to market-derived profits.) Dressed up as
promotion of the American Dream through homeownership, the planners used
the political meansultimately, the threat to imprison uncooperative
taxpayersto channel wealth to the construction, real-estate, and
financial industries. The primary instruments of this social engineering
were Fannie Mae, created as a government agency during the New Deal
andcough“privatized” in 1968 to get it off-budget, and Freddie Mac,
created as a “private” GSE in 1970.
The GSEs don’t make mortgage loans. Rather, using borrowed money, they
buy mortgages from original lenders, encouraging banks to make more loans
and immediately pass them on to others. Pooling lots of mortgages
together, the GSEs create mortgage-backed securities (MBS) and either
sell them or (more frequently) keep them, assuming the risk of default.
In fact Freddie and Fannie created the secondary mortgage market that has
come in for criticism since the subprime problem developed.
Freddie’s and Fannie’s activities were designed to channel money to
mortgage lenders so that they could loan widely, especially to people who
might have been priced out of a fully private mortgage market. The system
inevitably lowered lending standards and interest rates. If these
activities had been performed not by GSEs but by real private companies,
they would have been subject to market checks. But they were not. They’re
not called government-sponsored enterprises for nothing. As such they
have special advantages over real private companies, permitting them to
do things on a scale larger than would have occurred in a free market.
The advantages include tax exemption, government loans, an implicit
bailout promise, and lower capital requirements.
The result was a far more concentrated lending market and hence greater
vulnerability to changing conditions. Fan and Fred hold or insure $5.4
trillion in mortgage debthalf the national totalmaking the taxpayers
ultimately responsible now that the GSEs are under federal
conservatorship. Three-quarters of new mortgages are GSE-backed. So the
government has just become the country’s major mortgagee.
The GSEs have lost well over $10 billion since the mortgage meltdown
occurred, and they were getting close to being unable to borrow enough
money to roll over their debt. This and fear of a more general economic
meltdown are what prompted the government to step in, exposing the
taxpayers dramatically. The bailout will begin with a billion-dollar
infusion. Then the government will start buying shaky Freddie- or
Fannie-backed mortgage securities in the marketplace. A $5 billion
purchase will get things going, but up to $200 billion has been promised.
It will no doubt be more.
Where will this money come from: taxation, borrowing, or the printing
press? What will that do to our economic well-being?
The New York Times is wrong. This is not “an extraordinary federal
intervention in private enterprise.” It is the state bailing out statism.
Let’s hear no more about the “laissez-faire” Republicans. That myth
serves only to protect advocates of state intervention regardless of
party.
http://www.thefreemanonline.org/columns/perspective-bailing-out-statism/
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