Notes on the Fannie Mae/Freddie Mac Bailout

The following text is drawn from the Associated Press report by Jeannine Aversa, “Fed to Rescue Fannie Mae, Freddie Mac.”

The plan, unveiled Sunday, is intended to signal the government is prepared to take all necessary steps to prevent the credit market troubles that erupted last year with losses from subprime mortgages from engulfing financial markets.

Yes, what is a government for, if not to save us from the impending disaster that its own policies have produced? Thank heavens for the government!

The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies “should such lending prove necessary.” They would pay 2.25 percent for any borrowed funds—the same rate given to commercial banks and big Wall Street firms.

We may take it as a given that “such lending [will] prove necessary”; otherwise, these frantically fashioned keystone-cops high jinks will serve no purpose.

Note, further, however, that lending at 2.25 percent when the rate of inflation is at least twice that great means that the lender is giving away money. The real interest rate on such a loan is negative.

Worse, because the Fed itself is the lender, the loan will take the form of newly created money—that is, the loan will be pure inflation, a hidden tax on all assets denominated in dollar units, including dollar balances themselves.

The Fed said this should help the companies’ ability to “promote the availability of home mortgage credit during a period of stress in financial markets.”

Of course, the government always seeks to promote a noble purpose. And what could be more noble than pulling some leading crony capitalists away from the brink over which their own actions amply warrant their plunging? Our saviors protest, however, that the government’s every action aims only at helping the little guy. It’s music to the ears of the booboisie.

Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies and make an equity investment in the companies—if needed.

Ah, equity investment! Now we’re looking at overt government takeover. For laggard students, let us define socialism: government ownership and control of the major means of production (including production of financial services). In a pinch, we can always resort to socialism—after all, we are doing so only in order to save capitalism!

“Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies,” Paulson said Sunday. “Their support for the housing market is particularly important as we work through the current housing correction.”

Blah, blah, blah.

The Treasury’s plan also seeks a “consultative role” for the Fed in any new regulatory framework eventually decided by Congress for Fannie and Freddie. The Fed’s role would be to weigh in on setting capital requirements for the companies.

But Freddie and Fannie are publicly owned corporations; they are listed on the New York Stock Exchange and regulated by the Office of Federal Housing and Enterprise Oversight. Hence, they must meet capital requirements determined by recognized accounting standards. So, why is the Fed being injected where it is not needed? (I leave the answer to this question to the student as an exercise.)

Sen. Christopher Dodd, chairman of the Senate Banking Committee, on Monday called the Bush administration’s actions Sunday “probably the right steps” and said he will summon Paulson and Fed Chairman Ben Bernanke to a committee hearing Tuesday to answer questions.

“What’s important here as well is to calm people’s fears,” Dodd said in an interview on CBS’ “The Early Show.”

Of course, it wouldn’t do for the people to be afraid, even if the government’s financial house of cards is threatening to tumble down and crush them. Next, Dodd will tell us that the only thing we have to fear is fear itself—or has that line been used?

He also drew a distinction between last week’s failure of IndyMac—which engaged in originating riskier mortgages than traditional community and regional banks—and the two mortgage giants.”There’s a big difference between IndyMac and Fannie and Freddie,” Dodd said. “IndyMac engaged in very bad mortgages, luring people into deals they could never afford. That’s not the case with Fannie and Freddie.” Dodd said that while there may be more bank failures, “I’m more optimistic about Fannie and Freddie than I am about these banks.”

If Fannie and Freddie never “engaged in very bad mortgages,” then why has the stock market awakened to the fact that together they hold or insure more than $5 trillion of mortgage paper, a substantial portion of which is more or less worthless. Were those “securities” dropped on them by a monetarist helicopter? Or did these government sponsored companies simply wake up one morning and find themselves up to their eyeballs in these ever-so-iffy promises to pay and say to themselves, “How’d that happen?”

The White House, in a statement, said President Bush directed Paulson to “immediately work with Congress” to get the plan enacted. It also said it believed the steps outlined by Paulson “will help add stability during this period.”

Here’s a general rule for you amateur political economists: whenever the government justifies a policy on the grounds that it must “stabilize” something (e.g., stabilize the Middle East, stabilize Iraq, stabilize Afghanistan, stabilize the commodity markets, stabilize the financial markets, stabilize the macro economy, etc.), immediately conclude that it is up to no good and hold on to your wallet.

Senate Majority Leader Harry Reid, D-Nev., said “Senate Democrats stand ready to work with the administration to quickly and effectively address the situation currently facing these institutions.”

But, of course. Democrats and Republicans in the government belong to the same thieving gang.

House GOP leader John Boehner, R-Ohio, and Republican Whip Roy Blunt, R-Mo., said they “stand ready to work with Secretary Paulson and congressional Democrats to take appropriate steps to ensure the soundness of our mortgage markets.”

But, of course. Democrats and Republicans in the government belong to the same thieving gang.

Democratic presidential contender Barack Obama said the government’s main concern should be “to make sure that home ownership remains attainable and affordable for American families. Second, any measures should protect taxpayers and not bailout the shareholders and management of Fannie Mae and Freddie Mac.”

Evidently, Obama was absent the day the logic class took up the subject of internal consistency.

Republican rival John McCain believes the measures announced Sunday “are consistent with the goal of providing support for a path through the current duress toward steps that include regulatory reform, market discipline and mission focus,” said Douglas Holtz-Eakin, senior policy adviser.

To which the only intelligent reply is, “say what”?

Robert Higgs is Senior Fellow in Political Economy at the Independent Institute, author or editor of over fourteen Independent books, and Editor at Large of Independent’s quarterly journal The Independent Review.
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