American Elephants

Few Things are Ever So Bad That They Can’t Be Made Worse by The Interference of Big Government. by The Elephant's Child

The President has promised the “most transparent government ever,” both in the words of his mouth and the words on the White House website.  His actions and the actions of his administration belie the words.  Christmas eve — when most Americans’ minds are on other things — the Treasury Department announced that it was removing the $400 billion cap from what the administration believes is necessary to keep Fannie Mae and Freddie Mac solvent. (Pay no attention, just have another glass of eggnog).

Fannie and Freddie are what is called government sponsored enterprises (GSEs).  They buy up mortgages from lenders, enabling the lenders to make more loans. “GSE” is a fuzzy definition, for supposedly, since they are only “government-sponsored”, they are private entities, but everybody assumes that they operate with the “full faith and credit” of the US government.  So what the Treasury has done is issue a blank check on taxpayer dollars.  (Fannie and Freddie should have been privatized long ago, and left to survive in the free market).

If you ask a knowledgeable Republican what the financial crisis was all about, they will explain that it began with the Community Reinvestment Act of 1977, which was designed to get more people into their own homes.  Congress continually demanded that banks make more loans available and lower their standards of prudent lending so that more poor and minority people could own their own homes. ACORN got into the “affordable housing” game, picketing and threatening bankers, and Congress increased the pressure.  Once again, the triumph of wishful thinking over evidence.

During the first 15 years of the act, total commitments totaled around $9 billion.  The federal regulators who forced the CRA on banks didn’t bother to track the performance of the trillions of dollars of loans made to satisfy it. Starting in 1992, volume exploded.

Over the next 16 years, commitments totaled $6 trillion.  CRA defenders claim that the loans were not sub-prime, but it is more accurate to say that they were not classified as sub-prime.  Fannie and Freddie were first bailed out in 2008 to the tune of $200 billion.  This year Treasury handed over another $200 billion.  And now a generous Treasury has handed over a blank check.

On the other hand, ask a Democrat — particularly Congressman Barney Frank or Senator Chris Dodd — what caused the financial crisis, and they will tell you firmly that it was greedy bankers on Wall Street, and “deregulation.”  It is clear that Wall Street Banks got in trouble, but the problem did not originate with them.  Rating agencies classified the securitized packages of mortgages issued by Fannie and Freddie as fine investments, and after all, they were offered by government sponsored enterprises which had the backing of the full faith and credit of the US Treasury.  Wall Street Bankers should have prudently dug a little deeper into the whole story, but the securities came with higher interest rates than were generally available, and a fine Moody’s rating.

Just this year Fannie and Freddie will post nearly $100 billion in losses — with more to come.  Because of government subsidized credit, Fannie and Freddie hold nearly $6 trillion in mortgage loans.  The blank check is unconscionable.  Frank and Dodd are still there, making things worse by enabling the GSEs to continue lending — the same process that got us in this meltdown in the first place.  And they’re talking about expanding the Community Reinvestment Act.  Unbelievable.

In the same Christmas news dump,  Fannie and Freddie announced $42 million in bonuses for 12 top executives — for their excellent work in destroying the economy.  You might remember that when the President rants about “fat-cat bankers on Wall Street.”

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