There are many words — and most them not nice — to describe the new government conservatorship and planned bailout of Fannie Mae and Freddie Mac. But “nationalization” and “end of the free market” are not accurately among them. One cliche is certainly true: a certain substance has hit the Fan (and Fred, for that matter). But so is another, there is really nothing new under the sun.
Whatever the problems of this scheme, and there are many that we wil be dissecting, nationalization isn’t among them. The state is simply being more explicit in backing entities that CEI has always characterized as creatures of big government.
Fannie and Freddie can’t really be nationalized, because they were never really private in the first place. Fannie was created as the government agency the Federal National Mortgage Association in 1938 and spun off as a government-sponsored enterprise (GSE) in 1968. Freddie was created as a sister GSE two years later.
But even though they had private shareholders, they always retained government privileges. The President still appointed some of their board members, they were exempt from state and local taxes, and, importantly, they each had a lines of credit with the Treasury. Though these lines were “only” $2 billion, CEI President Fred Smith presciently warned at a Congressional hearing back in 2000 that “as long as the pipeline is there, it is like it is very expandable. … It could be $200 billion tomorrow.” (The transcript is here. Fred’s statement, in repsonse to questioning by Rep. Carolyn Maloney, appears on page 193.)
Fred also testified about the inherent dangers of the privatization of profit and socialization of loss in the Fannie-Freddie model. He described the GSEs were “strange organizations, neither private sector fish nor political sector fowl” and said that “as a result, no one is quite sure how these entities should be evaluated or held accountable.” Now, at least temporarily, they are explicitly “political sector fowl [double entendre intended]” If noting else, at last some honesty!
CEI believes the best option for the government to pursue — the only option to be forever rid of the GSEs risk to taxpayers and systemic risk to the economy — is an orderly liquidation of their assets. As Fred urged of Congress in 2000 — to mostly deaf ears — policy makers should “develop a divestiture or breakup plan for Fannie and Freddie.” Government should sell their holdings piece by piece to the private sector just as the Federal Deposit Insurance Corporation does with a bad bank. Our friend and longtime GSE skeptic Peter Wallison at the American Enterprise Institute has detailed how this can be done under the recently passed (mostly bad) housing legislation.
Like Fred, many of us here at CEI are “despairing optimists.” There is a “silver lining” here. The question is will there be the energy and focus to pursue it.