Tuesday, September 09, 2008

Fannie and Freddie takeover - does it matter?

Over at CEI's Open Market Blog, John Berlau argues that the announcement that control of Fannie Mae/Freddie Mac will be taken over by the US government doesn't matter because the companies have always been controlled by the state even if they were technically privately owned.

But is that the case - that it doesn't matter if it's always, technically, been that way, even if it wasn't official? I don't think so. Making it official is both important and upsetting.

The nominal private ownership of these companies, in spite of their extremely close ties with the government, was important because the US typically doesn't think of the housing market as something that needs to be controlled by government, and hasn't used government owned and controlled companies to control markets. With the nationalization (basically) of these companies, the US government has implicitly sanctioned government control of a very important part of the market.

While I wouldn't go so far as to say that the US is now more communist than China, it's still significant, and it's certainly not good.


Fortitudine said...

This bailout should concern all laissez-faire capitalists for very obvious reasons. The long-term consequences of this timorous clamoring for market security are evident. Fannie and Freddie have never before recent events received public funding. Now the government assumes their debt and responsibility heading into the future.

Fannie Mae and Freddie Mac made both good and bad business decisions. When they made good decisions, they profited. When they made bad decisions, they ran to the government and managed to escape dealing with the repercussions. This is capitalism.

It's a elegant showcase of the problem with a mixed economy, actually. You're a capitalist when things are going well and a socialist when they aren't.

Fortitudine said...

Excerpt from Johnathan Hoenig's article "Uncle Sam's Latest Intrusion":

"THIS WEEKEND'S HISTORIC federal takeover of Freddie Mac (FRE) and Fannie Mae (FNM) is yet another example of the market's only predicable theme of late: bigger government's intrusion, interference and theft.

Intrusion because there's no reason the government needs to be involved in the housing or mortgage markets at all. Private markets have come a long way since Fannie Mae was created back in the 1930s, with billions in nonbank dollars more than willing to invest in borrowers of every risk. Despite its undeserved poor reputation, the truth is that subprime lending permitted thousands of borrowers previously denied credit an opportunity to buy a home. In a free society, individuals are responsible for their own decisions both to borrow and to lend. Why the government needs to be in this business at all is both practically and unconstitutionally unclear.

Interference because, as I've pointed out numerous times in recent months, markets have become virtually impossible to forecast as they are no longer trading on underlying economic realities but arbitrary political whim. From windfall profit taxes to housing bailouts, the government is no longer a referee but the game's central player, moving the pieces and making up the rules as it goes along. The U.S. economy is now being driven by how many times Barney Frank wants his name in the paper and how well Treasury Secretary Hank Paulson slept last night.

Theft because on Sunday, while you were doing the laundry, playing with the kids or driving to the grocery store, the government snuck into your wallet and wrote itself a $200 billion check, secured by your tax dollars, purchasing power and sweat. Indeed, every cent the government spends propping up failing businesses is paid for by the people it's supposedly elected to serve -- in higher taxes and inflation, but also in the missed innovation of businesses not started and products never developed. (SmartMoney.com, September 8, 2008.)"

H/t Ego (http://egoist.blogspot.com/2008/09/wrap-up-federal-home.html)