Fannie and Freddie

[Tarheel]

I am sure that many of you heard on the news today, at least in passing, that the Federal government has seized Freddie Mac and Fannie Mae (two government sponsered enterprises responsible for about half this nation's mortgages) which have been managed so badly that they were (read as ARE) about to fail.  You may not know the full story about this issue nor how it may affect you.  This is the end result of what our Congress does when it tries for fix something; now they're trying to fix it again.  I'd suggest reading this article by Fred Thompson as a primer because we all are going to have to pay for this mess and the finger-pointing will happen during this presidential campaign; Fred also makes a larger point about limited government that I'm sure won't be lost on the readers of this forum (this from Townhall.com; all emphasis is my own):

The Dangers of Government Guarantees
Fred Thompson
Monday, September 08, 2008

I’ll bet it came as a surprise to most folks that the financial stability of the world as we know it depends upon the survival of a couple of outfits called Fannie Mae and Freddie Mac. Yet that’s what the so-called experts are telling us. Moreover, we taxpayers are now being asked to guarantee Fannie and Freddie’s tab, one that could make the $124 billion S&L bailout of the late 1980s look cheap.

So how did we get stuck with this bill? Well, Congress wanted to “do something” about what it saw as a “housing problem.” To them that meant that they should create an even bigger problem.

So Congress passed laws that made it easier for hopeful home-buyers to buy houses … even when they couldn’t afford them. Then the Fed and other regulators helped, in the form of easy money and loose credit standards for mortgages.

Not surprisingly demand for houses grew, home prices rose, lenders financed additional questionable mortgages, fueling even higher prices and so on. You get the picture. This is called a bubble.

Then an amazing thing happened – apparently impossible to foresee. Home prices did not continue to rise forever! Home prices came down and easy money dried up, causing the above mentioned cycle to reverse. In other words, the bubble burst.

So you’d think the in-over-their-heads homebuyers and the mortgage bankers would take the hit, and the market would right itself. No reason for an international meltdown here, right?

Not so fast my friends. Years earlier Congress established Fannie and Freddie as purchasers of these mortgages, which they could bundle up, repackage and sell to investors, freeing up more mortgage money. As government creations tend to do, the two companies grew until they either owned or guaranteed about half the nation’s $12 trillion dollars in mortgages.

Fannie and Fred were “government sponsored enterprises” which means heads they win, tails you lose. If they make money stockholders, creditors and Fannie and Freddie employees – some making millions annually – get the benefit. But now that mortgages have hit the skids, with mounting losses, the taxpayers potentially face trillions in exposure. This is because there is an “implicit” (read “actual”) government guarantee of Fannie and Freddie’s obligations and both are now too big to be allowed to fail. This is called the “bailout phase,” which will probably lead to a bigger bubble in the future.

Lost in this immense, complex mess is the root problem most people are missing: the government is gradually becoming the guarantor of seemingly every important aspect of American secular life, creating incentives and bureaucracies that cause failure and invite fraud.

In Fan and Fred’s case, it was in no one’s interest to turn off the bubble machine. Just the opposite. The system induced borrowers to take on financial obligations they could not afford and lenders to lower lending standards. Fannie and Freddie went along because their managers’ compensation depended on the firms’ short term financial performance. And investors continued to buy complex security packages they didn’t understand, because the securities were viewed as government-backed.

Heavy campaign contributions by those benefiting from this scheme induced Members of Congress to avert their gaze from the ugly mess that was unfolding.

You’d think we’d have learned by now: when the backstop of the federal treasury makes it easier for politicians, lenders, borrowers, welfare recipients, government contractors, or anyone else, to serve their own self interest at the expense of the taxpayer, many will do just that.

That is why we continue to see self-dealing, moral lapses, outright fraud and lack of management and oversight in a wide array of programs and government-sponsored entities, from housing to Medicare, education and the Small Business Administration, all costing taxpayers billions, even trillions of dollars.

Our Founding Fathers knew more than a little bit about human nature. It is one reason why in the Constitution, the federal government was given certain delineated powers and no others. I hate to burst another bubble, but our government simply doesn’t have the authority or the capability to be the guarantor or insurer of our every need or desire. Isn’t it time we started sending that message loud and clear to the big enablers in Washington?

The link:
http://920wgka.townhall.com/columnists/FredThompson/2008/09/08/the_dangers_of_government_guarantees?page=full&comments=true

[GarMan]

Where the fuck was this Fred Thompson when the Repubs were selecting a candidate?  Talk about hitting the nail right on the head...  It's the S&L Crisis all over again.  The same problem... gubmet, and it's going to involve similar "solutions"... brought about by gubmet.  I'm sure that we'll see another RTC to deal with a lot of these "bank owned" properties just as we did with the S&L situation.  The Dummycrats are gloating over this, a problem they were primarily responsible for creating in the first place, while the rest of us are left shaking our heads.  I said it before, and I'll say it again...  LET THEM FAIL.  It's a violation of natural order to enact a bailout.  Companies that make bad decisions are supposed to go out of business.  People who make bad choices are supposed to get burned.  Stupidity should be painful.  We're doing nothing more than reinforcing bad behavior with this bailout. 

[Tarheel]

Where the fuck was this Fred Thompson when the Repubs were selecting a candidate?

...

I have been asking myself that same question ever since Fred gave that rousing speech at the RNC a week ago!  As to your other comments I could not agree with you more.

Further, this is EXACTLY how fucked up a government-run, universal, inter-galactic healthcare program will be.