Fannie and Freddie Amnesia

The Illinois Policy Institute (IPI) today has a great piece on an unbelievable new video on the White House website:

http://illinoispolicy.org/blog/blog.asp?ArticleSource=3028&utm_source=Illinois+Policy+Institute&utm_campaign=a23f547c39-April+29%2C+2010+E-letter&utm_medium=email

(If you have trouble launching the video from their site, as I did, here is a direct link: http://www.whitehouse.gov/blog/2010/07/21/video-what-wall-street-reform-means-you)

The video blames the entire financial crisis on “casino banking” and promises that the new financial reform legislation will protect us all from a repeat. It also promises “No More Bailouts” and has the audacity to blame the “unintelligible mortgage paperwork” you have to sign when you buy a home on the bankers !! (Do you think maybe the government has a few forms in that stack?) The video promises that new legislation will reduce mortgage paperwork (I’ll take that bet, and I’m not even a casino banker).

The IPI piece points out that there is no mention in the video of personal responsibility, nor, of course, of the role that Fannie & Freddie, their implicit (now actual) government guarantees, loose credit from the Fed, and Justice Department pressure to lend to people who couldn’t pay back their mortgages played in the crisis. The lack of any Fannie/Freddie reform in the financial reform bill makes it laughable. The Wall Street Journal has had many editorials and opinion pieces laying out the role they played (and correctly predicted their demise), including a recent one on 8/3/10 (“Rewriting Fannie Mae History”), and one on 7/26/10 (“Fan and Fred and the Problem of Narrative”), where Brain Carney (editorial page editor of WSJ Europe) has a great quote:

“Fannie and Freddie…took advantage of implicit government guarantees to operate at leverage ratios that would have made Lehman Brothers executives blush”.

(Other good WSJ OpEds on this were on 4/20/10 (“Fannie and Freddie Amnesia”), 9/23/08 and 7/21/08. Another good piece is from the 2/6/2009 American Spectator:

http://spectator.org/archives/2009/02/06/the-true-origins-of-this-finan)

In the last week, Fannie and Freddie announced quarterly losses of nearly $6B, and asked for $3.3B more in bailout funds, bringing the total to date to almost $150B. The CBO estimates that the eventual cost will be $381B, and Treasury has removed a $400B cap on bailout funds for them.

The left likes to say that markets “failed” in 2008-9, but we have not tried a “free market” very much. The problem is that the Feds frequently regulate demand and not supply, or vice versa. In this case, they “under-regulated” Fannie/Freddie (treated them with easier rules than wholly private institutions) and created a couple of aggressive, risk-taking institutions. That, combined with the easy-money policies of the Fed (another government entity) created a huge supply of cheap credit that incented private institutions (and individuals) to take undue risks. If you are going to create that kind of supply of credit, and not regulate demand, you will have problems. But the right answer was not to have government intervention on both sides – the answer was to not have government create the excessive supply of credit in the first case !!

There is plenty of blame to go around for the financial crisis, including with individuals and financial firms, but I am still waiting for a single progressive congressman or pundit to admit that government policies had anything to do with it. A great example is the famous exchange that Joel Pollak had with Barney Frank at Harvard Law School last year (see YouTube), where Frank absolutely refused to answer the question “What, if any, responsibility do you take for the financial crisis?”.

As the great Ronald Reagan once said, “Government is not a solution to our problem, government is the problem.”

Paul Detlefs