Fannie And Freddie Hit The Buffers

IT WAS Weekend at Henry’s again last weekend as Treasury Secretary Henry Paulson executed another credit system surgery operation. This time, as we all know, the surgery was on the failed Depression era program that began as the Federal National Mortgage Assocation back in 1938. Today it is two government-sponsored enterprises, Fannie Mae and Freddie Mac.

Fannie and Freddie operate a secondary market in home mortgages, buying up mortgages and securitizing them into mortgage-backed bonds for sale to the public.

But like all government programs, what began as a good idea to mitigate the mess of the Great Depression turned into a political slush fund, and a firehose that sluiced mortgage money at the housing market.

Now it’s all ended in tears, because losses due to the housing collapse have used up all Fannie and Freddies reserves. It’s all Bush’s fault, my Democratic friends will say, because it happened on his watch.

Well maybe that’s a small price to pay, if we can put a stop to this silly program which has jacked house prices into the stratosphere, and is now insolvent as prices fall back to earth.

The Federal Reserve Board has been warning for years about the risks inherent in the operations of Fannie and Freddie. Back in the early 2000s President Bush and some Republican senators tried to get Congress’s attention to reform them. But Congress wouldn’t listen.

Everyone is talking about how the taxpayers are now going to have to bail Fannie and Freddie out. Actually, more likely it is not the taxpayers but the bondholders of Treasury securities and the average American who will pay. The bailout will result down the road in higher prices and a lower value of the dollar when the government papers over its mistakes with higher inflation.

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Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.