Fannie and Freddie, and the Bailout Around the Corner

Any day now — perhaps any hour — the plug will be pulled on Fannie Mae and Freddie Mac, and a massive government bailout will ensue. Together, they’ll become the largest government-owned entities in American history, and, once again, taxpayers will pay the bill, which could come to $25 billion or more.One question is how did we ever get to this? The Savings and Loan Bailout of the late 1980s should have taught us that when government guarantees the downside of risks and private investors reap the upside gains, there’s hell to pay. The risks Fannie and Freddie took on weren’t officially guaranteed by the government — that is, by you and me — but investors assumed they were. And so did Fannie’s and Freddie’s executives, who reaped a bonanza with bonuses in the tens of millions each year.

Apologists will say that Fannie and Freddie exist to make housing loans to low-income Americans, so it was inevitable that the two giants would get caught in the quagmire of the housing burst. But the fact is, Fannie and Freddie — and the executives who ran them and still run them — have been out to maximize profits. Period. Just the same as every other mortgage and investment bank. High-risk sub-prime loans offered a higher rate of return, so Fannie and Freddie went into them big time. And because of the implicit government guarantee, Fannie and Freddie could take on even more risks and make even more money. Until now.

It’s another case of socialized capitalism, folks. The largest, yet. Along with making lots of money for investors and their executives, Fannie and Freddie corrupted our political process. They blocked any attempt to reign in the risks. Their lobbyists were and are the most sophisticated and among the most ubiquitous in Washington.

What to do now? Hope that, like the S&L fiasco, taxpayers can get back a fair portion of our dollars. But unlike the S&L fiasco, this time we should make sure we bury socialized capitalism for good.

Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

5 Responses to "Fannie and Freddie, and the Bailout Around the Corner"

  1. Duric Aljosa   August 27, 2008 at 11:34 am

    Hi Robert, there is one thing i don’t understand:- Richard Fisher, the head of the Dallas Federal Reserve Bank about the national debt: “Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon”.Where will taxpayers find the money?Rusia or Iran?

  2. W P Gardner   August 27, 2008 at 2:32 pm

    Response to Mr. Aljosa: Obviously with an infinite horizon there are an infinite number of generations of taxpayers and they can easily pay it.What is Mr. Fisher doing talking about infinite horizons, anyway? These people cannot even see ahead a single year in time.

  3. Roro   August 27, 2008 at 3:38 pm

    Professor Reich,A question as to where you think Secretary Paulson is likely to intervene in relation to the FNM and FRE capital structure?Thank you.

  4. Qingdao   August 27, 2008 at 5:16 pm

    New Agency Proposed to Oversee Freddie Mac and Fannie MaeBy STEPHEN LABATONPublished: September 11, 2003The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.Full article at Greg Mankiw’s blog; notice the date!

  5. Anonymous   August 29, 2008 at 6:01 am

    Mr. Reich should know a lot about socialistic capitalism. As I recall he was incredibly pro-labor when he was in Washington.