Fannie, Freddie and Economic Failure
The Politics
On Sunday September 7, the Treasury Department announced that it was seizing control of mortgage giants Fannie Mae and Freddie Mac. While Sarah Palin doesn’t understand what that means, [HuffingtonPost] you should.
The Facts
Fannie Mae and Freddie Mac went bankrupt because they bought and guaranteed bad mortgage loans. The Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac, were set up as privately owned and operated government sponsored enterprises (GSEs). Their role was to guarantee or buy mortgages issued by various lenders. Together they own half of all mortgage debt in America, totaling about $5.4 trillion. During the past 8 years—and especially during 2006-07—both companies lowered lending standards to buy subprime and other risky mortgage products. [Los Angeles Times]
Economists were virtually unanimous in agreeing that the federal government had to do something to guarantee bonds issued by Fannie and Freddie. If the government failed to stand behind these bonds, the real estate crisis would worsen, mortgage interest rates would jump, and America’s economy could sink. [Paul Krugman]
However, the legislation that authorized the takeover went far beyond guaranteeing bonds. It is simply wrong to bail out the management who drove these companies into near-bankruptcy. Last year, the CEO of Freddie Mac was paid $18.3 million and the CEO of Fannie Mae was paid $11.6 million. [ABC News] Freddie Mac's CEO may now be entitled to an additional $14.1 million in severance and other payments, while Fannie Mae's CEO stands to receive another $9.3 million. [Reuters] In this fiasco, they’re the last people who should be rewarded.
Strangely, in this debate, it’s the conservatives who have staked out the populist position. House Republican leader John Boehner called the bill that authorized the takeover a “multibillion-dollar bailout for scam artists and speculative lenders.” [Los Angeles Times] Senator Richard Shelby (R-AL) called it “an open-ended blank check.” [Bloomberg] Almost all Democrats supported the bill while 13 GOP Senators and a majority of Republican House members voted against it.
The Argument
The failure of Fannie Mae and Freddie Mac was due to lax oversight by conservatives in Washington. To increase profits, finance companies sold subprime and nontraditional mortgages to millions of Americans who—the companies knew—could not afford to make the payments. Fannie and Freddie acted as accomplices while the Bush Administration and the Federal Reserve shirked their responsibility to stop these reckless lending practices.
It’s not government’s job to reward bad investment or incompetent management. The executives of Fannie and Freddie, especially, should not be rewarded. That’s not in the public interest, and it’s just not fair to all other Americans.
The housing crisis is just one element of the national economic decline. Unemployment is at a 5-year high and prices are rising. Banks are failing all over the country and America is falling into recession. We need to take immediate action to stimulate the economy and pull our nation away from disaster.
Progressive Solutions
To address the broad problems across our national economy, we should:
Provide $25 billion to state governments to fight the affects of recession, and another $25 billion to repair crumbling bridges, roads, and schools. This will help offset the states’ cumulative budget gap of over $40 billion and allow them to continue providing vital services to Americans hurt by the economic downturn. It will also make our economy more competitive by fixing our national infrastructure. The $50 billion investment will save more than one million jobs.
Fund most of the economic growth package with a windfall profits tax on big oil companies. There is nothing fair, or earned, about the record-breaking profits being taken by big oil companies. They did not become more efficient; they did not deliver a better product. What’s fair is to return those ill-gotten gains to the consumers who are being overcharged at the gas pump.
