FRONT PAGE CONTRIBUTOR
The Forgotten Bailout
When it comes to setting public policy fires, Democrats get away with serial arson. A maladroit opposition party and a complaisant media ensure that the public will never pin the tail of blame on the donkey. Nowhere is this more evident than with interventionist housing policy.
Decade’s worth of government intervention in the housing market almost single-handedly took down the economy. Bill Clinton’s National Homeownership Strategy did to the housing sector what Obamacare will do for the healthcare sector. His administration created entire offices and programs dedicated to forcing banks to underwrite risky mortgages under the dubious goal of universal home ownership. Concurrently, Fannie Mae and Freddie Mac bought up the lion’s share of the subprime mortgage securities and fueled the toxic asset bubble. The bubble popped, bringing down the entire economy with it.
Instead of learning from the deleterious effects of “fair lending” and universal homeownership programs, Obama has juiced up the goals of the Community Reinvestment Act that underwrote risky loans.
So what have we gotten for all the risky loans? We sunk $140 billion into Fannie Mae and Freddie Mac, and now we are on the hook for a $16.3 billion shortfall at the Federal Housing Administration. Taxpayers have not been reimbursed one dime for the housing bailout. Just wait until the Fed commences another few years of blowing up the housing market through MBS purchases; we’ll be back in 2008 in no time!
Amidst all the talk over the fiscal cliff, why is nobody talking about the stolen funds sunk into the dead rat GSEs? Josh Rosner, co-author of the must-read Reckless Endangerment, reminds us all of the forgotten bailout in yesterday’s edition of the New York Times.
Last summer, the United States Treasury decided that, rather than require the G.S.E.’s to pay interest on their debt to taxpayers, it would require any profits generated by Fannie and Freddie to be swept into the Treasury’s coffers. Unfortunately, this has created problems of its own because it has led to the commingling of the still legally private G.S.E. funds with those of the federal government — and it complicates the ultimate recapture of Fannie’s and Freddie’s value. Moreover, as the International Monetary Fund recently warned, the practice adds major risk to the United States balance sheet.
A better approach is possible — but to devise the right plan, lawmakers will have to start giving the issue the attention it deserves.
Well, here is a better solution. Senator McCain and Congressman Hensarling have a bill (S.693/H.R 1182) that will shut down the GSEs, albeit in a gradual way and with the understanding that they currently back 90% of all mortgages. His bill would impose a two-year limit on the current conservatorship and chart a course to complete privatization after 5 years. It would immediately end all affordable housing mandates, force the GSEs to pay back the taxpayer bailout money, cap their maximum portfolio size, reduce their market share and shrink their competitive advantage over private capital.
Housing policy is one of the most banal issues for many casual consumers of news, but it was the catalyst of the Great Recession. The blood of the entire housing and financial meltdown is on the hands of those who subscribe to Obama’s housing policies. It’s time someone demand accountability for the egregious federal intervention in the housing market. Otherwise, we’ll be in the midst of a new housing crisis in a few years.
Cross-posted from The Madison Project