Fannie, Freddie, and the Glorious People’s Revolution

Okay; not exactly. But I’m a little geeked about this week’s Economist.

In a post last month I talked a bit about what I’m beginning to see as the Fannie/Freddie Scandal. Stephen Colbert, I’m trademarking “FanFredScan” right now. Also Fredgate, Fangate, and Scangate, just to be safe.

I’ve been interested in the recent history of the upstate NY real estate market. After September of 2001, real estate prices outside of New York City rose county by county as New Yorkers (who had no intention of fleeing the city permanently) bought up parcel after parcel and house after house. The stock market was in the toilet because of Enron and 9/11, and real estate prices as far north as the Adirondacks were fed by a) people’s needs to stash investment money and b) fear of another catastrophe leaving them homeless. And what’s a $75,000-$250,000 mortgage to a successful New Yorker? The payment for a lot of people was a small fraction of their rent.

The bursting of the bubble, because of gross mismanagement and under-regulation, stopped this market in its tracks just like everywhere else. Real Estate was no longer a sexy investment, so that sweet New Yorker money dried up. Buddy, it’s tough all over.

The more I learn about this mess, the more I see it as the second major economic scandal of this presidential administration. It isn’t as sexy as a cigar and a blue dress, but there’s a trail of lobbying and pandering and political influence behind it that makes one wonder why we aren’t all a bit more upset. It’s Enron II, but this time it wasn’t illegal.

I’m trying hard not to be too partisan; my Nana is a lifelong Republican, and even she’s fed up with it.

What geeks me is that the folks at the Federal Reserve — some of the stodgiest, most conservative suits around — have taken a break from their project to bring back the monocle and the celluloid collar, and one (Jeffrey Lacker, head of the Richmond Federal Reserve) is actively advocating nationalization of the mortgage behemoths if recapitalization (i.e. massive bailout) is necessary. And it looks like it will be, as the first attempt to prop them up hasn’t gone all that well:

“This is not what Hank Paulson, America’s treasury secretary, envisaged last month when he announced an emergency plan to rescue the twins. By pledging to invest in them if needed, he had hoped to calm markets and thus reduce the likelihood of a bail-out. That gamble looks ever less likely to pay off, however.”

Last month, The Economist pointed out that a bailout of the mortgage giants will allow the mis-managers to profit because there never was any risk — Fannie and Freddie took risks and paid like private companies, but we can’t afford to let them fail. So imagine being able to take your life’s savings to Atlantic City, knowing that someone will replace it if you tank. What incentive would you really have to avoid outlandish risks?

The article (”American Markets: Still Bleeding” from the August 20th issue) cites that investor (especially foreign investor) confidence in Fannie and Freddie’s debt is waning, and a lot of that debt is due to mature soon. Fannie and Freddie are F’d.

I’ve heard back from my readers on this — the “less government” crowd weighs in heavily against the bailout (any bailout) because we foot the bill. But (well) what do you folks think of nationalizing the damned thing? Isn’t that like socialism? Won’t it make us all play with dolls and do drugs and worship Satan?

Sure enough, we’re going to foot the short-term bill for any bailout; but these are historically very profitable institutions, considered by many experts to be too important to our economy to be left in private hands.

Case in point: right now.

So…can the government screw it up worse?

First, we’re in this mess because of under-regulation, not government interference. That said, I’d also have to say that deregulation (and the resulting consumer free-for-all) was partly due to political corruption; not as Sopranos-esque as HUD, but just as devastating, and a pattern we can easily see repeated down the line whether they remain private or are nationalized.. So, um….
Second, I feel like if I have to pay for it, I should be buying something. I lean hard left when it comes to Energy and Housing, but I can also be very personally conservative; it weirds me out that guys like Lacker and Paulson might be going my way.

At the very least, there ought to be some house-cleaning going on at F&F. I wouldn’t mind hearing about, you know, the responsible parties getting the sack. I’d even be up for some Enron-style scapegoating.

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