The Fannie and Freddie Sideshow
What do you call two companies that have cumulatively lost tens of billions, are now wards of the state, and continue to receive multi-billion dollar government subsidies?
If their names are “Fannie” and “Freddie,” the answer is: the world’s two biggest red herrings.
Or, if you prefer, a sideshow to what’s currently going on with the overall financial sector.
That’s because instead of resolving Fannie Mae and Freddie Mac — the so-called government sponsored enterprises at the heart of today’s housing market — we’re now treating “too big to fail” Wall Street firms the same way.
Author and financial commentator Michael Lewis (“Liar’s Poker,” “The Big Short”) puts in perspective Fannie and Freddie’s role in the larger financial ecosystem:
The big Wall Street firms are essentially operating with a government guarantee, having been bailed out by the government. They were failed institutions. If the free markets had been allowed to run their course, if nature had run its course, all these businesses — Morgan Stanley, Goldman Sachs, Bank of America, Citigroup — they’d all be out of business, they’d all be failed.
You think of the Republican Party as the party of markets, but they’re supporting an enterprise right now that is essentially state-backed. Having complained about Fannie Mae for years, they’ve turned the entire top end of the financial sector into Fannie Mae.
I’d give Democrats a little . . . uh . . . credit, too, but Lewis’ central point is exactly right.
One more irony (hypocrisy): the same banks that are now clamoring for home buyers to come up with fatter down payments — ideally, 20% or more — have been maneuvering for years to lower their own capital requirements.
That’s because the less capital banks need to hold, the more profitable they are — at least until asset prices fall and wipe out their paper-thin equity.
Necessitating . . . wait for it . . . government bailouts, zero percent interest rates, QE I, QE II, ad nauseum.
P.S.: Guess who said, “if they’re too big to fail — make ’em smaller?”
Answer: George Shultz, Ronald Reagan advisor and Cabinet member.
Going on three years after the Crash, we’ve done exactly the opposite.