I think...

Differing Viewpoints #1: Fannie Mae and Freddie Mac

A Free Market relies on its ability to balance and solve its own problems. Individual actors within the economy know best how to fulfill his or her needs, and at which price. This is what makes capitalism extremely efficient. Government regulation and interference in the economy only leads to impede the natural actions that produce the said efficiency. This interference is exactly what has caused our current economic issues, and the endangerment of several economic firms.

Following the Great Depression congress set up Government Sponsored Enterprises (GSE), which include Fannie Mae, and Freddie Mac. The goal of these organizations was to create liquidity in the mortgage market. The general theory was and is that the ability of more citizens to own homes positively influences the economy, the neighborhoods, and American quality of life. Considering this tends to be the case, the potentially damaging and negative side effects were not as thoroughly examined as should have been.

Although the hope was more low-income families would be capable of purchasing homes, the effect turned out to be larger, and more extravagant homes for those who could already afford one. This also led to the increased production and maintenance of homes that would otherwise have been non-existent in a healthy, un-touched economy. The ability of homeowners to secure cheap mortgages also led to many Americans living with large piles of debt, and beyond their means.

To complicate the issue even more, these “corporations” were semi-privatized and only marginally removed from government control. They were given certain breaks and privileges other companies cannot and will not receive. Even though these companies were not given the ability for unlimited government support, the backing they did and do receive led investors to believe them “invincible enterprises” that the government would support and bail out if necessary. Unfortunately it seems investors were correct.

This “government halo” that Fannie Mae and Freddie Mac received also allowed them to participate in somewhat risky business. They felt empowered to practice more risk, in order to return more profits, as long as they had the netting of the US Government to fall back on. This has greatly contributed to the current economic problems and the situation Fannie Mae and Freddie Mac currently find themselves in. For if they had bought and practiced good business, and acted more conservatively, they would not find themselves unable to collect money.

Further, this “support” from the government that these corporations have been issued have largely prevented completely private, governmentally independent organizations from entering the market. Instead, we have placed all our proverbial financial eggs in one basket. As this basket falls, everything can and will break.

Without the government regulation and backing, it is likely (although unproved and untested) that private companies would have entered the secondary mortgage market, diversifying that economic sector. So if a financial crisis did happen, as we are currently experiencing, less of the economy would be threatened by the collapse of one or two companies.

Not only would our economy be more sound and supported by the diversification, but the lack of governmental support would prevent excessive risky business actions. Instead, mortgage-brokers would rely on sound investments in order to stay afloat and turn a profit. Less risky business means fewer issues when an economy goes sour, and less chain-reaction problems than we are currently experiencing.

Now, what do we do? It is hard to say. Unfortunately the problem is already created and there is no “easy fix”. Economists have seen this issue approaching for quite a few years, and have warned against the government backing of such industries. At this point we have already dug the hole; it is just a matter of who is going to end up laying in it.

This is an economic issue in which many actors contributed to the current problem. We cannot blame one group, or punish one and not the other. Everyone involved needs to feel the pain in order for the market to balance, and to prevent such problems from re-forming. If we privatize these GSEs now, enact strict penalties for using government funds, or withdraw them completely we will see a change in the actions of future markets. Companies will learn not to rely on the government, and will become entirely self-sufficient. Sure failures will happen here and there, but it will become more profitable to be conservative in business practices, and more profitable to be a small to medium sized company. Meaning when one does fail, it will have less impact on the economy as a whole.

I strongly believe Fannie Mae and Freddie Mac should have been completely removed from government help, aid, and protection long before this crisis reared its ugly head. Unfortunately we are now stuck with a problem that only has ugly solutions. Hopefully in the future it can be made clear that our economy is independent, has no government ties, and will not ensure it remain afloat. This should be a standard policy of all economic sectors, as we try to allow the free-market economy to regain its natural balance and control. Only then, can we hope for true economic stabilization.

References:

Hayek, Friedrich A. The Road to Serfdom. University of Chicago Press. Chicago, IL. September 1944.

Higgs, Robert. Notes on the Fannie Mae/Freddie Mac Bailout. The Independent Institute. July 15, 2008.

McKinley, Verne. Freddie Mac and Fannie Mae: Corporate Welfare King & Queen. Individual Liberty, Free Markets, and Peace. CATO Institute. November 17, 1997.

White, Lawrence J. Policy Analysis: Fannie Mae, Freddie Mac, and Housing Finance: Why True Privatization is Good Public Policy. Individual Liberty, Free Markets, and Peace. CATO Institue. October 7, 2004.

Differing Viewpoints is an attempt at offering other opinions on the same issue. Please click one of the blog links to the right hand side, to read what other people may have to say.