Editore"s Note
Tilting at Windmills

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December 29, 2010

ABOUT THAT PRIVATIZATION SCHEME.... Remember all that rhetoric from congressional Republicans about privatizing Fannie Mae and Freddie Mac as soon as humanly possible? Well, forget it.

Earlier this year, leading House Republicans proposed privatizing mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) or placing them in receivership starting in two years.

Now, as Republicans prepare to assume control of the House next week, they are offering a more nuanced message: Any retreat of government support in the housing market should be gradual.

"We recognize that some things can be done overnight and other things can't be," said Rep. Scott Garrett, (R., N.J.), incoming chairman of the House Financial Services subcommittee that oversees Fannie and Freddie. "You have to recognize what the impact would be on the fragile housing market as it stands right now."

Cautious statements from key Republicans on the House Financial Services Committee are a shift from the debate over the Dodd-Frank financial overhaul during the spring and summer, when Republicans blasted the Obama administration for leaving Fannie and Freddie out of that legislation.

It was just nine months ago when House Republicans were rallying behind a bill to cut off federal backing for the mortgage giants altogether. Indeed, the GOP insisted that this was entirely necessary.

Now that they're poised to retake the House majority, these same Republicans have concluded they can't quite do what they said they'd do, at least not yet, without devastating the struggling housing market and making matters much worse.

This isn't necessarily surprising -- officials sometimes have to rethink their policies once they're actually in a position to implement them -- but it should make for an interesting parlor game in 2011. What Republican policy prescriptions will the House GOP be forced to abandon in the next Congress once they realize their original approach was crazy?

Steve Benen 11:30 AM Permalink | Trackbacks | Comments (19)

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My nephew works in the housing finance industry (a progressive who's also a banker, talk about your "cognitive dissonance" :-)), and he was telling me this last week that literally the only action that is happening at all in financing housing comes through Fannie and Freddie, since the rest of private finance is too busy giving themselves bonuses for not making loans. As he put it, the pendulum has swung as far this way as it the other way did back in the bad old days of 5 years ago.

Given that Republicans claim to be the party that represents the interests of property owners, and they used to want to create an "ownership society," keeping Fannie and Freddie around is almost the only way they can do it right now, at least until their corporate masters change their policies.

It's also going to be interesting to see their change on food safety, once the food and agriculture corporations who supported the change in regulations out of self-interest come around and give them their new marching orders.

Posted by: TCinLA on December 29, 2010 at 11:41 AM | PERMALINK

Sure. With Obama and the democrats cowed on stimulus programs the only things to be bailed out would be federally guaranteed paper.

And who has all this toxic mortgage backed paper..still?

Posted by: Kill Bill on December 29, 2010 at 11:45 AM | PERMALINK

What Republican policy prescriptions will the House GOP be forced to abandon in the next Congress once they realize their original approach was crazy?

Well, maybe ALL of them.

But it doesn't matter. The crazies don't remember from one moment to the next -- it's all about emotional reaction, not fact or thought -- the country-clubbers knew it was all hot air to begin with, and the semi-mythical Great Center is way too busy keeping their heads above water to spend time on the details of political argument.

So who cares? I wouldn't waste electrons pointing out the inconsistencies; you're not gonna change anybody's mind.

Posted by: bleh on December 29, 2010 at 11:45 AM | PERMALINK

Seeing as they want to consolidate government agencies to reduce costs and redundancies they should give up their goal of destroying the Consumer Financial protection Bureau which consolidates the duties of 7 different smaller sub depts at various govt agencies, that weren't doing the job anyway and let them get on with the job. We'll have cheaper and more effective consumer protections that way. Of course cheaper and more effective consumer protection is anathema to Republicans so I don't expect they'll stop.

Posted by: markg8 on December 29, 2010 at 11:45 AM | PERMALINK

Sadly, I have to agree with bleh -- most people I know have no idea what the declared policies of candidates or elected officials are, let alone when those policy ideas are crazy, or when the people holding them flip-flop. It's not as if their local newspaper or television station, or Fox, is going to cover it, or give voters any truly useful information.

Posted by: SciMom on December 29, 2010 at 11:51 AM | PERMALINK

I'm still wondering when they will give up their government health insurance.

Posted by: joan on December 29, 2010 at 12:03 PM | PERMALINK

The secondary question for the 112th Congress, especially in the House, is:


The primary question is:


Their campaign rhetoric would suggest they are too extreme to govern a nation looking for middle class financial relief, better employment opportunities and a future that includes old-age pensions, medicare, and social security!

Let's see what they'll do! Step up, or continue the charade of caring! -Kevo

Posted by: kevo on December 29, 2010 at 12:03 PM | PERMALINK

Perhaps we can give it to those bankers who operate with such self interest that they would never destroy an institution which they lead. Oh wait, we already did that, and millions lost their pensions and life savings. But, in a Randian world that never happened.

Posted by: KurtRex1453 on December 29, 2010 at 12:09 PM | PERMALINK

Actually, Benen misses the point. The GOP doesn't give a damn about good governance. Hello? Was START opposition that long ago that Benen forgot about it already?

The GOP simply likes a good bogeyman. Why abolish Freddie and Fannie when you can keep them around and blame them for all of our economic ills? Plus, like the Fed, Fannie and Freddie have been bribed to take Wall Street's bad assets off the banks' balance sheets.

To the extent that it was possible to wind down Fannie and Freddie and simply stick middle-class taxpayers with the bill, the GOP would seriously consider it. But that isn't possible. Winding down Fannie and Freddie now would cause the real estate market...and then the entire economy...to immediately implode. Not good for the GOP's wealthy backers. So they are happy to keep Fannie and Freddie on life support.

Of course, acknowledging how fucked up the management has been for these agencies would require that Benen deviate from his narrative that TARP was the primary bailout mechanism and that the government might even turn a profit.

Posted by: square1 on December 29, 2010 at 12:15 PM | PERMALINK

"You have to recognize what the impact would be on the fragile housing market as it stands right now."

But . . . the market yearns to be FREE!

Posted by: kc on December 29, 2010 at 12:26 PM | PERMALINK

Some Democratic dirty trickster should be able to keep the Tea Party riled up on issues like abolishing Fannie and Freddie so that House Republicans either embrace nutso legislation or get primaried by crazies in 2012.

They made their bed, time to make them lay on it.

Posted by: danimal on December 29, 2010 at 12:28 PM | PERMALINK

Of course the Republicans don't want to act precipitously. They'll need at least two years to properly sabotage and loot before privatizing the smoking ruins.

Posted by: Joey Maloney on December 29, 2010 at 12:32 PM | PERMALINK

As TCinLA notes above, the banks have to have Freddie and Fannie or they wouldn't be making any loans at all.

So the marching orders have come down from the real Republican leadership, the corporations involved in any particular issue.

Banks will decide policy on loans. Wall Street will dictate financial regulation. Koch, Exxon and Massey will dictate energy and environmental policy.

If you do not believe there are enforcement mechanisms to bring Baggers to heel, consider this: The loon who pushed Oklahoma's immigration law [opposed by the Chamber of Commerce] is now indicted for bribery.

He got so full of himself that recently he took a Tea Party caravan to picket the Republican leadership caucus meeting to insure that bigotry and misogamy [immigration and eliminating reproductive rights] were the sole focus of the legislature.

The Chamber wants "tort reform", "regulatory reform" and "workman's comp reform" not more nonsense to drive out cheap labor.

Posted by: OKDem on December 29, 2010 at 12:51 PM | PERMALINK

bleh is right: The public has the intellect and attention span of a two year old. Unfortunately, unlike a two year old, the public is allowed to vote.

Sadly, the concepts of 'emperor's new clothes', 'no such thing as a free lunch', and 'you get what you pay for' have become obsolete in this age of reality TV and credit cards.

Posted by: DAY on December 29, 2010 at 12:57 PM | PERMALINK

I find myself agreeing with the Republicans (and Barney Frank) on this one. Fannie and Freddie need to go, but perhaps the time for that is not now.

Posted by: dbeach on December 29, 2010 at 12:57 PM | PERMALINK

You are assuming that teabaggers understand the link between housing and a healthy economy. That could be a dangerous assumption.

Anyone who believes the answer to severe unemployment is to cut government spending, or that a big snowstorm proves there is no global warming problem, probably is going to have little comprehension between the buying of a house and the ripple effects which follow in terms of buying furnishings and services.

Posted by: dweb on December 29, 2010 at 3:57 PM | PERMALINK

Two year olds have longer attention spans than most of our fellow citizens. Most have the attention span of a goldfish.

Posted by: Powkat on December 29, 2010 at 4:04 PM | PERMALINK

LOL, Fannie and freddie have been the vehicles used to magically transform debt from the general public into money for Wall Street to play with. They aren't going away anytime soon.

From 2000-2007, consumer debt (plastic, autos, etc.) rose 30%. Government debt rose 60%, and mortgage debt rose 70%. That's where the rich got their money - from us going into debt. The financial crisis was merely the realization that we weren't good for that much debt. We still aren't, but everyone seems to be pretending we are, for now.

If we want the rich to stop getting richer, all we have to do is stop using debt. Simple concept, huh.

The CRA gets blamed for the mortgage crisis all the time. Baloney. The Gramm(R)-Leach(R)-Bliley(R) Act of 1999, the banking deregulation bill, actually contained many of the ruinous expansions to the previously modest CRA. Almost immediately after the deregulation bill in 1999, Fannie and Freddie were mandated to push ridiculous amounts of mortgage debt. The mortgage debt bubble took off shortly afterwards, in 2000, and Fannie and Freddie presented over $10 Trillion dollars to Wall Street over the next 7 years.

If you want to know whether or not our economy will collapse again soon, you have to know whether or not the average household is still over-leveraged. Is it? The value of the wealth the 1% currently have is really just the value of the general public's ability to pay it back. Money will continue to devalue until it represents the real value of what we produce. Jobs. Are we there yet?

Remember, it's not just the mortgage and consumer debt either; government debt is coming out of our pockets, too. Funny that: Wall Street finally realized the general public's debt was over-leveraged, but... still believe in government debt? I think they're just pretending they haven't connected dots yet. Might as well get as much as they can before it collapses, eh?

You can bet that before Fannie and Freddie go away, there will be a new scheme to convert more of our debt into more of their money. Ad Nauseum until the whole thing comes crashing down. It always take longer than you think, but still seems to catch us off guard when it happens.

Posted by: h4354x0r on December 31, 2010 at 2:53 AM | PERMALINK

Fannie and Freddie have been the top two sources of mortgage funding since their foundation. Even when the TWO entities lost the majority of the market share in MBS in 2005 and 2006, they were STILL ranked number 1 and number 2, with Countrywide in a DISTANT third place.

If two private firms controlled more than half the market share in any other market, Congress and the FTC would be screaming about enforcing anti-trust laws.

There is a false narrative being written about a narrative. Liberals are trying to whitewash the role of government in contributing to the housing and financial crisis. They are creating the straw man that conservatives are SOLELY blaming government. Few people are advocating a "single bullet" theory for this crisis, and no one with any knowledge or sense is doing so.

Republicans haven't changed their tunes at all. They continue to believe that the subsidies provided by the two mortgage giants toward home ownership distort the prices and quantities of housing, and contribute to employment and GDP volatility. The two large GSEs are themselves sources of systemic risk!

The speed with which government divests itself from the GSEs requires careful consideration. If taking over F&F was necessary, what is our exit strategy?

The speed with which we unwind the tremendous market power of these mortgage behemoths deserves a measured approach.

The distortions to the real estate and financial markets created by Fannie and Freddie, Ginnie, FHLBs, HUD/FHA, the VA, and other government incentives are enormous. Many people and financial institutions made long-term decisions based on explicit and implicit subsidies which should not be removed abruptly.

Aside from the political backlash, would it be fair to remove the mortgage interest deduction from millions of Americans who prudently bought a home with a 30-year fixed rate mortgage when their buy-vs-rent calculus included the deduction?

There are good reasons - political, economic, financial, and social - to take a deliberate and gradual approach to divesting government from the FIRE sector.

No Republican (that I'm aware of) ever promised to attempt to eliminate Fannie and Freddie on their first day in office. This isn't a case of governing differently than campaigning.

This isn't "hypocrisy"; it's just good governance!

Posted by: Six Ounces on December 31, 2010 at 7:24 PM | PERMALINK



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