I will be honest with you: I know absolutely nothing about economics. It takes me all morning to read one business article in the Wall Street Journal.
Unfortunately, I am not the only one. I don’t think most politicians know very much about economics either. At least I am making the effort to learn about it because, unfortunately, right now our economy is one of our biggest problems. And the economic crisis, particularly the subprime mortgage crisis, mandates that citizens (especially voters) learn their economics. In reality, I am getting tired of reading day after day of gloomy reports in the Wall Street Journal. I want something more uplifting to read.
After this article is published, I will most likely be drowned by an onslaught of e-mails by economics professors lecturing me on what was wrong with my article, but frankly, I don’t care. I just want to promote dissent and debate, to change something, because whatever is going on right now just isn’t working. So, here it goes. Ladies and gentlemen, please keep all hands and feet inside the vehicle.
This week, the government announced it is taking over the mortgage loan companies Fannie Mae and Freddie Mac because they are failing miserably and taking the country down with them. Fannie Mae, Freddie Mac and the Federal Housing Association together currently own or guarantee over half of all mortgages in the United States.
Fannie and Freddie are essentially government sponsored enterprises (GSEs) that insure loans (mortgages). So, if a loaner cannot make a loan, Fannie and Freddie essentially make a loan to the loaner. That’s the short and sweet definition, anyway.
The GSEs do not receive any direct subsidies from the government, but they receive enormous benefits that give them decided advantages in the secondary mortgage market. Furthermore, loaners mistakenly have the impression that if the GSEs can’t follow up on their guarantees, the federal government will, in turn, guarantee Fannie Mae and Freddie Mac.
The problem with this process has been that it has given GSEs an unfair advantage over their free market competitors, and it has unnaturally diverted capital in the free market world to housing.
According to Ron Paul, “Housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone.”
That, combined with a lack of accountability by the government of the GSEs, led to the current subprime mortgage crisis. With the half-monopoly owned by the GSEs, foreclosure rates rose, interest rates went up and the whole industry went downhill.
GSEs provide an excellent short-term fix to slides in the housing market, but investors in the long run end up losing more than they would have normally. The disruption in the free market caused by Fannie and Freddie is yet another example of how big government screws everything up.
I have not yet made up my mind whether the takeover was a good idea or not. The Treasury Department’s plan for the two companies is to back them up until they are healthy again and then reduce them in size. However, they are leaving the details to the next administration. In my opinion, they either need to liquidate the companies or completely privatize them, or else they will continue to cause fluctuations in the market and keep interest rates high.
Lazarus Austin is a senior majoring in history. He can be contacted at [email protected].