September 8, 2008
They never would have tried this during a weekday, when the stock market could have panicked. The takeover over "Fannie Mae" (the Federal National Mortgage Association) and "Freddy Mac" (the Federal Home Loan Mortgage Corporation) by the U.S. Government, which was announced on Sunday by Treasury Secretary Henry Paulson, in effect means that the mortgage industry is nationalized. Given the continued shakiness of secondary markets for mortgage-backed securities, which undermines Wall Street and by extension the world financial system, such a drastic move was probably inevitable.
As the Washington Post points out, however, there is no guarantee that putting those privately-owned yet publicly-chartered institutions under U.S. Government control will solve the underlying problem. No one can even estimate what the total cost of the bailout-buyout might be. What we do know is that the Federal Government will become a major participant in the secondary mortgage market, meaning that political considerations will inevitably impact on housing supply and demand. There will be huge temptations for politicians of both parties to speak in lofty terms about preserving "the American Dream" of homeownership for most Americans. Nevertheless, the move toward greater government control, however well-intentioned, will paradoxically reduce economic opportunities for enterprising people of modest means.
If a Democratic president had pulled such a sweeping government takeover of such a big segment of the U.S. economy (whether housing, energy, or health care), you can be sure there would be a ferocious outcry by conservatives over the march toward socialism. The fact that a Republican president did so takes some of the sting out of it, sort of like when Nixon went to China in 1972. (A Democratic president doing so would have been suspected of treason by some people.) But that doesn't change the fact that our economy took a big step away from capitalism and corporate accountability yesterday, and a big step toward a more statist, regulated economy. It is a sad day for advocates of free markets like me.
One of the big lessons that we should draw from the mortgage debacle is that, for all its strengths and virtues, a large portion of the U.S. economy is so badly distorted by misguided public policy that market signals no longer serve to make automatic corrections when supply and demand are out of kilter. Put more simply, very little of our economy these days operates according to free market principles. So why don't you hear hardly anyone making that point? Because Republicans are ashamed that they have failed to enact much-needed free market reforms that were the intended follow up to the "Republican Revolution" of 1995, and Democrats don't care about free markets anyway.
As for the political angle, I am glad that Sen. McCain has emphasize reforming the culture of corruption in Washington and distancing himself from the Bush administration on such matters, as I suggested he do on June 11. McCain may be weak on economics, but he understands from an up-close perspective that giving more power to politicians in Washington is what caused most of our economic troubles in the first place. He is in no position to take issue with the Bush administration's emergency policy move, because it's probably too late to do anything different, but he can at least declare with good reason that he has been the one who has been warning of such dangers all along.
We should also remember that the mortgage banking crisis has bipartisan origins, in spite of the Bush administration's close ties to the worst of the subprime mortgage lenders, Ameriquest. Democratic Sen. Christopher Dodd and a former campaign aide to Barack Obama were among those who took favors from mortgage lenders, no doubt undermining the government's function in scrutinizing the financial markets at a critical time; see my June 18 blog post.