Terminate Fannie Mae and Freddie Mac

Professor Michael S. Rozeff reports:

Any restructuring presumes what is not in evidence, which is that the Federal government has to sever completely its relationships with housing markets and specifically with Fannie Mae and Freddie Mac. There’s the rub. Congress won’t do this, unless seized by some unforeseen miracle of rationality.

There are millions of Americans who may fear the dissolution of these companies. They will wonder where they will get mortgages from. There are hundreds of columnists who share this fear. Some will pretend to hold their nose while supporting a government bailout. Some will want to maintain the government’s interference in housing markets or even expand it as a matter of public policy.

There is nothing to fear. The amount of money on the sidelines that is available for funding mortgages is tremendous. It can be coaxed into mortgages if the interest rates paid are high enough. A free market in mortgages will easily provide capital to creditworthy borrowers. But that too is the rub. The government wants to keep mortgage rates low so as to keep the housing industry going and to satisfy the voters who take out mortgages. The government does not want a free market in mortgages, and that is because neither voters nor the housing industry want a free market in housing. As long as there is a government that is empowered to interfere, the pressure to interfere will overcome the free market.

Democracy just does not work, my friends! Sooner or later, in this case 70 years later, 70 years after Fannie Mae began, the system starts to break down. Call it what you will, democratic socialism or democratic fascism or both, democracy does not work. It doesn’t work in agriculture, in the military, in the space program, in the banking system, or in any other part of an economy. Sooner or later, depending on various particulars, blowups occur.

Without the government in the picture, there is no way that Fannie Mae and Freddie Mac could ever have grown so large. Their balance sheet assets (and liabilities) total about $1.6 trillion. They have off-balance liabilities of another $3.5 trillion or so. How big is $5 trillion? The national debt of the U.S. is $9.5 trillion!

It is almost unbelievable that these two companies could have run up debts that are more than half the size of the country’s national debt. But that is inherent in the chemistry of government + housing + debt guarantees. The housing market is huge, especially over time as the housing stock accumulates. By giving Fannie Mae and Freddie Mac an advantage in issuing debt, these companies came to dominate the housing finance market. There is no better time than now to end this absurdity.

You'll want to read the whole thing.