Thursday, September 11, 2008

Russell Roberts' Fable on Fannie and Freddie

Once upon a time, Fannie and Freddie were partners in a business. Well, it wasn’t exactly a business. It was almost a charity. Not quite. It was sort of a government agency. Or maybe it was all three together. When Fannie and Freddie talked to investors, they acted like a business. When they talked to the government regulators, they acted like a government agency.

And when they talked to the American people, they acted like a charity. A charity whose goal was to help more people own a home. Who could be against that?

But it’s hard to be three things all at the same time. So maybe it’s not surprising that Fannie and Freddie ultimately ended up suffering from multiple personality disorder. Which were they? A business? A charity? A part of the government? No wonder people were confused.

One day, Henry, who worked for Uncle Sam, woke up and discovered that Fannie and Freddie didn’t have enough money to keep the promises they had made. Henry was one of the last ones to find out. A lot of people had been saying for years that Fannie and Freddie were living beyond their means. Now the bills had finally come due. Who was going to get stuck with the bill?

Everybody wanted to blame someone else. Some blamed Fannie and Freddie. But it wasn’t really their fault, they explained. Uncle Sam told us to act like a charity. So we helped a lot of people get houses who wouldn’t have had them otherwise. And our investors told us to make money. We tried to do both. And we’ve succeeded. Unfortunately, our books don’t balance.

When Uncle Sam got mad at Freddie and Fannie for making promises they couldn’t keep, Freddie and Fannie just shrugged. Hey, they said. You said you’d always take care of us. I know you winked when you said it. But can you really blame us for living large? When you have a rich uncle, nephews and nieces with credit cards are known to have a spending problem.

The lesson is clear for Uncle Sam. Fannie and Freddie need new rules, rules so different that we may as well change their names and call them Florence and Floyd. We also should remember, there really isn’t a rich uncle. There’s just you and me. If we’re going to pay for the misdeeds of Florence and Floyd, let’s make them government agencies with accountability. Or disband Freddie and Fannie and let the people who take the risks risk their own money instead of yours and mine.

Cafe Hayek.


At 9/11/2008 9:14 AM, Blogger bob wright said...

"let’s make them government agencies with accountability"

Now there's an oxymoron.

At 9/11/2008 10:06 AM, Anonymous Anonymous said...

Good one, Bob :)

Let's get the government out of the mortgage business.

If you can't afford a home, then you should be renting. You shouldn't be able to buy a house with no money down or a 3% deposit. Pushing low income citizens into excessive leveraging is neither helpful nor responsible.

The market currently provides lots of financing options for borrowers who have adequate earnings to support their debt load.

Many other countries don't offer anything close to the opportunities for financing available in the U.S. When one travels in central America and Mexico, you see abandoned construction where the money ran out. The construction is financed solely by the owner who just runs out of money.

At 9/11/2008 2:08 PM, Blogger the buggy professor said...

For a favorable view of the government take-over of Fannie and Freddie --- by a well-known Wall St. guru, who believes that Fannie and Freddie will soon be good investments for the public --- go to this site:

Highlight the web address, copy it, then insert it into your browser address-bar.

And yes, the day that the government announced its take-over --- anyway, this Monday --- prof bug did invest in Feddie's and Fannie's financial assets.


Michael Gordon, AKA, the buggy professor

At 9/11/2008 5:21 PM, Anonymous Anonymous said...

Good luck with your investment, Buggy Prof.


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