Fannie Mae and Freddie Mac have notified their parent, the US government, that they need more money. The demand is for billions. Both are owned by the Treasury Department. Before receivership, they were public/private entities known as GSEs: Government Sponsored Enterprises.
The GSE is a fundamental building block of state corporate socialism. GSEs are corporations created by Congress that enjoy an “implicit guarantee” that government will back them and refuse to allow them to default or fail.
Because of this, GSEs enjoy access to discounted credit and can sell their securities above market price. Due to these government provided market advantages, Fannie and Freddie reaped huge profits for years, enriching their private sector executives and shareholders. Despite these advantages, both blew it big-time during the housing slide and (after emptying the cash registers) called it quits and left the mess for the taxpayer. As they say, “private profit, social cost.”
These corporations were created under the guise of increasing availability of low cost mortgages to the public in order to increase home ownership. They do no such thing. What they do is provide investors with a state-subsidized investment tool and bankers with easy profits. Both agencies purchase mortgages from bankers and mortgage brokers. They guarantee and bundle the mortgages into Mortgage Backed Securities (MBS) and sell these “guaranteed” products to investors. The MBS, which would probably never show its face in a free market, becomes a sure thing for investors. What better to the subsidized investor than reward without risk?
Bankers sell mortgages without worrying about the credibility of the homebuyer or even the feasibility of the loan over the long term, since the paper will soon be swapped for cash. Homebuyers may find increased availability of mortgages with somewhat lower interest rates, but they also find increased housing prices and as a result, larger monthly payments.
When capital is funneled to any sector of the economy or toward any produced good or service the result is higher prices. It’s true that if production increases at the same rate as available capital, inflation will be negated. Home builders attempt to accomplish this by throwing dwellings up wherever they can find dirt. But builders are no match for the combination of directed guaranteed capital from Fannie and Freddie and the Federal Reserve’s seemingly unlimited production of newly minted state backed paper money. We’ve witnessed time and again the ruthless cycle of inflationary housing prices and the inevitable subsequent downward spiral. Profits are pocketed on the way up, lives ruined on the way down.
The collusive relationship the federal government enjoys with the financial system, directing and discounting capital to its wards at will, while depriving the rest of us by withholding capital and instituting incessant monetary inflation causes damage far beyond the housing sector.
Supporters of Fannie and Freddie warn that interest rates will increase if they are liquidated. The truth of the matter is that housing prices fall when interest rates rise. It is the monthly payment that determines affordability in our credit obsessed world, not the interest rate.
The real solution is to dissolve all GSEs, examples of pure corporate welfare, and incorporate free and unrestricted competitive banking. Repeal legal tender laws and allow free creation and exchange of currencies and monies. With the medium of exchange freed up to truly reflect value, houses will cost exactly what they should; whatever those interested in purchasing them can afford and desire to pay. Bearing in mind recent events demonstrating the unrelenting drive of the status quo toward greater control and increased monopoly, these changes are probably out of the question.
An alternative is to remove all subsidies to housing price or security creation and allow the formation of true mortgage banks; banks that would directly transfer clients’ deposits to the needs of homebuyers.
These banks could store 50% of deposits and loan the other half toward mortgages. Using a 1% markup fee for overhead, mortgage banks would be able to outperform traditional banks on both ends of the transaction: the rate of interest for both depositors and mortgage holders.
A bank of this sort would establish the depositors as shareholders. They are the ones putting up the coin and rightfully deserve ownership.
That current banks have both depositors and shareholders is evidence that there’s little competition within the banking industry. In a true free market, banks that returned revenue to the depositor in the form of a greater rate of interest (or a lower mortgage rate) rather than to the shareholder as a dividend would have prospective clients beating down their doors to give them money. Conversely, try setting up a bank without depositors!
Any method that would directly benefit the actors involved, rather than third parties, would prove itself more efficient in a free market and would be a viable solution.