Thursday, January 17, 2008



The Wall Street Journal reported this morning that the “Bush administration appears to be softening its regulatory grip on Fannie Mae and Freddie Mac, reflecting a growing reliance on the companies to provide money for home mortgages as other investors retreat.” This “softening” involves a number of steps, including requiring semi-annual, as opposed to the previously proposed quarterly, reports by Fannie and Freddie of planned debt issuance, a relaxation by HUD of Fannie and Freddie’s affordable housing goals, and, most important, the lifting of the limits on Fannie and Freddie’s mortgage portfolios, currently around a combined $1.4 trillion.

Being a nearly reflexive deregulator, I would, one would expect, be pleased by this loosening of the regulatory noose. However, in the case of Fannie and Freddie, which have implicit taxpayer backing of their debt, the government has every right to regulate. Taxpayers’ money is on the line, albeit indirectly. Since Fannie and Freddie have shown no shyness in taking the government’s indirect handout, they have to submit to a more onerous regulatory regimen than does the typical business. This is a financial variation on “He who pays the piper calls the tune.”

However, there is something troubling, even sinister, about this latest round of proposed deregulation at Fannie and Freddie. Note that in the case of Fannie and Freddie, the two major parties’ traditional stances regarding regulations are turned on their heads. The Bush administration, and the GOP in general, have long been put in the odd position of wanting to more tightly regulate Fannie and Freddie for the reasons outlined in the last paragraph. The Democrats, on the other hand, have favored loosening regulation of these two most prominent Government Sponsored Entities (“GSEs”). The Democrats never miss a chance to pursue what they perceive as worthy social goals as long as those goals can be achieved with other people’s money, and their stance toward Fannie and Freddie is just another instance of the “my goals with your money” approach of the Democrats. In fairness, this approach to government seems to have gained immense popularity among the GOP as well, but I digress.

So why are the Republicans suddenly in favor of lightening the regulatory burden on Fannie and Freddie? Because the Bushmen see Fannie and Freddie as the perfect vehicles for bailing out the irresponsible homeowners and the witless traders who form a substantial chunk of their electoral base. Doubtless the Bushites would love to have the government bail out everyone who bought too much house and/or borrowed against his or her house in order to stock up on useless baubles and other gimcracks that no one needs and every 20-something trader straight out of an Ivy League B-School who had, and seized, the opportunity to cripple a major financial institution while spouting fealty to a free market, pull yourself up by the bootstraps approach to economics—for everyone else. After all, who was the modern GOP designed to serve? But hypocrisy has its limits, even in the Bush administration. Further, there is resistance by inconvenient genuine free market types, like a (very) few GOP Congresspersons and the Insightful Pontificator, to forcing the responsible to bail out the irresponsible.

So the Bushmen have come up with a plan: let Fannie and Freddie buy all this financial flotsam and jetsam. This gets the tough guy free market trader types the succor they so richly deserve from the government because, after all, they are the linchpin of the economy. This sleight of hand also gets the overextended, financially clueless U.S. consumer off the hook and back to what s/he does best—spending money s/he doesn’t have in order to get us more in hock to Far and Middle East “investors.” But the beauty of saving the GOP constituencies this way is that no taxpayer money is involved—for now. In a few years, Fannie and Freddie will, of course, effectively go bankrupt. But then there will be no choice but to bail those two GSEs out; after all, a default by Fannie and Freddie would shatter confidence in other agency paper and, probably, even in Treasury paper. The consequences would be too dark to ignore. That a Democrat will probably be in the White House by then, and that the Dems will also control the Congress, has probably not escaped the Bushmen’s notice either.

So, according to this latest GOP scam, everything works out perfectly for the Bushmen: they bail out their “free market until it causes me to slightest tinge of discomfort” core constituencies, but few people recognize the bailout for what it is. The economy gets a (very) short reprieve, the Democrats get the blame when the consequences of this completely political maneuver start to bear a (very) heavy cost, and the GOP gets a chance at a Lazarusian comeback after the drubbing they will get at the polls, courtesy of George Bush’s disastrous tenure, in 2008.

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