Government Activism: Goodbye Fannie Mae, Freddie Mac?

Have you noticed how certain Republicans and Tea Party activists have flung the appellation “socialist” at the Obama administration in the guise of an epithet? Justified or not by the President’s past decisions, these political conservatives are certainly not extending their criticism of the President to Treasury Secretary Tim Geithner’s recent proposal for financial reform. In fact, some free market oriented politicians are actually supporting Secretary Geithner’s ideological goals and policies.

Geithner has proposed an extreme down-sizing of Fannie Mae and Freddie Mac, entities that implement some of the federal government’s most intrusive activities in the affairs of the nation’s private sector economy. Their activities have been authorized by a bipartisan array of Democratic and Republican presidential administrations since the birth of Fannie Mae during the 1930s.

What exactly do these organizations do? Why have they been supported by the federal government for so long? And is Geithner’s proposal an isolated one, or is it a harbinger of an emerging trend?

An Ownership Society

Fannie Mae was created in the midst of the Great Depression during the Democratic administration of Franklin Roosevelt to support the residential housing market and to encourage home ownership. Freddie Mac was subsequently created to supplement Fannie Mae’s economic activities during the Republican administration of Richard Nixon.

What do these organizations do? On a fundamental level, they purchase mortgage loans from banks and then resell them. Or they buy such loans and simply hold onto them for a while. Or they issue guarantees that the loans will be repaid by their homeowners. Throughout the twentieth century, and for the first few years of the current century, the federal government created many such operating programs and activities to prop up the private mortgage markets through these two organizations.

Our political leaders in Washington D.C. have undertaken other activities to prop up the mortgage industry as well, of course. The income tax mortgage interest deduction, for example, effectively enables the federal government to make the mortgage payments of home owners more affordable by permitting borrowers to reduce their federal tax obligations. After all, the larger our mortgage payments, the lesser the income taxes we pay, and the more we can afford to splurge on larger homes!

Every President, prior to the Obama administration, heavily promoted Fannie Mae and Freddie Mac in an effort to support the goal of universal home ownership. Bill Clinton, for instance, focused on the extension of loans to minorities and low-income consumers. And in relatively lofty language, George W. Bush often expressed his vision of an “ownership society,” supported by the operations of Fannie Mae and Freddie Mac.

Geithner’s Proposal

Comparably speaking, how intrusive is the presence of Fannie and Freddie in our national home mortgage market? As compared to, say, the federal government’s presence in our national education system? Or our national health care system?

The U.S. Department of Education’s Race to the Top program, for instance, recently injected $4.35 billion into locally controlled school districts. And the most conservative critics of President Obama’s national health plan complain that its ultimate cost may exceed $2 trillion. At the height of the financial bubble in 2008, in comparison, Fannie Mae and Freddie Mac owned or guaranteed $5.3 trillion of home mortgages in the United States, over half of the total amount. In other words, its fiscal footprint on our national economy actually dwarfs the federal government’s positions in the education and health care sectors.

Geithner’s somewhat audacious proposal is, essentially, to remove Fannie Mae and Freddie Mac from our nation’s home mortgage system through a series of gradual reforms that shift their activities towards the private sector. Many worry that the economic effects of such reforms will lead to higher mortgage interest rates and thus less affordable homes for American citizens. On the other hand, many believe that the political and fiscal effects of such reforms will lead to a significant reduction in the risk probability that multi-trillion dollar government bailouts of this sector of the banking industry will be needed in the future.

Crossing the Aisle

Are you still feeling a bit nonplussed, though, at the sight of a Democratic president proposing a level of fiscal deregulation that his conservative Republican predecessors never seriously contemplated? Such crossings of the ideological aisle may have been unusual a short while ago, but they appear to be growing more common in an era when opposing party politicians are making conscious efforts to display their proclivity for cooperation, collaboration, and comity.

Interestingly, incidents of growing Republican support for government intrusions into the private sector are emerging as well, with staunch conservative Texas politicians vowing to investigate alleged market manipulation in the energy industry, and a bombastic free market oriented New Jersey governor proposing a government rescue of the Atlantic City casino industry and partial government ownership of the insolvent Xanadu retail and entertainment complex. Apparently, on both sides of the political aisle, pragmatic considerations are giving rise to political consensus.