Fannie Mae & Freddie Mac

I'm really shooting from the hip here, because there hasn't really been enough time for me to read anything on the subject. But I'm going to go out on a limb on the off chance that I might be right. If I'm wrong, I already told you I was uncertain of my own predictions.

The government is spending billions of dollars nationalizing Fannie Mae & Freddie Mac (FM&FM). What will be the outcome? The government is basically taking money from productive enterprises and propping up bad investments in real estate. While the rest of the economy is avoiding real estate like the plague, the government just pumped in billions of dollars. The problem with this move is that the government is not solving the problem of foreclosures, it is propping up the entity that created the high foreclosure rate in the first place. FM&FM borrows money from international investors at low interest rates, it then lends this money to banks to lend to borrowers. FM&FM received this money from the US, where government policy has been to inflate the currency, as well as international investers whose governments have the same policy. Because of FM&FM, banks of you are familiar with were able to offer sub-prime mortgages, which got us in this mess in the first place. By pumping billions of dollars into this system, the US government is enabling this practice to continue.

If this somehow fixes our foreclosure mess, I would be terribly interested to find out how. In my opinion, a "successful" bailout will only enable home-borrowers to begin another round of musical houses. Homes will be bought and sold, which will run up prices until this latest round of inflationary credit runs out, at which time the market will collapse again. If it doesn't acheive this end, then it will only prolong the length which houses sit on the market waiting to be sold. Loans will be available, but no one will be willing to borrow money for a house that they know is not worth the asking price.

The other major problem with this policy is that we are "robbing Peter to pay Paul" to borrow an overused expression. In order to fund this little adventure, the government must take money from sectors of the economy that are performing well, in order to prop up the real estate market. By taking money away from productive enterprise, we limit the consumers ability to pay for goods like real estate. In aggregate, we have made it easier for banks to lend money, and more difficult for consumers to pay off the loans.

My guess here, is that the US government had to bail out FM&FM, not because of the housing market, but because of the investments of foreign nations. It is bad foreign policy to allow your creditors (ie, the Chinese) to lose billions of dollars they invested in the US.

What's the real solution? That's a good question, and while I could offer a solution or two, none would avoid the hardship that the US must necessarily endure. That's the trick: we don't consider solutions to be sound unless they ward off the recession and return the economy to what it was in 2004 (or whatever other arbitrary date you want to pick). Personally, I think the real solution is to let FM&FM fail. Interest rates would skyrocket. Home prices would plummet. Investment portfolios would collapse. However, we would begin the real road to recovery. US citizens would see the true cost of borrowing money and save their money for future purchases instead of borrowing against future earnings.