As a free market advocate I am concerned about federal bailout of private financial firms whether it is Bear Sterns, Long Term Capital or Fannie Mae and Freddie Mac. What was the SEC and other federal regulatory agencies (OCC) doing when these firms were engaging in ridiculous practices?

More often the regulatory agencies serve to stifle new competitors than to stifle bad practices by large companies with strong political connections.

Fannie Mae and Freddie Mac, recently bailed out by you and me, originated from the government and then were set ‘free’. They were directed to enforce a government policy to make housing more affordable, but the government created this mess and then regulated it poorly.

At American Thinker

July 29, 2008
Meet Fannie Mae and Freddie Mac
By Jim H. Ainsworth

excerpts

First, Fannie is getting pretty old. She was born in 1938 as part of FDR’s New Deal. Her real name is Federal National Mortgage Association. Uh-oh. She was created to bring liquidity to the mortgage market (help lenders loan money to folks who needed a house). In those early days, she did this by either buying the mortgages or guaranteeing them.

Fast-forward to 1968 when the government decided that it did not want Fannie Mae in its house (on its balance sheet) anymore. She was changed to a private corporation and the responsibility for guaranteeing mortgages was transferred to Fannie Mae’s sister Ginnie Mae (Government National Mortgage Association or GNMA). Uh-oh, again. Ginnie provides guarantees for mortgages associated with FHA, VA, and other government organizations. Wait a minute, you say. Aren’t those FHA mortgages already backed by the government? Well, yes. But GNMA provided the vehicle for the bundling or pooling of these mortgages into securities (also called bonds). GNMA guarantees those securities, which are traded like other bonds on the market.

So what happened to poor Fannie, cast off by the government? She started doing her own guaranteeing of securities and charging a fee for it. Fannie was now called a GSE (Government-Sponsored Enterprise). As a private corporation, Fannie no longer offered the security of a government-backed guarantee — but most folks continued to think she did. It was only natural to assume that government-sponsored meant government-guaranteed.

As for me, I blame them all. But most of all, I blame Congress. They created this mess of bureaucratic organizations. They are guilty on multiple counts. With the worthwhile intention of making it easier for people to own their own homes, they interfered in the markets and unwittingly encouraged greed, poor business practices, and the creation of weak securities. Most of all, they discouraged acceptance of personal responsibility for one’s acts. A chicken in every pot, a car in every garage (a two or three car garage, by the way), a home you can’t afford. Elected Senators and Representatives have a time horizon that does not extend past the next election. Some have a horizon only as far as cocktail hour. They do not understand the law of unintended consequences.

Congress and the Federal Reserve have unrelentingly kept up a steady march to make mortgages available to everyone. From the Community Reinvestment Act of 1977, which encouraged faulty lending practices (demanded them), to the formation of GSE’s, to the encouragement of interest rates below what the market should allow, to indirect and direct subsidies to GSE’s, the government, in all of its machinations, caused this crisis. Now, they are rewarding this bad behavior by bailing out irresponsible lenders and borrowers.

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