Holman W. Jenkins, Jr.
Wall Street Journal
July 16, 2008
Much of what the Federal Reserve and Treasury said to prop up Fannie
Mae and Freddie Mac over the weekend was redundant. For the Treasury to
offer them a potentially unlimited line of credit was redundant: Fannie
and Freddie already have full possession of the federal credit card, a
fact of which their creditors (including Asian and Middle Eastern
central banks) and politicians never were in doubt.
Opening up the Fed's discount window was likewise redundant—at
least up until the point where Uncle Sam's own credit is shot and the
Fed starts printing money to make good on its commitments. We're not
there yet—but that's where all this may be heading: to the
Federal Reserve "monetizing" all kinds of bad public and private debt,
from mortgages to student loans to the unfunded liabilities of Social
Security and Medicare.
Where's Ron Paul when you need him?
The third element of the Treasury's weekend heroics, the suggestion
that it might use taxpayer money to inject new equity into Fannie and
Freddie, was not redundant. It was a terrible idea. Putting taxpayers
in bed with Fannie and Freddie's shareholders would only ratchet up the
stakes. Congress would insist on showing a "profit" from this
adventure. The game with the federal credit card would start anew.
The obvious solution is to nationalize Fannie and Freddie and break
them up. Sell off their regional underwriting offices to private
investors. Don't heed any guff about how Fannie and Freddie are "vital
to the functioning of the U.S. housing market." Houses would still need
to be financed, and the private sector would jump at a chance to get
the solid, triple-A business that Fannie and Freddie now monopolize.
Indeed, there's evidence that their implicit subsidy never flowed
through to homebuyers anyway, but was captured by their shareholders
and managers.
Let's also dismiss the worry that assuming Fannie and Freddie's debts
might somehow soil Uncle Sam's own credit rating. If Moody's thinks
that honestly owning up to liabilities that everybody already knows
Washington faces should lead to a downgrade, it only shows how feckless
ratings have become. Especially since the goal here would be to stop
Fannie and Freddie from continuing to stack up taxpayer-backed IOUs in
pursuit of private profit.
And yet ... a subtle mystery is why the Treasury and the Fed allowed
themselves to be goaded into action by a collapse in Fannie and
Freddie's stock prices, which are irrelevant to their functioning as
long as their debt is perceived as having government backing—that
is, unless Washington feared their managements might go on strike and
hold the mortgage market hostage to their shareholders being helped. If
so, Treasury could simply have renounced any idea of nationalizing
them, relieving their shareholders of fear of being wiped out as a
matter of policy. Their regulator could have been rolled out to promise
forbearance on any technical capital shortfall. Existing shareholders
would then have welcomed a large dilution by new private investors if
it restored the previous economics of the business. Fannie's and
Freddie's beaten-down shares would have surged, dilution
notwithstanding.
In fact, worth noting is how much this "crisis" is a crisis of the
commanding heights of the economy, of the Wall Street-Washington axis,
and not a crisis of Main Street, which has proved remarkably resilient
so far.
But then we'd never have today's precious opportunity to solve the
Fannie and Freddie problem once and for all. As this column noted five
years ago, Yale's Jonathan Koppell aptly concluded a study with the
observation that while in theory Freddie and Fannie aren't beyond
political control, in practice they are. When all else fails, they
threaten havoc in the home-financing market if anyone challenges their
privileges. Now, for once, it may be possible to move against them.
We'd be fools not to do it.
With Fannie and Freddie on the ropes politically, let's put them on a
path to privatization and liquidation. Treasury's Henry Paulson and Fed
Chairman Bernanke are still talking as if restoring the status quo is
desirable, with tweaks. But putting the Fed in the job of helping to
regulate them, one of Treasury's ideas, would just be to put monetary
policy at the service of propping up yet more financial services
companies. This is not a policy for financial stability—but for
finally prostituting the dollar to the massive liabilities of the
federal government.
