Finish the Companies Off
July 16, 2008 12:25 a.m.; Page A15
BUSINESS WORLD
By HOLMAN W. JENKINS, JR.
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.
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