Wednesday, May 12, 2010




Bailout: When the federal government plays mad scientist, it doesn't destroy the monster it realizes it's built. Instead, after wreaking global economic havoc, Fannie Mae gets the taxpayers' blank check.

The Federal National Mortgage Association, "Fannie Mae," a mutant hybrid with the worst features of government agency and private business, holds about $6 trillion in mortgages. Now it wants another $8.4 billion in cash.

More largesse for Fannie and its equally evil twin, the Federal Home Loan Mortgage Corp., "Freddie Mac," is like emptying a dump truck full of taxpayer cash down a bottomless pit.

In its 12th straight quarterly loss, the mortgage behemoth consumed $11.5 billion in this year's first quarter. That's an improvement: A year ago, Fannie lost twice as much.

Why would American taxpayers pay billions to keep these monsters alive? As the Manhattan Institute's Nicole Gelinas points out in "After the Fall," her book on how to save capitalism after the 2008 disaster, "Fannie and Freddie used their considerable power both to bribe and to intimidate politicians and the media; but their unique power to do so came from their carefully preserved apple-pie image as every homeowner's friend."

It's some mighty expensive apple pie: Late last year, the Obama administration raised Fannie and Freddie's $400 billion borrowing cap, handing the two government-sponsored enterprises (GSEs) a blank check signed by Uncle Sam.

FDR established Fannie in 1938. As Cato Institute senior fellow Johan Norberg describes its later mutation in his recent book "Financial Fiasco," "In 1968, private stockholders were allowed to take stakes so that Fannie Mae would not have to be recorded as an expenditure in the federal budget, which was already weighed down by the Vietnam War and burgeoning entitlement programs."

Fannie bought and bought mortgages from lenders, who then could make more mortgages; Fannie would often then sell mortgages, allowing it to buy still more loans.

As Norberg writes, "A GSE is potentially the most dangerous type of enterprise since it may allow private owners to take any risks they can imagine, pocket any profits for themselves, but count on taxpayers to take care of any losses."

Federally guaranteed, Fannie and the other mortgage GSEs lent at ultralow interest rates and enjoyed reduced capital requirements and an exemption from state and local taxes, unfair advantages giving them about half of the U.S. mortgage market.

In the mid-1990s, Bill Clinton added a "Trillion Dollar Commitment" to give homes to 10 million poor Americans, then juiced up Jimmy Carter's Community Reinvestment Act to pressure banks to lend to the unqualified in the name of social and racial justice.

In the new book "How Capitalism Will Save Us," Steve Forbes and Elizabeth Ames describe the obvious solution: "Breaking up Freddie and Fannie into smaller private mortgage entities would eliminate the market distortions created by these two giants; it would open the field to new companies that would not have to fear having to compete against the U.S. government."

Destroy this destructive, cash-consuming monster. Don't feed it.

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