Black and White Program

The Taxpayer Stands By

September 11th, 2008 by Kyle Rankin

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As taxpayers watch news of the federal government’s takeover of Fannie Mae and Freddie Mac, they realize that their taxes are being spent again, and, further, this unfolding mess is the fault of distant executives, lobbyists, and government regulators. They may begin to question the bits and pieces of the information that is streaming out about these two mega-firms.

One may ask: how did this happen? How did these companies get into this precarious situation? How can two government sponsored enterprises come so close to failure? Even after the mortgage crisis of the past year and a half, did no one see this coming? One may wonder how these companies came to be responsible for over 50% — and as recently as a few months ago, nearly 80%– of the mortgages in the U.S. One may wonder if a few companies controlling the marketplace is fodder for an unhealthy business environment? Were there not antitrust issues? One may wonder how two companies that are government sponsored, with regulatory oversight, came to be in their fragile state while controlling so much of the market? Aren’t these things taught in business school?

With taxpayer money in tow, the Treasury Department has taken over the enterprises, terminated the CEOs, replaced boards, and is planning a combination of efforts to reduce their size, return them to a healthy financial state– if there ever was a healthy state– and slowly return them to the private sector, with what most likely will be sale of securities. Along the way, more controls, regulations, and oversights are expected.

The taxpayer stands by.

Past the current disbursement of daily news, a few things are apparent:

The take over of Fannie Mae and Freddie Mac by the federal government is not the solution to the housing and mortgage crisis. While foreign and U.S. markets have given positive indications that they are headed towards such, it is, essentially, a measure designed to prevent further damage, instill confidence in foreign debt holders so they continue to purchase our debt, and prevent a free fall of financial markets in the U.S. These are all ancillary measures that do not address the core of the problem.

The core of the problem is that there are millions of homes in the U.S. that are over-financed by mortgage firms. The value of these homes has fallen and the debt exceeds the market value of the home. Accelerating terms are causing defaults and subsequent foreclosure, at the highest rate since the Depression. As a result, credit is harder to obtain for new mortgages and fees are on the rise, even for people with solid credit scores. The credit problem has reverberated to the commercial market. Foreign entities, especially Asian companies, who have purchased the debt in the form of securities are concerned about their repayment. As a result, credit has become scarce, creating a slowdown of economic activity in the country.

The Fannie Mae and Freddie Mac takeover do not address the record foreclosures that have taken place and are forecasted to continue to take place in the next 12 months. While there may be a temporary calm, there is still a storm due. With the takeover, the federal government will actually hold the mortgages for over 50% of this debt, unless Fannie Mae and Freddie Mac have sold it to a foreign entity. So the federal government will be in the position to do the workouts in the foreclosures, a position they have not been in before, but they do so with taxpayer funds.

The taxpayer stands by.

The government is trying to right the market, inject it with taxpayer funds, prop up weaker segments, open up credit lines, etc. They take the typical government macroeconomic approach designed to affect the masses: far reaching policies and infusion of billions of dollars into the system that end up with numbers that stagger even mainstream economists. This is the opposite of a microeconomic solution in which decisions for allocating resources largely from individuals are based on indicators from supply and demand.

A plausible idea is to consider a microeconomic approach towards resolving the current economic problem of the credit and housing industries. Where macroeconomic solutions fail, microeconomic solutions may succeed. One may recall the recent decline in the price of oil. No real government effort has resulted in the recent decline of the price of oil in the U.S., but rather reduced consumption by individuals have been responsible.

The problem with recent efforts is that they address only a portion of the symptoms, namely preventing Fannie Mae and Freddie Mac from failing, while not addressing other symptoms such as the foreclosures and the core problem— unregulated banks and brokers who over-financed millions of homes to buyers who cannot pay for them.

So as the taxpayer stands by, watching the use of their funds be used to quell symptoms, one may ask– where is the plan for the other symptoms, or the cure for the pain?

Is there one?

The taxpayer stands by.

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