Despite generalized finger pointing, today’s credit implosion is not really the result of CEO excesses or even of poorly managed risk on Wall Street. It is instead the predictable result of misguided Depression-era government intervention 70 years ago.
Franklin Roosevelt’s politically lucrative “bailout” of the U.S. economy included the creation in 1938 of a socialized housing system hinging on the quasi-governmental enterprise Fannie Mae and later, Freddie Mac. Today’s catastrophe is the long awaited dropping of FDR’s other shoe, and it is today’s taxpayer that gets to pay the price for a New Deal somewhat rank with age.
As we contemplate the largest nationalization of an economic sector in American history, it would be well for us to ask how we got here. Fundamentally, this crisis is about the housing market. But why is this?
Many will say that individual recklessness led hundreds of thousands in over their heads, buying more house than they could reasonably afford. To be sure, the market had its share of careless speculators (as it always does), but it would be naïve to claim that this was the fount of all our problems. Rather than chalk our troubles up to a case of collective self-indulgence, we need to ask why it was that so many of us embarked on this one-way path to bad debt. The fact is, what seems in current hindsight to have been rampant speculation made good financial sense five years ago. Extraordinarily low mortgage rates and a steadily growing economy made the housing market an attractive place to be.
And why was it so attractive? It now seems clear that the market was caught in the heady embrace of Fannie Mae and Freddie Mac, who were artificially lowering rates on home loans by bundling and selling huge mortgage-backed securities without adequately assessing their true market value. As in any subsidized industry backed by taxpayer largesse, standard business accounting came second to effective congressional lobbying.
Government dabbling in the housing sector was an economic time bomb waiting to go off. The ticking could be heard years ago, as analysts warned that Fannie Mae and Freddie Mac’s exemption from SEC oversight and access to a U.S. treasury credit line made the credit system inherently unstable. Worse, the government’s attempt to dress the two in private business suits by allowing public stock-holding and standard corporate profits put every incentive in the wrong place. The ticking could be heard, but we were all too flush to hear. The toppling of the housing market has started a chain reaction that jeopardizes our entire economy.
Make no mistake, the government program designed to ensure “affordable housing” has now risked not only people’s homes, but their livelihoods and life savings as well. As we muddle our way out of this mess, it’s important that we understand where the true blame lies if we hope to avoid such a thing again. While it is fashionable and amusing to point the finger of blame at “excessive” compensation packages and greedy “golden paratroopers,” we must remember where the root of the problem first took hold. The worst-of-both-worlds Rooseveltian philosophy of large government “solutions” in which risk is socialized and profit privatized is one we need leave firmly behind.
Paul Schwennesen is a rancher in Pinal County with Arizona roots. He received a bachelor’s degree from the U.S. Air Force Academy and a master’s degree from Harvard. He currently raises natural beef on the Double Check Ranch.