One Hundred Days to Nowhere

Been away so long I hardly knew the place
Gee it's good to be back home
Leave it till tomorrow to unpack my case
Honey disconnect the phone
--The Beatles

Today's news that the US government will take over Fannie Mae (FNM) and Freddie Mac (FRE) is a watershed, but not unexpected, event. Indeed, if you've been reading Minyanville, then this announcement should not surprise you much. MV has been elaborating the F-Troop situation for years.

I have no doubt that many mainstream media commentators, as well as political pundits, will portray this situation as a 'market failure' and that government intervention was necessary to preserve social welfare.

Critical thinkers likely won't drink that kool aid. Fannie and Freddie are 'government sponsored entities (GSEs)' which, by definition, are vehicles of bureaucratic intervention in market functioning. Fannie, for example, was born from FDR's New Deal programs in 1938 with the goal of boosting home ownership above what free markets would have permitted alone.

There is nothing 'market failure' related about the F-Troop case. Instead, this situation is the product of potential energy turned kinetic from pressures building over years of bureaucratic market distortion.

Claims that placing FNM and FRE in government receivership are necessary to preserve social welfare are contestable as well. Consider those likely to benefit from this bail out, including holders of GSE debt and mortgage backed securities (including bond firms like PIMCO), politicians promoting housing market preservation and housing for the poor, mortgage holders who borrowed more than they should have, lenders who lent more than they should have, among others.

Who gets hurt? Those who were prudent. People who didn't reap reckless rewards during the preceding housing boom, but who will pay for the recklessness of others as the boom inevitably busts.

As such, the rich get richer and the poor get poorer. For those concerned about increasing disparity in class wealth, look not on 'free markets' as the cause of this phenomenon. Consider instead the consequences of government intervention that distorts markets, and of our ongoing willingness to privatize gains and socialize losses.

no positions