Swan Song for Fanny Mae

Eulogy for the Ownership Society

By MIKE WHITNEY

The Fed's emergency rescue plan for the financial markets is hopelessly flawed. It's a scattershot approach that doesn't address the real source of the problem; an unregulated, unsustainable structured finance system that emerged in full-force after 2000 and spawned a shadow banking system that creates trillions of dollars of credit without sufficient capital reserves. This is the heart of the problem and it needs to be debated openly. The present system doesn't work; it's as simple as that. It makes no sense to provide trillions of dollars of taxpayer money to shore up a system that is essentially dysfunctional. It's just throwing money down a rat-hole.

The Federal Reserve and US Treasury want a blank check to prop up Fannie Mae and Freddie Mac, the two war-horses of the mortgage industry, that currently underwrite nearly 80 per cent of all new mortgages in the US. But by any objective standard both of these GSEs are already insolvent. Thus, the taxpayer is being asked to rescue a failed industry that has been used for private gain so that speculators will not have to suffer the losses. Even worse, Fannie and Freddie have written hundreds of billions of dollars worth of mortgages that have not yet defaulted, but will certainly default within the next two years. This is bound to batter the already faltering economy.

The bad paper held by Fannie and Freddie are mortgages that were made to unqualified applicants who are presently losing their homes in record numbers. Their loans were approved because there was no functioning regulatory body to oversee their issuance and because the mortgages were transformed into complex securities that were sold to credulous investors around the world. The ratings were fixed to meet the requirements of their employers, the investment banks, which marketed these exotic bonds to foreign banks, insurance companies and hedge funds. That puts Fannie and Freddie at the center of a system that needs radical surgery to eradicate the bad paper. If this doesn't happen in a timely fashion, then foreign investors will stop purchasing US debt and the dollar will crash. By creating a backstop for Fannie and Freddie, the Fed is linking US sovereign debt with mortgages and derivatives that are already known to be fraudulent. This is a big mistake. According to Merrill Lynch, the US is already facing a long-term "financing crisis" as the weakening US economy and sluggish consumer spending could signal an end to the $700 billion in foreign investment that covers America's current account deficit. By assuming the GSE's enormous debts, the Bush administration is just speeding this process along and inviting disaster.

http://www.counterpunch.org/whitney07182008.html

goodbye, and probably the 15 year mortgage. That means damned few people will become homeowners and things will revert to the way they were in the 20s, with balloon mortgages that nobody who doesn't have an unknown relative die and bequeath them a fortune or hit the lottery can afford. Just as they did in the years before the Depression, people will either rent or renegotiate a balloon mortgage every 3 years after they've paid all the interest and before the unaffordable payments kick in.

Nobody likes to see fat cat investors bailed out. However, some things are well worth saving. Fannie Mae and Freddie Mac were created for US, not them, and losing them will be just another nail in the middle class's coffin.

You could easily say that about anything in this economy right now, which is why the pessimists are still pessimistic: the fundamental problems have not been fixed. In fact, the fundamentals are worse now.