Editors at National Review Online urge the Trump administration to avoid a major mistake with federal housing policy.
The Trump administration wants an IPO for Fannie Mae and Freddie Mac sometime this year, according to the Wall Street Journal. What sounds like privatization would likely not really be privatization, and the move risks setting up a similar scenario to the one that ended in disaster in 2008.
Congress created Fannie Mae in 1938 and Freddie Mac in 1970. Their purpose was to provide liquidity for the mortgage market by purchasing mortgages from financial institutions and then packaging them into securities that are sold to investors.
They used to be private corporations — sort of. They were publicly traded companies, but they were government sponsored and had enormous lines of credit with the Treasury. The implicit government backing made them ripe for corruption. The theory many investors believed — which was proven correct in 2008, following the bursting of the housing bubble — is that while Fannie and Freddie’s profits were private, their losses would be socialized when push came to shove.
In 2008, they were taken into conservatorship by the federal government. They were indeed too big to fail. And they have remained under conservatorship ever since. That means their private shareholders lack full rights and the government ultimately directs the firms’ operations.
Before the 2008 crisis, Fannie and Freddie owned or guaranteed about 40 percent of U.S. mortgages. Today, that proportion is roughly the same. So it’s not as though the firms aren’t still too big to fail.
A major corporation operating with the implicit backing of U.S. taxpayers is not private industry. Capitalism operates under the profit-and-loss system. The market signal of a loss is just as important as the signal of a profit. Pretending to be a private business while being insulated from failure is a lie, and it turned out to be a destructive one to the overall economy.
