By now everyone is buzzing about the federal government bailout of Fannie Mae and Freddie Mac.
Riddle me this:
- Whose idea was it?
- Was it smart?
- Was it necessary?
- Could it have been prevented?
- How did this happen?
The answers to these questions are easy.
- Treasury Secretary Hank Paulson
- Fannie Mae and Freddie Mac knew that the federal government would bail them out if they ever got into trouble
The Chicken and the Egg.
More on “Whose idea was it?”:
WASHINGTON — President Bush may be the nation’s first M.B.A. president, but when Mr. Bush and a small coterie of advisers met in the Oval Office last week to complete their plan to rescue the mortgage giants Fannie Mae and Freddie Mac, there was no question who was in charge.
It was Treasury Secretary Henry M. Paulson Jr. who first proposed the idea of a government conservatorship, and broached it with Mr. Bush while the president was at his ranch in Crawford, Tex. It was Mr. Paulson who set the guiding principles for the subsequent deal; Mr. Bush endorsed them, a departure from usual White House practice, in which the president articulates principles for his underlings to follow.
Had the federal government not taken over these giants, we would most likely have experienced what is called a systemic breakdown of our nation’s financial system resulting in most likely a recession (already likely by most accounts) or even the next depression.
The moral of the story? You can’t have a free market system unless you truly have a free market. The implied bailout of these mortgage giants, which until this week were public companies, allowed (encouraged?) them to take unnecessary and unmitigated risks.
Risks otherwise unadvisable, especially given the small margin of extra return that could have potentially been delivered to investors, had the potential upside been fully realized.
And now the taxpayer has become the beneficiary of the not yet fully realized downside.
So who’s the
idiot (sorry) uninformed overseer behind the formation of this disaster in the first place?
Care to wager as to what party he represents?
Taxpayers are now on the hook for as much as $200 billion to rescue Fannie Mae and Freddie Mac, and if you want to know why, look no further than the rapid response to this bailout from House baron Barney Frank.
Asked about Treasury’s modest bailout condition that the companies reduce the size of their high-risk mortgage-backed securities (MBS) portfolios starting in 2010, Mr. Frank was quoted on Monday as saying, “Good luck on that,” and that it would never happen.
There you have the Fannie Mae problem in profile. Mr. Frank wants you to pick up the tab for its failures, while he still vows to block a reform that might prevent the same disaster from happening again.
Could it have been prevented? (Yes – emphasis mine)
At least the Massachusetts Democrat is consistent. His record is close to perfect as a stalwart opponent of reforming the two companies, going back more than a decade. The first concerted push to rein in Fan and Fred in Congress came as far back as 1992, and Mr. Frank was right there, standing athwart. But things really picked up this decade, and Barney was there at every turn.
That is what happens when Democrats are allowed to stand behind our nation’s cash register. They’re like one of Donald Trump’s ex-wives…only you and I get to pay the bill.