Fanni and Freddie Conservativeship

The Bush Administration handling of the economy is dazzling. The moves have not only been effective, but also calming to the markets. And thus the markets have made an orderly retreat to lower levels.

But tn spite of the real estate melt down, the political season and the credit crunch, there has been no recession. While the sub prime debacle reverberates all over the world, the American economy still has strong fundamentals.

The irresponsible rhetoric of an impending Great Depression aside, there has been only one month (December) of contraction. The last quarter shows a robust 3.3% growth and an unemployment rate that for the last six years has been consistently lower than the last four decades. Too bad for the big tax and spenders, the tax cuts must be given credit for the economy’s strength.

To libertarians it is very scary but the conservatorship of Fannie and Freddie goes back to the man on the ten dollar bill – Hamilton, creator of the central bank. Many consider him the premier American economic genius who understood the configuration of the most powerful economy on earth and capitalism itself. He was ahead of his time. A powerful Fed making mitigating moves would have his approval.

The loss of innovation is the curse of government (politically correct) regulated industry. The engine of incentive and the hunger for innovation is lost within taxpayer supported bureaucracy. It breeds things like tenure, seniority and mediocrity. The sub prime debacle simply brought that weakness to a head. These loans were sub prime for a reason. They were made with liberal lending rules that succumbed to the needs of real estate over-development.

The unqualified and defaulted buyer got to live in a house he could not afford. And, sub prime lenders got a great deal more interest for taking a risk. We can say that they already received their due. In many cases buyers received that privilege without down payment and without a good credit report. They walked away when they could not make the usury interest rate payments. But why were taxpayers guaranteeing such instruments?

By the time it discovered sub prime mortgages were too risky, it was too late. Even though they are partly private businesses, just like any bureaucracy, Fannie and Freddie descended into complacency. Instead of competition there were “agreements” padded with winking eyes that every bureaucratic administrator knows about. Being outside the competition makes one rusty and feeling secure while one hand washes the other that has grease for the palm.

Fannie and Freddie deteriorated into hybrid semi bureaucracies with many closets needing cleaning. This duo could not go below their current rates because they were sapped of competitive capability by regulation and thus inefficient. No matter how low fed rates went mortgages were anchored to the cost of bureaucratic waste. Well, the party is over.