Tag Archives: Fannie


Recessions are a natural element of the economic cycles in a free market society. They even serve a useful purpose. Recessions put a damper on the irrational exuberance that leads to boom and bust. Recovery from recession is just as natural as its recurrence.

MOTHER OF SEVEN Photo from FDR Library via National Archives and Records Administration

Since the end of the Great Depression the average length of a recession has been 11 months; the longest was 16 months in duration. The National Bureau of Economic Research is the universally accepted arbiter for determining when these periods began and when they ended. The NBER has set December 2007 as the start of the current recession. That makes it 2 years and 9 months old. It is by far, the longest recession on record.

Banks have cash to lend, corporations are flush, interest rates are low, labor is plentiful and cheap. These are the seeds for renewal of growth that naturally occur in any recession. But they are not taking root. It is the herbicidal policies of the Obama Administration we have to thank for that.

Taxes will rise but the details remain unknown. The rule of law has been subrogated to executive dictate. Assets have been acquired by government through intimidation. Unions are supported by government as seldom before. Obamacare has significantly increased the cost of adding new employees to a payroll. The Dodd and Frank Act for financial reform has given regulators carte blanche to make the law, no one knows what’s in store. Cap & Trade and Card Check hang as specters for 2011. The Federal debt is set to soar. Socialism is knocking at the door. There is no need to wonder why business is not rushing to expand and banks are reluctant to lend.

The collapse of the mortgage industry brought on this recession. It was the Community Reinvestment Act (CRA) and the actions of the government sponsored enterprises Fannie Mae and Freddie Mac that fed the real estate bubble which, one day, simply had to burst. It was Andrew Cuomo, Secretary for HUD who threatened the banks because “only” 42% of their loans were to sub-prime lenders. This was not a naturally occurring recession. It was government induced and now it is being government prolonged. It is FDR redux.

What did Reagan say? “Government is not the solution to the problem. Government IS the problem”.

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We have written that the Act is vague in many respects. However, some of it is specific and some of it is good. For example, it puts an end to “Liars Loans” also called NINJA loans because you could get a mortgage with No Income, No Job and No Assets. Also good is the provision known as the Volcker Rule that puts limits on how far a bank can go in trading in derivatives and swaps for their own account, i.e, how much risk they may take in search of trading profits.

Anyone who listens to the excellent Howard Clark show knows there is need for reform in the credit card industry. We have no details, but the Act purports to bring needed reform here. Sounds good.

What the Act fails to do, and fails completely, is to fulfill its stated purpose. That is to take measures to prevent a recurrence of the financial collapse from which we are all still suffering. Can anyone deny the primary cause was too many sub-prime loans? Fannie Mae, Freddie Mac, Barney Frank, Franklin Raines, Andrew Cuomo and Jamie Garelick were the major players in designing, building, promoting and protecting the house of cards whose inevitable collapse created the crisis. It would be naïve to expect Barney Frank to censure Barney Frank but not to reform Fannie and Freddie is an unmitigated disgrace.

Space here does not allow a complete analysis of the causes and contributors to the crisis and the recession. Fortunately, some excellent, well written articles on the subject were published at Town Hall a year and a half ago. I urge you to click the blue links and read them.

Mortgage Mess Blame Game.

The Day the Democrats Brought Down the World

Pelosi’s Gall

(Confession: I wrote them)

Bob B

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Fannie and Freddie Redux

In the opinion of Sen. Gregg (R) N.H., the Senate version of the financial reform bill “is a disaster because it doesn’t address the fundamental underlining causes of the economic issue, which were real estate and underwriting. “ The focus in the drafting of this legislation “was directed at scoring political points.”

Two things are horribly wrong with the Senate bill which was drafted primarily by Sen. Dodd. First, the bill creates a giant new government authority with the propagandic title “Consumer Protection Agency”. Its provisions center, not around protection, but around ordering banks to lend “on social justice purposes instead of safety and soundness purposes.” In other words the new rules would be a form of affirmative action for banks to lend to borrowers of questionable ability to repay, all in the name of social justice.

The current financial crisis, the one that Rahm Emmanuel urged Democrats not to waste, was the natural consequence of large scale lending to borrowers who could not afford to repay. A high level of sub-prime lending was mandated by HUD and facilitated by the Government Sponsored Entities (GSE) known as Fannie and Freddie with added help from Greenspan’s low interest rates. The federal government set up the conditions in the real estate market that led to its inevitable collapse. The Dodd bill just passed by the Senate would set up similar conditions in the consumer lending industry as it did in real estate.

The second problem with the bill is the unintended consequence of less regulation of derivative markets.  The prohibitions in the bill are likely to cause those markets to find a home overseas where restrictions are less onerous and out of reach by U.S. regulation. Such a response would be what economists call “rational expectations”.

Remember, social justice, to the left means equal status. To achieve social justice, wealth must be redistributed.

Bob B

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