Bringing Down The House

The New York Times has an article up from late last week about the bipartisan plan to dissolve Fannie Mae and Freddie Mac. While I do agree that something needs to be done about the two GSEs and the mass government guarantees of subprime mortgages, I am a little skeptical about this:

Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.

Some Republicans and Democrats say the price is too high. They want the government to pull back, letting the market dictate price, terms and availability.

“A purely private mortgage finance market is a very serious and very achievable goal,” Representative Scott Garrett, the New Jersey Republican who oversees the subcommittee that oversees Fannie and Freddie, said at a hearing this week. “No one serious in this debate believes our housing market will return to the 1930s.”

[...]

Hanging in the balance are the basic features of a mortgage loan: the interest rate and repayment period.

Fannie and Freddie allow people to borrow at lower rates because investors are so eager to pump money into the two companies that they accept relatively modest returns. The key to that success is the guarantee that investors will be repaid even if borrowers default — a promise ultimately backed by taxpayers.

They are still kicking ideas around and this will ultimately take an inordinate amount of time to solve, but if recent history is any precedent, this sounds like another opportunity for government to give up the entirety of its role to the free market Jesus that will enrich Wall Street even further and leave the middle class paying even more for mortgages.

And if we're so concerned with removing subsidies and government backstops, then why the fuck don't we end this one?

MATT TAIBBI: Well, Greenspan—I think what people don’t understand about the Fed is what an important role the Fed plays in this entire mess. Going back, you know, 20, 25 years, every time Wall Street gets in a lot of trouble, the Fed has been there to bail them out. They even had a term for it on Wall Street called the "Greenspan Put," which essentially meant that every time the banks blew up a speculative bubble, they could go back to the Fed and borrow money at zero or one or two percent, and then start the game all over again.

After the crash in 2008, interest rates were slashed to basically nothing. The banks could go to the Fed and get money for free, and then they’re out lending it to us at five, six, seven—I mean, how much is your interest on your credit cards? It’s 15, 20 percent. It’s almost impossible not to make money in banking if your cost of capital is zero. That’s what banking is all about. And that’s what the Fed has done. It’s provided a massive subsidy system for the banks on Wall Street.

I forgot - Wall Street's continued ability to borrow at 0% interest from the Fed's discount window is just what the Invisible Hand intended, and the free market and capitalism can only flourish when Wall Street is able to have access to free capital, because they work really hard and eat what they kill, and the economy will explode if Wall Street misses a dividend payment or its bonus payouts.