While the Dodd-Frank financial reform bill, which, according to one of its designers, will prevent financial crises in the future, didn’t even mention the primary instigators of the subprime mortgage catastrophe, Washington is now finally wondering what to do about the government-sponsored enterprises known as Fannie Mae and Freddie Mac.
Together, these benevolent institutions either provided or purchased half of all subprime mortgages in the United States — in just a few years. They were created to provide affordable housing for low-income families and racial minorities. The unintended consequence of their actions was an exponential spike in housing prices during the first decade of this century; a bubble that started to collapse in 2007 and nearly tumbled in the entire financial industry the next year.
Banks were bailed out during the crisis. Fannie and Freddie were nationalized. The White House missed a deadline at the end of January for telling Congress what it wants to do with the companies. The New York Times reports that the administration will present a report as early as Friday, listing options without stating a preference.
The preference is perfectly clear. Fannie and Freddie should never have existed to begin with. It is not the government’s job to provide “affordable housing.” It is not the government’s job to interfere in the housing market at all.
Fannie and Freddie cannot go back to the ambiguous semiprivate status that they had before the meltdown. That was part of the problem! Because private banks assumed that Fannie and Freddie would be bailed out by the government (as they were) in the event of a crisis, they took on far more risk than they otherwise could have.
There is no reason to let Fannie and Freddie continue to exist in anything but a private capacity. Their assets should be auctioned among private firms. Not ever again should the United States government pretend to be a mortgage provider. The country’s economy is still in recession today because it once did.