It’s becoming a bad habit in Washington: policymakers tilting at windmills while ignoring real problems.
For example, while most Americans were concerned mostly about jobs, President Obama spent the better part of a year flogging his health care “reform” bill (which will do nothing to boost employment) through a reluctant congress. Now the president is using the BP oil spill to push for a “cap and trade” climate-change tax bill, even as Americans wonder if we can’t, oh, stop the leak first.
This disquieting pattern extends also to efforts to “reform” the financial industry.
Last month the Senate passed a 1,300-page bill that aims to prevent future banking meltdowns. It would create a Consumer Financial Protection Bureau (a new layer of federal bureaucracy), encourage a new set of financial institutions that are “too big to fail,” (setting the stage for future bailouts) and stand up an extremely powerful Financial Stability Oversight Council (that could order a private company to break itself up, stop selling certain products, or even go out of business).
But the bill would do nothing to reform two companies that helped inflate the disastrous housing bubble in the first place. Fannie Mae and Freddie Mac, two “government sponsored enterprises,” are “too big to fail” and, apparently, too big to reform.
This isn’t an oversight. It’s a policy decision.
“This is a big, massive bill as it is,” Sen. Mark Warner, D-Vir., says. “We’ll come back next year and take on Fannie and Freddie in a more thoughtful way.” So, wait ’til next year, eh? Hope that policy works out better for taxpayers than it does for, say, Cubs fans.
Unfortunately, lawmakers are coming at this problem from the wrong direction. They won’t solve the problems that plague our financial markets until they deal with Fannie and Freddie, since those companies are such big pieces of the problem.
Before the housing collapse, Fannie and Freddie controlled as much as half of the nation’s residential mortgage market. Since then, both companies have gone belly up, and rely on the federal government to keep them alive.
In just the first three months of this fiscal year, Freddie Mac announced losses of $8 billion and requested $10.6 billion more in taxpayer help. For its part, Fannie Mae lost $11.5 billion and wants $8.4 billion more. And keep in mind that the companies have already blown through some $145 billion in taxpayer money.
You might assume the federal money is all part of a sweeping plan to wind these companies down gradually, until the private sector can pick up the slack. But in fact, the opposite is occurring.
Even as they rely on federal handouts, the companies are expanding their control of housing markets. Last year, the GSEs financed or backed about 70 percent of single-family mortgage loans. They now hold about $5 trillion in their investment portfolios. Policymakers apparently think the best way to handle a company that’s “too big to fail” is to make it bigger.
And there’s no end in sight.
At Christmas (while most Americans were paying attention to other things), Santa certainly delivered for Fannie and Freddie. The Obama administration lifted all caps on how much the companies could drain from federal coffers. Once limited to “only” $200 billion apiece, they can now borrow endlessly. And they don’t even have to prepare a plan to pay the “loans” back.
Fannie Mae and Freddie Mac have always imposed risks on taxpayers and the financial system. It’s time for genuine, effective financial reform. They should be partly wound down, with their remaining assets broken up (if they can stand on their own) or sold off (to private banks and investors). They shouldn’t be replaced, reformed or rejuvenated.
Lawmakers also should make certain that they never again write a blank check to a financial institution. In a failed attempt to boost American financial markets, Congress created a monster that ended up dragging down the residential mortgage market.
The stock market has spoken -- the twin GSE will soon be delisted, as their stock is trading for less than $1 per share. It’s time for lawmakers to stop ignoring Fannie and Freddie. Let’s fix them -- once and for all.
Dr. Edwin Feulner is president of The Heritage Foundation.
