September 24, 2022

Mortgage Co. Bailout

Two actions by the feds in D.C. are aimed at bailing out Fannie Mae and Freddie Mac, two large mortgage finance companies that are being dragged down by the domino effect of the mortgage mess we’ve gotten ourselves into. 

The NY Times says:

Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.

In a separate announcement, the Federal Reserve said it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision “to promote the availability of home mortgage credit during a period of stress in financial markets.”

What makes these companies special? 

The companies, known as government-sponsored enterprises, or G.S.E.’s, touch nearly half of the nation’s mortgages by either owning or guaranteeing them, and the debt securities they issue to finance their operations are widely owned by foreign governments, pension funds, mutual funds, big companies and other large institutional investors.

“G.S.E. debt is held by financial institutions around the world,” Mr. Paulson said in his statement. “Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.”

In other words, the U.S. can’t afford to default on payments owed to investors in the two companies lest an international run on U.S. debt begin in earnest.  The slide in the dollar’s value is indicative of a lack of confidence in our country’s future, of course, and evidence that foreign investment in America is being made with at least some skepticism these days. 

Needless to say, this financial weakness is a potential vulnerability for a nation with enemies.  It’s the last thing that we need to have happen in this country, yet we did it to ourselves by failing to exercise even the rudiments of fiscal discipline in managing our personal debt loads.

Phil Gramm, a man I admire in many respects, says that Americans are whining while enjoying a fundamentally sound economic situation.  Yet we save virtually nothing – hence the term "negative savings rate" – while we indulge in consumption well beyond our means.

At a micro level, two major failures in judgment lead to this sorry state of affairs:

  1. a simple unwillingness to accept mathematical limitations on our ability to pay for new homes, cars, and electronics
  2. a seeming inability to acknowledge the cause-and-effect relationship between our inability to meet our obligations and the consequences that follow

Some have blamed the mess on predatory lenders, some of whom undoubtedly played a part, and others the politicians who updated financial regulations making markets more fluid.  But the truth is that Americans created this nightmare by being greedy and the situation isn’t going to resolve itself until there’s a fundamental shift in values, the first of which is to recognize that economic realities cannot be denied indefinitely.

No stimulus plan, tax cut, or social program, regardless of which political party’s muscle is behind it, can change the fact that Americans of all stripes must take stock of their financial limits and live within them.  Period.

John McCain says he’ll balance the federal budget if he’s elected president.  While I’m not sure that I believe in the senator’s new-found conservatism, this is a message that Americans need to receive loud and clear.  Moreover, we need to do the same in our homes and families.

marc

Marc is a software developer, writer, and part-time political know-it-all who currently resides in Texas in the good ol' U.S.A.

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