Bush Nationalizes Housing Finance Industry

Bush Nationalizes Housing Finance Industry

Treasury Secretary Henry M. Paulson, Jr. got annoyed by all the whining about foreclosures and other petty matters, and took over Fannie Mae and Freddie Mac, the mortgage insurance “entities” that keep U.S. housing prices from skyrocketing and plunging. Oh, they did? Despite all that deregulation that President Bush decreed so prices could be stabilized by the Wisdom of the Market?  Golly.

For those of you unfamiliar with the fine points of the American financial system, Freddie and Fannie are quasi-governmental public-private partnerships that package mortgage-backed securities from housing loans. That means they are not really the government, except when they are. The current administration allowed Fannie and Freddie to trade shares on the New York Stock Exchange.  Why? Just because.

Fannie Mae and Freddie Mac benefited from the deregulation of the American financial system, under which a potential buyer’s respiration qualified him for a home mortgage, and higher prices were guaranteed by the multiplication of middlemen in real estate transactions. Freddie and Fannie were joined by banks, brokerages, and corner convenience stores in bundling together bunches of mortgages and selling shares in them, since buying and selling these mortgage-derived securities was where the money was. Who cared if mortgages lost money?

The idea behind mortgage insurance is that profits from good mortgages make up for the ones that go bad, ensuring profits. This works fine, except if there is lax regulation in granting mortgages to home buyers due to the pressure to produce a greater volume of mortgages to bundle as securities. You’ll never guess what happened.

Many (perhaps most) buyers of U.S. mortgage-backed securities do not live in the United States, so this has repercussions for the world economy. It also means the U.S. government is taking over Freddie and Fannie to bail out foreign nationals, not American homeowners. Just thought you would like to know.

The High Priest of Deregulation (the religious dogma that allowed this situation) is former Republican Senator (and McCain economic advisor) Phil Gramm, PhD; he could not be reached at his office at Union des Banques Suisse (un établissement financier mondial). Dr. Gramm’s Wife, Dr. Wendy Gramm, wielded the ceremonial deregulatory knife in the White House.

The Treasury Department action is known as a “bailout,” except if you work for George W. Bush. The White House calls it a “conservatorship.” Bet you didn’t know that nationalising companies was conservative.

Image by Mike Licht. Download it here.Creative Commons license; credit Mike Licht, NotionsCapital.com

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