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Addressing Mortgage Malinvestment in the Financial Sector

Notwithstanding a great deal of tough language in September 2008 from our government about how Fannie and Freddie were a disastrous case study in government failure, not much has been done to get rid of the mortgage twins.  Here is part of a piece I had in the Hill blog this week about how to move them away from their status as wards of the state and towards a freer mortgage market, a wind down process that can begin immediately:

“The Romney-Gingrich political grudge match over Freddie Mac presents an opportunity to ask a basic question: Why are Fannie Mae and Freddie Mac still operating? Michael Williams’ recent resignation as CEO of Fannie Mae has set up a struggle over the direction of the two mortgage behemoths. It comes just a few months after Freddie Mac’s chief executive Ed Haldeman announced his departure. Will the two mortgage giants continue to muddle along in conservatorship as they have since September 2008, or will these resignations act as a catalyst to put them in receivership and wind down their operations? The latter scenario would enable taxpayers to put the fiscal disaster of these two government-sponsored enterprises behind them.”

For the full article follow the link.


    1. They are talking about legislation which is not necessary. The FHFA can place the two in receivership to wind down the pair without resort to legislation.

  1. Mitt Romney has a rare moment of frankness – in which he admitted that the only way to deal with the problem is to let the price of housing FALL.

    Of course Fannie Mae, Freddie Mac and FDIC (and so on) should not exist – and yes the housing market would CRASH without government support (the government, indirectly, owns a huge percentage of mortagages).

    However, the market SHOULD crash – it is the only way for the market to clear.

    And (for example) for all those people who can find no property to buy or RENT (there is no shame in renting and there is no "right" to own a house or apartment) to find that prices have gone down far enough for them to be able to afford accomidation.

    Of course all Hell was let loose on Romney – and, not being a very brave man, he fell back.

    For people who want the facts on why the housing "boom" happened (rather than subMarxist agitprop stuff) read Thomas Sowell's "Housing: Boom and Bust" and (for the general background of Alan Greenspan's credit money expansion) Thomas Wood's "Meltdown".

  2. My understanding is that money can only enter an economy in three major ways: (1) by being directly spent into existence through government projects and programs; (2) by the Fed and other banks lending it into existence as debt; and/or (3) directly through human labor upon deposit of the worker's wages, which is presently not allowed because wages are treated as being derived from pre-existing (debt-based) capital.

    So, regarding the question as to why Fannie Mae and Freddie Mac are not going away, since #3 is not allowed to happen, and Fannie and Freddie are major "feeds" into the monetary system through a combination of methods #1 and #2, getting rid of this major "aqueduct" would have devastating, politically-unacceptable consequences for the economy, particularly those areas of the economy associated with real estate, construction, legal fees, manufacturing of home improvement related products, etc.

    Why not simply allow #3 to occur to fill in money supply voids left in the wake of the gradual phase-out of Fannie and Freddie. Then, as the new feed lines get established, let bankruptcy courts help with the transition.

  3. Rick I do not deny that getting rid of Fannie Mae, Freddie Mac, the FDIC (and on and on) would bring the economy crashing down – but THAT IS GOING TO HAPPEN ANYWAY.

    The present credit bubble economy is UNSUSTAINABLE. And it will not last long whatever the governmnet does – indeed my guess is that the system will start to fall apart in 2013 (sadly giving a relected Comrade Barack just the excuse he needs for Emergency rule – for which the plans have already been drawn up).

    I also think seeing the value of money in terms of human labor is a mistake. Human labor is vital to any economy (there we AGREE), but it is NOT what gives money (or anything else) its value – Adam Smith (in his last years) was very misleading on this point, and David Ricardo developed this error into a whole theory, the "labor theory of value" – very carefully refuted many times (by Samual Bailey, Ferrara, Gossen, and many others – long before the so called "marginal revolution" of the 1870s, of Carl Menger and others, which is normally recorded as the refutation of the labor theory of value.

    1. On the credit bubble, I agree that we cannot avoid the required adjustment to correct the malinvestment and prior efforts to avoid so-called "politically unacceptable consequences" have only prolonged the period of adjustment.

  4. Yes Vern McKinley – but now the "adjustment" will be terrible.

    All the chances to have a fairly mild recession have been lost. Each time the bubble looked like it was going to burst, Alan Greenspan came along and "saved the world" – i.e. put off the bust, at the expense of making the bust WORSE.

    And the Chairman of the Federal Reserve B.B. (if only that was "Bilbo Baggins"), has carried on this practice and taken it to an demented point.

    When will things fall apart?

    As I have said – my guess is 2013.

    But, God forgive me, I am actually HOPEING that the crash comes sooner than this – for poltical reasons, although (in my defence) political reasons of a very fundemental kind.

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