Leave it to the federal government to fail to fix a problem that they created themselves.
In 2008, the economy fell into a massive recession, caused in large part by the crashing of the real estate market.
When the housing bubble popped, the economy took a huge hit.
That bubble was made possible by government policy.
The mechanism used to create the asset bubble was two government-backed real estate companies—Fannie Mae and Freddie Mac.
What was the government’s solution to the problem they caused?
Take over Fannie Mae and Freddie Mac.
Obviously more government is always the answer in the “Swamp.”
The great economist Thomas Sowell described the role the Fannie and Freddie played in the market collapse, writing:
“Fannie Mae and Freddie Mac were crucial to these schemes to force lenders to lend to those whom politicians wanted them to lend to, rather than to those who were most likely to pay them back…the two government-sponsored enterprises that were buying up mortgages that banks were willing to make under political pressure, but often unwilling to keep.
The risks that banks were passing on to Fannie Mae and Freddie Mac were ultimately risks to the taxpayers. Although there was no formal guarantee to these enterprises, everybody knew that the federal government would always bail them out.
Fast forward now to 2008, after the risky mortgages had led to huge numbers of defaults, dragging down Fannie Mae, Freddie Mac and the financial markets in general— and with them the whole economy.”
The government made the mortgage crisis possible with their tacit agreement to cover the bad loans if they went into default—a problem that was made worse by complex mortgage-backed securities.
The government took over Freddie and Fannie eleven years ago, and still control the companies to this day.
However, the Trump Administration is finally taking action to change that.
Trump Administration Plans to Privatize Fannie Mae and Freddie Mac
The Wall Street Journal reported, “The Trump administration said it would support returning mortgage-finance giants Fannie Mae and Freddie Mac to private hands, a development that could keep the companies at the center of the housing market for decades to come.
The principles announced Thursday represent a major reversal from what leaders of both parties over the past decade promised—to abolish the companies, which guarantee roughly half the U.S. mortgage market. The approach, which doesn’t require approval by Congress, would mark an important win for investors who have been betting politicians wouldn’t follow through on those promises.”
It is a delicate situation, given the fact that over half the mortgages in the United States are guaranteed by Freddie and Fannie.
Homeowners love the fact that they can get fixed-rate 30-year mortgages, and no one can blame them.
However, homeownership isn’t a constitutional right. If a potential homeowner can’t get a loan in an unregulated market, there is a reason for that.
Homeownership requires a lot of saving and smart budgeting.
When the government backs up loans for those who shouldn’t be buying homes, that is when things get bad, and markets crumble.
The Trump administration is moving the ball in the right direction. However, at some point, Fannie Mae and Freddie Mac need to be released from all forms of attachment to the federal government.
If that doesn’t happen, there could be another housing crisis, which once again would be the fault of the government.