The decline in economic growth over the past couple years has rattled the American schema, as everyday citizens struggle with bankruptcy, foreclosures, and joblessness. Though many factors have attributed to the U.S. recession, the housing crisis and its lingering ubiquity are much to blame for the recession's emergence and its continued discontents.
Fortunately, though long overdue, the Obama administration is developing a proposal for housing reform - something the Republicans have been calling for - and for once the president is promoting market-driven change, and not the rhetorical "change we can believe in" from his evangelic 2008 campaign.
Obama's initiative blueprints an overhaul of the mortgage market, with a plan to phase out roles of staggering mortgage giants Fannie Mae and Freddie Mac and reduce the government's anchored residence in the housing industry.
Part of the proposition requires a new minimum down payment of 10 percent for all loans guaranteed by Fannie and Freddie, as well as a reduction on the amount of mortgages they can back. It also plans to limit the government's regulatory role to only intervening "in a crisis." Overall, the president's plan appears to be pushing for a more privatized housing market.
Fannie and Freddie are classified as Government Sponsored Enterprises (GSEs), because of their privately owned business structures combined with governmental financial protection, an ideal position for any corporation. The way Fannie and Freddie operate in the market are similar to the corporations in Germany in the 1940s and Russian oil companies today - privatized profits, socialized losses. It's corporatism at its finest.
Over the years, Fannie Mae and Freddie Mac have evolved into a "benevolent guardian of the people", eager to assist anyone and everyone in financing a home - quite literally, anyone and everyone. Their pending demise is a result of irresponsible business decisions and shady business practices, which have widely contributed to the housing crisis and, ultimately, the recession. The havoc these two companies have imparted on the economy emerged from a business model that bought up bad home loans from banks and packaged them for sale to investors, and their official government backing attracted investors from all over the world.
The problem is Fannie and Freddie made misguided decisions, and their exorbitant $5 trillion debt liabilities - despite Congressman Barney Frank's countless public diversions - are to show for it. Taxpayers have footed the bill for over $150 billion in bailouts.
The fact is, reform for the two mortgage giants is past due, and the devastation to both the housing industry and recession are unforgivable. Fannie and Freddie own or guarantee over half of all U.S. mortgages, leaving them a majority stockholder in the $11 trillion mortgage market.
No one person has been a stronger advocate of Fannie and Freddie than Congressman Barney Frank.
Congressman Frank has always praised Fannie and Freddie, even through the toughest of times. In 2003, in Congressman Frank's opening speech over a proposal to alter regulation on GSEs he stated that Fannie and Freddie are "not in a crisis." He admitted there had been an "accounting problem" with Freddie Mac, but that the people responsible had been dismissed. He then claimed that Fannie and Freddie "have played a very useful role in helping make housing more affordable," and that "we, as the Federal Government, have probably done too little rather than too much to push them to meet the goals of affordable housing."
In 2008, when the housing and financial markets were under collapse, Congressman Frank stood by his delusionary stance on the GSE's market functions and the government's necessary roles as overseer and regulator of housing finance. When questioned about his faulty market ideology, he emphatically blamed Wall Street and the "bad decisions that were made by people in the private sector." His prerogative: "The private sector got us into this mess. The government has to get us out of it."
From 2004 to 2006, Fannie and Freddie purchased a combined total of $434 billion in securities backed by subprime loans, fueling a new market for subprime lending. As Congressman Frank and his colleagues justified, they were working for the "public good". If the public good means attracting unemployed and bankrupt borrowers to purchase $300,000 homes then, yes, the GSEs - and ultimately the government - were working for the public good.
The problem is, being government-backed companies the consequences of homeowners dodging mortgage payments and going into default are not anticipated. Risks were ignored by Fannie and Freddie, which induced reckless speculation, the precise "speculation" Congressman Frank condemns. By his paradoxical standards, if it's not Wall Street, it's not speculation.
When approached on the reform proposal, Frank asserted that the Republicans are currently divided on the issue, but conceded that he was "open to hearing what people in the market have to say." But with being the big government apostle that he is, something tells me that supporting any legislation that liberates the market is simply not on his agenda. Then again one human being can only take so much failure.
Too harsh? Tell that to the millions of dollars lost by people who responded to Frank's deceptive backing of the most poorly run companies in the history of the United States.
Brian Koenig is a politics and economics writer, and is a regular contributor to The New American, American Thinker, and Hawaii Reporter. He can be reached at briankoe@gmail.com.
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