Fannie And Freddie: Giant Stimulus Slush Funds For An Election Year

Includes: FMCC, FNMA
by: Edward Harrison

Here’s how I put it in May 2010 about Fannie Mae (OTCQB:FNMA) and Freddie Mac’s (OTCQB:FMCC) domination of the mortgage market:

There’s another reason that banks earned so much cash: The GSEs. It is clearly the unsaid policy of the Washington elite to use Fannie and Freddie as a vehicle for manipulating mortgages. They are dominating the market for new mortgages. Without them, house prices would be much lower. But, Fannie and Freddie are being left with all the garbage loans and losses that the rest of the banking sector could be taking and this represents the nationalization of America’s mortgage problem I predicted it would in September 2008. It is a backdoor bailout of the banking sector.

See, Fannie and Freddie have already been nationalized and the government is already on the hook for hundreds of billions of dollars of losses as a result. Clearly, this makes it a lot easier to use the GSEs as vehicles to pump money into the economy because any incremental loss is completely obscured by the existing gargantuan losses. Fannie and Freddie can essentially become a giant stimulus slush fund for the Obama Administration as we head into the 2012 election.

That’s why I wrote last week that:

The combination of the U.S. President’s State of the Union mortgage announcement and the Fed’s aggressive monetary policy the very next day demonstrates a monetary agent and fiscal agent working hand in hand to achieve twin goals of full employment and price stability.

Do I advocate this policy? No. It’s a big socialization of bank losses and a transfer of risk from banks to taxpayers’ community chest (picture below).

This plan is an attempt to revive the asset-based economic model that Steve Keen decries in his post on Economics in the Age of Deleveraging. It will only work to the degree you expand private debt – and given that private debt is already at record levels, this is not good policy. Because the Obama plan targets underwater borrowers, one can consider them a kind of cramdown. But if I were running things, I would want much larger writedowns/cramdowns – and on the original loans rather than new loans via the GSEs that transfer mortgage loan balances from bank balance sheets to GSE balance sheets.

The Obama-Geithner-Bernanke plan will goose the economy (and asset prices) for a time as well as help to win an election though and that’s it’s real purpose. Yes, it’s Timmy Time.

Plus ça change?