The Bush Administration Embraces Socialismby Doug Mataconis
The government seized control of Fannie Mae and Freddie Mac yesterday in a dramatic bid to restore faith in the embattled mortgage giants and arrest a vicious cycle that has driven the nation’s economy into a steep downturn.
Following weeks of round-the-clock planning, Treasury Secretary Henry M. Paulson Jr. announced the takeover to try to stabilize the deeply troubled housing and financial markets. Fannie Mae and Freddie Mac, with a combined 11,000 employees, have funded more than two-thirds of U.S. home loans in recent months, and doubts over their ability to continue doing so had threatened to immerse the economy into even more turmoil.
With home loans harder to come by, buyers have recently been unable to make purchases, causing the housing market to tank further, leaving banks and other lenders with huge losses. Those losses, in turn, have made loans even harder to get.
“Our economy will not recover until the bulk of this housing correction is behind us,” Paulson said yesterday. “Fannie Mae and Freddie Mac are critical to turning the corner on housing.”
They are, in other words, “too big too fail,” and thus entitled to a taxpayer bailout that makes the 1979 Chrysler bailout look like chump change by comparison:
There is no guarantee that the takeover will work, and it comes at a potentially massive cost to taxpayers. The government has pledged to inject money in the companies in any quarter in which they would otherwise be insolvent — up to $100 billion in total for each company.
While, the stock market seems to be reacting positively to news of the bailout, there is plenty of cause for concern.
For one thing, as the WaPo’s Steven Pearlstein notes, the bailout, while not unprecedented, represents a dramatic change in the nature of the government’s involvement in the economy:
In wresting control of Fannie Mae and Freddie Mac, and in authorizing the Treasury to begin purchases of mortgage-backed securities, Secretary Henry M. Paulson Jr. has taken responsibility for assuring that low-interest loans will continue to flow into the country’s hard-hit housing markets. Not since the early days of the Roosevelt administration, at the depth of the Great Depression, has the government taken such a direct role in the workings of the financial system.
And, as The Cato Institute’s David Boaz makes clear, this could only be the beginning:
[T]he bailout of Fannie Mae and Freddie Mac is another giant step toward government control of the economy. NPR reported this morning that the government takeover “could turn out to be a smart one.” Yes, if you think nationalization of the means of production just might work. The government is writing a blank check on the taxpayers. It might cost nothing, it might cost $25 billion, it might end up costing trillions of dollars, given the size of Fannie Mae and Freddie Mac’s portfolios and the risk of further large declines in housing prices.
Boaz also leads one to ask a very good question — where in Article II of the Constitution does it even authorize the President, via the Secretary of the Treasury, to do this ?
[S]peaking of the imperial presidency–all these huge new powers and expenditures are being conducted without any sanction from Congress and with little public debate. This isn’t Venezuela, but the executive branch is certainly expanding its powers on its own authority.
But the quote of the day goes to financial commentator Jim Rogers, who noted that this takeover effectively means that the United States is now more socialist than supposedly Communist China:
Rogers is right.
H/T: Club For Growth