More On Fannie And Freddie

Here's some more information on what's going on this weekend with Fannie Mae and Freddie Mac and The Big Big Bailout.

Bonddad has an excellent primer on the situation.

So, what do these two institutions do? Why are they so important?

Let me explain that by comparing the mortgage business of 100 years ago to the mortgage business of today. 100 years ago, a borrower would go to a bank and get a home loan. However, the bank would own the loan for the duration of the loan - that is, the bank that made the original loan would be the bank that sent out monthly statements and collected mortgage payments until the loan was paid off.

Let's compare that to the mortgage business of today. Today a borrower gets a loan from a lender. Once the loan closes, the lender sells the loan to a larger financial institution. Sometimes this is Fannie and Freddie, sometimes it's some other large financial institution (think Citigroup, JP Morgan or another large, money center bank). Fannie and Freddie stood atop the financial pyramid of buying, selling and pooling mortgages. They issue the largest amount of securitzed product. They touch about 70% of all US mortgages. Both institutions have (until now) an implied governmental guarantee. That gave both institutions an incredible advantage in the market by allowing them to borrow at slightly cheaper rates then their competitors. This is how they attained top dog status in the financial world.

Chris Bowers at OpenLeft agrees with me that what The Big Big Bailout means is that the GOP has finally become everything they hated about big government: they have nationalized the mortgage industry to the tune of trillions.

The problem I have with this is not the move to nationalize the mortgage industry. That actually seems like a good idea to me. The problem I have is with the incredible cognitive dissonance surrounding "big government" in our national political discourse. Even as we have reached national consensus on nationalizing industries, which is the literal definition of socialism and big government, politicians of every party keep talking about "small government" as though it were a virtue. I mean, the day after the Republican convention, which included countless attacks on big government, the Republican administration goes out an nationalizes a major industry. It will probably be done in the corporate welfare style typical of American government--privatize the profits, socialize the risk--but it is still nationalization.

Voters, Democrats, Republicans, Independents, Conservatives, Moderates, Progressives, Greens--everyone is in favor of "big government" moves like nationalizing the mortgage industry now. And yet, all of those same people keep talking about how terrible big government is, and how we need to stop it. It is massive national lie. It is as though the entire country is a homophobe who is actually a closeted homosexual. It is as though the Emperor has no clothes, but now the entire nation has decided to dress to match.

Can we all stop lying to ourselves on this one? Please? Pretty please? This national self-delusion is a major obstacle to having an honest ideological debate in this country.

Like it or not, America is becoming a socialist country. Government is getting bigger every day. It's time to admit it, and then fix it.