A Contrarian View On The Fannie Mae/Freddie Mac Bailout

I know that the decision by the Bush Administration to put Fannie Mae and Freddie Mac into government conservatorship is being hailed in corners wide and far as being a splendid decision. Certainly, the move did wonders to rally the stock market today and to cause people to think that the worst of the mortgage crisis may well be over, that credit and mortgage rates will ease and that the economy may be back on track sooner than some might have expected.

Forgive me, however, if I don’t buy it. Taxpayers are now on the hook to get Fannie and Freddie in fighting form once again. Stockholders are wiped out completely–a massive disruption in property rights that ought to disturb us all. We were warned many a time by careful and smart observers of the situation that Fannie and Freddie were headed for disaster but those warnings went unheeded. Now, with this conservatorship, we have introduced a moral hazard into the equation; companies may feel that if they are big enough, they can be reckless beyond measure; the government will step in to bail them out of things go really bad. The case of Fannie and Freddie provides precedent for this descent into Moral Hazardville. It also represents a decision to forgo what works–capitalism–in favor of excessive government control, which has repeatedly been shown not to work.

One may argue–as a number of my RedState colleagues have–that since Fannie and Freddie were never private in the truest sense of the word, this takeover by the government does not really mean anything. But while that is strictly true, it is also, respectfully, besides the point. We are bound, in short order, to hear about how Fannie’s and Freddie’s failures constituted “yet another” supposed failure on the part of the free market, how excessive regulation is not all that excessive and is really quite wonderful indeed and how even nationalization is not as bad as we free marketeers believe that it is. If these “arguments” are not soon visited upon us, I would be shocked beyond measure. When they are, it will be as natural and as expected as night following day.

This conservatorship will only be worthwhile if it results in Fannie and Freddie being broken up, with the resulting pieces being sold off completely to subsist in the private sector. But I am not sure that this will happen. Once the state sinks its hooks into something, it is not apt to let go all that quickly. And this latest expansion of government power could very well augur more dramatic and disturbing expansions ahead.