(This article was originally published on January 22, 2010 and submitted to The Washington Post as an Op-Ed piece. There is reason to believe that the article was removed without my knowledge by illegally accessing my email and WordPress accounts because it is a potential exhibit in my grievance against the Federal Reserve submitted to Senator Barbara Mikulski of Maryland for suppressing dissent within the Fed against the Fed’s official position on the matter of financial regulatory reform.).
It is not a bad deal to be a government sponsored enterprise. Profits are private and losses are public. As the economic stagnation (I stopped calling it a recession or an impending depression for the purposes of technical accuracy) becomes prolonged waiting for inflation to rise to eventually turn into stagflation, the mounting losses of the implicit-converted-to-explicit guarantee of Fannie Mae and Freddie Mac are beginning to knock on the door of the Treasury. The government has little choice but to take them on.
The debate in Washington seems to be of technical nature: should the obligations show up on the monthly treasury statement? Hiding either assets or liabilities is not good accounting practice. If the government is going to take on the losses of the GSEs, it is better off explicitly nationalizing them and integrating their balance sheets cleanly and completely into the government’s. They could be still be ‘off-balance sheet’, just as social security and the postal service are. At least, this will give the government better control over how it will recover the housing sector.
Doing so, however, must not be the last the country would be hearing of the GSEs. Their reform had come up several times before but to no avail, causing the housing crisis. In good times they had lobbied the Congress to make housing ownership broad and affordable so that the constituents of members of Congress could accumulate wealth, with a guarantee that in bad times the tax payer will stand behind them as a payback for the good times they had enabled.
The arithmetic of that standing behind means some combination of higher government deficits, higher taxes or the devaluation of the U.S dollar in what had become a game of putting off the bad times while savoring living well in the moment. Instant gratification was the policy behind “don’t stop thinking about tomorrow.” So, the good times had lasted while they lasted.
It increasingly seems as though those feel good days had a political purpose. The entire financial system of the United States, let alone the GSEs, has turned into one giant government sponsored enterprise, beginning in some ways with the reluctant bail out of Chrysler by Ronald Reagan. It has become an opportunistic mixed-economy in the guise of free market capitalism. It has become a better deal to be an American than a European, if you know the ropes in the system to catch the fat end of income redistribution.
Bill Clinton knew the Reagan vulnerability: if it came down to saving jobs or imposing discipline on the markets, even a conservative Republican had to yield to the public sentiment by either directly or indirectly expanding government. The issue, therefore, is not saving jobs, but imposing discipline. The government has to bite the bullet of not being politically expedient at some point to restore economic discipline. This is one of those times, because the expediency has only festered into a cancer on the society.
The GSEs must be nationalized only on the precondition that they would be spun off into private financial institutions once the economy returns to normalcy. The government must use its time of absolute ownership of the GSEs to stabilize the housing sector through job creation by means of other reforms. This is a tall order to trust democratic politicians with. The risk that the nationalized GSEs could become an albatross around the government’s neck forever is far higher.
The better alternative therefore would be to privatize them completely now, while the economy is still in the depth of stagnation, by converting them into a giant housing bank with a bank holding company charter from the Fed and asking them to raise capital in the private markets with full access to all the Fed facilities. This could be the best option so as not to take onto the government’s books a potential doubling of the national debt, almost overnight, should there be another major housing decline at some point in the future.
Reform is the exit strategy.