Fannie and Freddie Reform: Too Little, Too Late
At the beginning of February, amidst Beltway budget clamoring and ahead of yesterday's statement from Bernanke, the Treasury issued a report to Congress announcing efforts to "wind down" Fannie Mae and Freddie Mac. The report, though conspicuously lacking in detail, sets forth three alternatives for reducing the role of the two government-backed companies, none of which actually prune the state's role in the housing market. Whatever route Congress decides to take, the fundamental problems that bedevil the present framework and caused the housing bubble (and resultant financial calamity) are left unaltered.
Despite all of the familiar and staid panegyrics to "privatization" and a reduced state presence, the culpable attributes of our collusive state-corporate system are not going anywhere.
Fannie and Freddie, ostensibly the predominant fixtures in the US real-estate market, are only elements in the statist schema that created the meltdown. They are part of a complex of interventions in which the more central ingredient is the Federal Reserve System.
The disaster originating in the state's manipulations of the housing market — one that happens to shift enormous swaths of land from ordinary people to politically connected banks — was both predicted and explained by the Austrian theory of the business cycle. Where the prevailing narrative's confused senses of "public" and "private" have served to harden a misguided faith in the state, the teachings of Mises and Rothbard expose the political realities behind these events.
Ridding the market of the crippling appetites of Fannie and Freddie, even if a step in the right direction, is hardly a panacea for the current economic plights. Insofar as the roots of the problem are systemic, permeating every part of the American economic order, the solutions too will have to be comprehensive.
The entire structure of the American banking system, including the market for home-mortgage loans, hinges on the interventions of the Federal Reserve. Though they take place largely out of sight, they are intrusions of the first order. That the Fed is so detached from evaluation or debate, that it is almost universally praised as a vital institution, is suggestive of what Adolf Hitler branded "the big lie." "[I]n the big lie," he said, "there is always a certain force of credibility; because the broad masses of a nation are always more easily corrupted in the deeper strata of their emotional nature than consciously or voluntarily." So when Ron Paul calls for an end to the Fed, or Austrian School economists demonstrate the congenital flaws of fractional-reserve banking, their claims are regarded as the height of apostasy.
Fannie and Freddie, far from being the sole miscreants of the crisis, operate on the same parlous economic principles that the Fed functions on and facilitates. Delineating "the basic model of the business cycle" in The Mystery of Banking, Rothbard discussed the first step as occurring when "bank credit expansion raises prices and causes a seeming boom situation." Fannie and Freddie, although nominally "private," publicly traded companies at the time of the crisis, were encouraged by their insulation from real risk to invest in housing at a level a free market never would have endured.
In the consummate example of the "predatory lending" that left-liberals are forever decrying, Fannie and Freddie financed home buying at exaggerated levels. The big banks and mortgage companies, happy to avail themselves of the credit-engorged market, apparently never contemplated the precariousness of the boom; instead they pushed new mortgages to Fannie and Freddie, taking a flood of money to turn around and give new loans. It didn't much matter to the banks whether Fannie and Freddie could afford to purchase the new mortgages, nor whether all of this home buying was comprised of "good risks."
In a genuine free market, investors would have recognized the mortgages devoured by Fannie and Freddie for what they were, and their prices would have reflected those judgments. The assumption underpinning Fannie and Freddie's involvement in the housing market was that, while the profits of the two were "privatized," the government was ultimately the guarantor against losses; losses could be offloaded onto the public. And there have been plenty of losses for the big banks and for Fannie and Freddie, all of which have — as promised — been imposed on ordinary taxpayers through the bailouts.
The housing bubble and the financial crisis, rather than expressions of a free market, were the aftermath of madcap state intervention that led to some of the most barefaced corporate welfare in US history. Meanwhile, the federal government trumpeted its reckless underwriting of Fannie and Freddie with language reminiscent of the "stakeholder society," promising everyone the fulfillment of their own cul-de-sac daydreams.
But fulfilling the dreams of the average citizen was far from being the state's primary goal. This fact becomes clear when we pay a little attention to the winners and losers of the state's dizzying game of housing roulette and examine the fruits of the state's meddling in the housing market, from the rescue of the "too-big-to-fail" establishment players to the preponderance of foreclosure signs.
In occupying that ambiguous, indeterminate space of the quasi-public, government-sponsored enterprise, Fannie and Freddie might be thought to transgress the supposed great divide within American economic life: the gulf separating the "public" and "private" sectors. That borderline, however, is much less definite than we are led by the mainstream discourse to believe. In specific, highly cartelized areas of the economy, noted Robert Higgs in Against Leviathan, "the lines separating the public sector and the private sector have been almost completely obliterated; and even where they seem to remain … the appearance has little substance."
Critics of the plans to phase out Fannie and Freddie have argued that handing mortgage financing over to the private sector portends still further "market" failures. But the nominally private sector of the statist economy is decidedly unlike the truly free market contemplated by the Austrian School.
Central banking, that disastrous force that enabled Fannie and Freddie and inflated the bubble, is the lodestar around which the entire financial universe orbits. Geithner's talk of "reform," then, whatever it means for Fannie and Freddie, does not herald the kind of sea change that either its critics or supporters imagine. Even if Fannie and Freddie are reformed or phased out entirely, the Fed, with its clutch on the money supply and its control of interest rates, will produce financial maladies like the most recent crisis.
Rothbard called the Fed's increase of the money supply a "hidden fraudulent tax." He recognized (as so few do) that the Fed "exploits some people for the benefit of others." It was abundantly clear to him that the "some people" being exploited were the vast majority of consumers of financial services, and that the "others" who stood to benefit were "the large Wall Street banks." In a true free market, one without the state's coercive monopoly over what can be used as money, the Fed's unbounded dissemination of new warehouse receipts would be looked on as the sham that it is.
Because, as Rothbard and Higgs have explained, the state's public/private dichotomy is almost completely hollow, we might look at the profusion of bank-owned properties today as the kind of "land monopoly" that Rothbard warned against in The Ethics of Liberty. Seeing as the banks taking mortgages in our present economic model are the protected and favored results of the Fed's cartelized atmosphere, it would be difficult for any champion of the free market to regard the banks' assets as legitimate property. Rothbard consistently derided the notions of those who "blithely assume that all land titles must be protected simply because some government has declared them 'private property.'"
Rather, the free market prefers "true owners," what Rothbard described as possessors "tilling the soil" (or its modern equivalent), against the "arbitrary claims" of the state's "monopoly landlords." It is unclear, at least from a free-market perspective, why the banks — oligopolies who have been bailed out, who have benefitted at every juncture from the state's restrictionist interventions — ought to be thought of as legitimately holding title to these homes.
Rothbard addressed the "land problem" within the context of undeveloped countries, the inheritors of feudal land systems, but to the extent that our real-estate market is mired in statist controls, the application of his analysis to present conditions is fitting. The conclusion is that we need not have any special deference, in the ethical sense, toward the neomercantilist institutions that prevail today, which are themselves — in a very real way — government-sponsored enterprises.
As Mises argued in Socialism, it is the legal and regulatory environment, as against the operations of a free market, that "maintain large-scale landed proprietorship, because it could not be kept together otherwise." Austrian School libertarianism acknowledges that only naïveté could cast the state as the protector and advocate of the peasant or the worker. Legislation is tailored to the interests and desires of the powerful. Therefore, Mises wrote, "If economic circumstances had tended toward the continuous concentration of land ownership such laws would have been superfluous."
No material facts distinguish our statist economy from those to which Mises and Rothbard applied their analyses, and libertarians should not feel any obligation to defend those "too-big-to-fail" corporations in the name of the free market. Every new bailout and round of "quantitative easing" ought to permanently disabuse us of the idea that the financial giants of today have to play by the rules that cover the ordinary household.
However important they are, Fannie Mae and Freddie Mac, as mere modules in a program of constraining interventions, are not indispensable to the state's inflationary exploitation. Geithner's statement on Fannie and Freddie is an attempt to create scapegoats — not an attempt to make substantive change.
We can continue to call the banks "private" just as we might call GM or Boeing "private," but the substance of these firms' relationships with the state conveys something else. "'Free market' for American conservatives," wrote Rothbard, "obviously does not encompass an end to feudalism and land monopoly." With each passing week, and with each announcement from the political class, it becomes more clear that Rothbard's cautions do not stop at the Third World, but have relevance for us right here in the land of the free.