“It is hard in this world to do well. It is hard to do good. When I hear a claim that an institution is going to do both, I reach for my wallet. You should too.”–Former Treasury Secretary Lawrence Summers, in “Notable & Quotable”, The Wall Street Journal.
Former Treasury Secretary Summers reminds us of the folly of good intentions gone overboard without market discipline. First, the question: How can the virtuous American objective of widespread home ownership be best supported and the most adequate financing be assured? Answer: With creative capitalism, by chartering private companies as government sponsored enterprises with the mission of promoting home ownership. Give them the credibility of a public/private partnership, with a social responsibility objective for financing access to “affordable housing” balanced with the profit motive, and make it tacitly clear that the government stands behind their capital market creativity so that they have unfettered access to the markets at subsidized rates. And incidentally, allow the management of these companies unlimited lobby budgets and access to government policy makers.
If this reads like an invitation to witness a case study in terminal moral hazard facilitated by political cronyism, you’re describing the outcome of the Great Society brainstorm for the restructure of Fannie Mae and the subsequent chartering of Freddie Mac. It took about 40 years for all of these good intentions to play out into the unintended consequences resulting in the inevitable bailout approved last month by Congress, but anyone with minimal insight should have forseen the eventual outcome.
In fact, let’s give some credit where it’s due for the insightful and tireless reporting and editorial coverage of this looming disaster by The Wall Street Journal over the past six years. For a recap of this coverage and its chronology, WSJ Editor Paul Gigot has recently written a great article, noteworthy as much for its restraint in condemnation of the cabal of cronies who collaborated in responsibility, protection, and apologies for the perpetrators and the debacle they created, and who were so critical of his publication for calling them out. The culpability ranges across the spectrum of fellow travelers on Wall Street, in Congress, and in the mainstream media, as Gigot characterizes this crowd, “…..journalists on the left, pseudo-capitalists on Wall Street, liberal Democrats and country club Republicans”.
This history and this bailout are outrageous and scandalous, reflective of crony capitalism at least as bad as anything that has been witnessed in Russia since the fall of the Soviet Union, and I am disappointed that President Bush didn’t veto the bailout bill, as futile a gesture as that would have been. But it will be compounded if we don’t put a permanent end to these kinds of monstrosities. These two entities should be placed into receivership under the jurisdiction of a trustee beyond reproach, with authority to fully privatize them, issue a preferred security to the government so that the taxpayers are provided some possibility of recouping their “investment”, and wean them off the public subsidy on a definitive timetable not longer than five years–no more government line of credit, no more implied guaranty of liabilities by either the Federal Reserve or Treasury. And then we should kill this idea of creative capitalism through government sponsored private entity forever.
