As Promised – Some Insight into the Mortgage Mess

Today President Bush signed the largest government bailout of private debt in history.

In recent weeks the Fannie Mae and Freddie Mac financial fiascos have introduced a few relatively new or at least misunderstood terms into the evening news lexicon; Quasi-Governmental Organizations and Government Sponsored Enterprises.

The three most common questions I have received are:
What is a Quasi-Government Organization?
Where did they come from?
What can we do to prevent this in the future?

The framers of the Constitution had a fairly direct approach on how government would work. The executive branch got most of the authority of government while the legislative would provide accountability.

This concept worked fairly well for almost 100 years. The first significant breaks were in the form of congressionally mandated “commissions” such as the Civil Service Commission (1883) and the Interstate Commerce Commission (1887).

Going into the 20th century more and more independent agencies were created such as the Tennessee Valley Authority and NASA. Although considered independent agencies, they functioned like any other government agency for the most part.

Then in 1962 the congress created the Communications Satellite Corporation. This was a private, for profit, company that would spearhead the US effort to dominate space communications. Congress rightly realized that a private company could do this much more efficiently than the government. This was the same argument that was used to create Public Broadcasting in 1967.

These entities have evolved and usually now fall into one of two main categories; Quasi Official Agencies and Government Sponsored Enterprises.

Quasi Officials Agencies such as AMTRAK and the National Academy of Sciences are both organizations that were never seriously expected to make money and therefore their primary link to government is more subsidy than service. The National Archives also fall into this category. Interestingly the National Archives’ only real accountability seems to be that they are required to report certain information annually “The United States Government Manual”, which incidentally, the National Archives publishes.

The next category is where it gets dicey, these are called Government Sponsored Enterprises (GSE’s). The biggest difference is that these organizations must have a federal charter authorized by congress and that they must be privately owned.

This is where Fannie Mae and Freddie Mac and a few others come into play.

The government does not overtly subsidize GSE’s but what they do is more dangerous. GSE’s enjoy an implicit federal guarantee and as such have a limitless line of credit with the federal government.

This is where it gets kinda stupid. The mission of organizations like Fannie Mae and Freddie Mac is to put people in homes. Whether they can actually afford them is secondary. They were graded simply on how many new families they put on the rolls.

For a truly private enterprise, this makes no sense. Every bank and mortgage company in the country employ an army of risk managers to keep the bottomline in the black. GSE’s are not burdened by such common sense.

GSE’s have become a very lucrative landing pad for politicians of all stripes. Take the licks in an administration and land a job that will glean $13-18 million a year and a great parachute; not a bad gig if you can get it.

The fix is to make these GSE’s totally private and let the market decide their fate.

To put this in layman’s terms: GSE’s are a private enterprise when they make money and a government enterprise when they lose money.

If most folks knew this, these programs would go away with the next election.

Category: Politics