Sunday, January 27, 2013

How Fannie Grew (cont.)

As we said in the previous post, James Hagerty has produced a gem of exposition of Public Choice Economic theory--though whether he knows that isn't obvious in his text.  The Govt. Sponsored Enterprise known today as Fannie Mae was created in 1938 by FDR, as a minor bit of law to give a boost to the private mortgage market.  Certainly not to replace that market.

It probably should have been put away (as the Works Progress Administration or Civilian Conservation Corp) in the 1940s, as by the end of WWII its raison d'être (the Great Depression) was long since gone, if not forgotten.  However, the closest thing to eternal life, it is often said, is a government program.  Fannie Mae not being an exception.

Constituencies grow up around these programs and they are loath to see the goose fly away with its golden eggs. With the end of WWII,  newly civilian-ized GIs wanted housing, and Fannie Mae was looked upon as a way to provide the funds for it.  Which it did, thus growing even more established (and further from its New Deal roots).

With a change to a Republican presidency after 20 years of FDR and Harry Truman, it might have been thought possible to finally get the federal government out of the business of buying private sector mortgages. Dwight Eisenhower found otherwise.  The entrenched interests couldn't be overcome, even though a new charter, in 1954, for Fannie stated that it should only give 'supplementary assistance' to the mortgage market.

It wasn't until the budgetary pressures on LBJ from the Vietnam War that Eisenhower's idea of privatizing Fannie Mae came to be.  But, not exactly, private.
Therein, the seeds of the 21st century's financial crisis.

More to come.

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