Saturday, January 26, 2013

How Fannie Grew

Like a little acorn into a mighty oak.  But a blighted oak, according to James R. Hagerty's new The Fateful History of Fannie Mae, which packs an amazing amount of history into a little over 200 pages of  non-technical, very readable prose.

The Wall Street Journal reporter has produced (in its first half) a near masterpiece of an object lesson in Public Choice Economics that would have made the (recently) late Nobel prize winning James Buchanan pleased to see his theories validated.  Born during the New Deal of FDR as the Federal National Mortgage Association (FNMA) to backstop mortgage lending only in times when traditional lenders were retreating from that market, Fannie metamorphosed into the 800lb gorilla (along with its 'cousin' Freddie Mac) of the USA mortgage industry.

The most fateful development came in 1968 when LBJ found himself having to pay for not only his Great Society ambitions, but also the Vietnam War.  For Fannie to have continued as a govt agency would have been for its liabilities to remain on the federal budget, in addition to those obligations.  To have both his guns and butter, and his housing, LBJ needed to remove the latter as an official obligation of the taxpayers.

So, it was privatized...with special accommodations--ability to tap the Treasury for funds, exemption from state and local income taxes, exemption from registration and disclosure with the SEC, and no limits on how much of its bonds federally insured banks could hold.

It was an entity that was a not-by-accident waiting to happen.  And, along with Freddie Mac--created in 1970 by congress at the behest of the Savings and Loan industry--it eventually did.  For entirely predictable reasons; there was money available, and power to be exploited.  I.e., incentives inviting ambitious people to use the two Government Sponsored Enterprises for their own purposes, all in the name of a higher purpose; housing Americans.

That's the story Hagerty tells.  And he tells it well.

More anon.

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