The new housing bubble?
posted at 2:55 pm on December 29, 2009 by Ed Morrissey
Over the weekend, I noted the late-Christmas Eve announcement that the Obama administration had lifted the bailout caps on Fannie Mae and Freddie Mac, attempting to sneak it past Americans while they focused on family, friends, and religious observance. The obvious conclusion was that Barack Obama wants to use the collapsed GSAs for even more social engineering through the lending markets, and wants an unlimited supply of cash from Treasury to force taxpayers to subsidize the next failure. The Washington Examiner has reached the same conclusion:
Obama’s decision is particularly disturbing for two reasons. First, taxpayers have already sunk $111 billion into the Fannie-Freddie bailout in just the last few months. The removal of the $400 billion cap suggests that things are about to worsen considerably. Second, it was precisely such government guarantees that caused the housing bubble and economic collapse in the first place.
In 1999, when Fannie Mae initially began securitizing subprime mortgages in a pilot program, American Enterprise Institute’s Peter Wallison predicted in the pages of the New York Times that a massive bailout would eventually be necessary. Wallison’s warning was ignored by President Clinton and the Republican-controlled Congress, which together allowed the pilot program to expand year after year. The process continued under President George W. Bush, with loan standards being steadily lowered by Fannie and Freddie in their effort to give 55 percent of their mortgages to families at or below the median income level. The economic carnage of politically motivated mortgages surrounds us now.
Today, Wallison points out that nearly two-thirds of the nation’s subprime and otherwise bad loans were created, securitized, backed by, and/or required by various programs within the United States government, including Fannie and Freddie, the Federal Housing Administration, Ginnie Mae, and the Community Reinvestment Act. Ten million of these 17 million dicey mortgages — or about 40 percent of the nation’s subprime and otherwise low-grade mortgages — were either owned or securitized by Fannie and Freddie when they collapsed last year.
That Obama would now give these two companies a blank check is incomprehensible. Taxpayers got another thumb in the eye when Fannie and Freddie chose the same Christmas news dump to announce $42 million in bonuses for 12 top executives — obviously for their excellent work last year as they drove the ship into the iceberg. Keep that one in mind the next time you hear Obama feign outrage over Wall Street bonuses.
The question that everyone should be asking is why the untapped $289 billion in the credit line isn’t enough. That represents more than three times the amount spent already, when the crisis hit its peak. At this point, we should be seeing improvement rather than an escalation of crisis in the housing market, or at least some stabilization, if this strategy was correct in the first place.
Instead, Obama now wants no cap at all, which means that he has plans to spend a lot more money on inflating a housing bubble that still needs deflating. That will once again start the cycle of price escalation, speculation, and eventually another collapse of the bubble. The pattern is utterly predictable, as is the damage it will inflict on the economy.
We need to demand some answers from this administration from its attempt to aggrandize its power in the dark of night.