Fannie Mae and Freddie Mac are government sponsored enterprises (GSE’s) that, at the urging of many Congressmen, were at the heart of the expansion of sub-prime lending, purchasing sub-prime loans, and mortgage backed securities. It is the dual nature, part public, part private that is the genetic weakness of any GSE; its management must satisfy investors and elected officials. In Fannie and Freddie, politicians saw the opportunity to funnel dollars to favored constituents through the private sector, off government books. The GSE’s traded agreed to increase the scope of sub-prime lending for weak regulation. Perhaps I have reversed causality. Maybe the GSE’s bribed Congressmen with money for their districts for weak regulation.
Sub-prime loans and mortgage backed securities clogged the economies financial system, and in 2008, blocking financial flows and the real economy seized as the nation plunged into the Great Recession. Democrats Barney Frank and Christopher Dodd are often noted as elected officials who pushed the GSE’s to lower loan quality, and expand sub-prime lending but many forget the role of Republicans.
A Wall Street Journal editorialist does readers a great service in “The Fannie Mae Republicans” by naming three Republicans, Gary Miller, Randy Neugebauer, and Spencer Bachus, who supported the loosening of credit standards and continued weak regulation of the GSE’s. As the Congress prepares to reform the GSE’s, all three Representatives sit on the House Financial Services Committee in key minority positions. The editorialist recommends Ed Royce chair the committee rather than Bachus. Royce had the economic foresight to oppose the GSE’s expansion into sub-prime markets and support tougher regulation during the housing boom and before the financial crisis. He seems a better candidate to guide meaningful reform through Congress than his three Republican peers.