The Politics of Fannie and Freddie

At first glance, the government takeover of Fannie Mae and Freddie Mac should be great for Barack Obama. It puts government in the role of the guarantor of American economic security, the ultimate backstop when markets fail. And at the heart of Obamanomics is the belief that a more activist government is needed. But John McCain has a powerful counterargument: The failure of Fannie and Freddie is the failure of a pair of de facto government institutions and the failure of government housing policy. With the government-housing intermingling such a miserable failure, McCain could say, do we really want more government meddling in healthcare? And the potential financial cost of the bailout plays into McCain's budget hawk reputation. Plus, as economist Robert Brusca says at his blog:

This is a case of policy gone amok. Instead of helping some marginal potential homeowners with finances Fannie and Freddie grew to be the bulk of the US mortgage market. This became a program that took on a life of its own. Banks have long opposed the poaching of business by Fannie and Freddie due to their lower cost structure courtesy of the government backstop. But politics intervened. No party reined them in. As a result the subsidy to the whole of the mortgage market grew. Many taxpayer-homeowners benefited, one reason why having 'them' (us) bear the cost makes some sense.

Me: Someone asked me, "Is this the end of privatization?" Rather, doesn't this make the case for privatization, and powerfully at that? Don't forget that we are also sitting here with Social Security and Medicare leaving taxpayers on the hook for more than $50 trillion in liabilities. I also just have to toss in this quote from investor Jimmy Rogers: "America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich...it's just bailing out financial institutions."