After the housing meltdown in 2008, private corporations Fannie May and Freddie Mac, who backed mortgages, required a $187 billion taxpayer bailout to avoid insolvency. At that time these quasi-government-backed corporations were placed in conservatorship under the FHFA (Federal Housing Finance Agency). The government also took a majority ownership position in the Fannie and Freddie. However, like so many other government actions, once it gets its mitts into something it never lets go and typically inflicts damage on the organizations they gain authority.
The Wall Street Journal reported that by the end of 2014 the federal government was paid back by Fannie and Freddie to the tune of $230 billion, approximately $40 billion more than the original bailout. So far so good for taxpayers. But that was just the start of this governmental intervention.
Four years after making the bailout to Fannie and Freddie, the government changed the rules allowing the US Treasury Department to take all of Fannie and Freddie’s profits and place them in the government’s general account. This is allowed the government’s budget deficit to look smaller than it actually has been. Even worse, taking these profits stripped Fannie and Freddie of the ability to build up capital, a necessity in warding off future financial crises for these firms. This has increased the risk that Fannie and Freddie will require future taxpayer bailouts.
The warnings of impending financial problems for Fannie and Freddie are percolating. The FHFA Inspector General announced that Fannie and Freddie may require further government bailouts if the housing market slows down. Slowdowns are inevitable! In addition, Fannie’s CEO Tim Mayopoulos warned that its depleted capital raises increased the likelihood that Fannie will require additional bailouts.
The government’s Fannie and Freddie actions are another indication that its interventions are not benign. While the initial bailout may have had at least some good intent, it has opened a dangerous door that has allowed the government to illegally raid these businesses’ balance sheets. Once again the government has shown that if it is unable to increase taxes or print money, it will take other actions to perpetuate its own interest and growth, irrespective of long-term consequences.
It was just six years ago that the world was at the brink of economic Armageddon. The crisis was brought on by the cheap loans made available to borrowers including those rated as subprime with credit scores below 640. The cheap mortgages to those with limited assets helped create a huge bubble in the housing market. When the economy slowed down and home values began to depreciate, many borrowers began to default on the mortgages, which placed at risk major financial institutions worldwide that invested in these bundled mortgages.
Banks and others that owned the collateralized mortgages then required bailouts from the government to stave off failure. This did not eliminate the debt, but merely moved it from the private sector to governments; i.e. taxpayers. In addition, the bailouts inordinately benefited companies and their shareholders who made the imprudent loans. Without the bailouts they would have encountered substantial financial losses.
There is also been a more incipient result of the bailouts of investors who made imprudent loans in the subprime market. Without suffering losses investors have had short memories and in fact they are back at it again in the subprime financing business, once again supported by low interest rate central-bank policies with interest rates worldwide remaining at artificially and historic lows.
Last month, the Wall Street Journal highlighted the growth of subprime loans in an article titled Borrowers Flock to Subprime Loans. Today, subprime loans are not in the housing market, but in consumer goods. The Journal published the following:
- Subprime loans are at the highest level since before the 2008 financial meltdown.
- Approximately 4 out of every 10 loans for autos, credit cards and other personal borrowing in 2014 were in the subprime category.
- During the fourth quarter of 2014, total US household debt increased by over $300 billion.
Milton Friedman once said “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.” Friedman’s quip was not far from reality.
Alex Pollock recently posted an op-ed in the Wall Street Journal titled “A Federal Guarantee Is Sure to Go Broke” in which he outlines yet another example of a mismanaged government program that will ultimately cost taxpayers billions. This relates to the near insolvent finances of the Pension Benefit Guaranty Corp(PBGC). This organization created in 1974 is a private corporation, but with the implied backing US government. Its goal is to protect pensioners from the failure of private pension funds that pay them. However, it is but another Ponzi scheme that will ultimately need a governmental bailout meaning that some taxpayers will lose and others will win.
According to economist Pollock:
- The PBGC insurance fund has a negative worth of $62 billion for 2014, up from a deficit of $36 billion the year before.
- The PBGC’s total assets are $90 billion with total liabilities of $152 billion. A company disconnected from the government with such a ratio would be shut down.