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JEFFREY: Government guaranteed

By | Friday, July 18, 2008

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Look over old news reports about Fannie Mae and Freddie Mac, and you will repeatedly read that these two corporations were believed to carry an "implicit guarantee" from Uncle Sam.

That would apparently make them distinct from Social Security and Medicare, which most Americans assume carry an explicit guarantee from Uncle Sam.

"Though Fannie Mae and Freddie Mac say the federal government doesn't guarantee them against failing, Wall Street generally interprets the two companies' congressional charter - and the $2.25 billion line to the Treasury each has - as an implicit guarantee by taxpayers," The Washington Post reported in 1999, for example.

Now, the Bush administration has proposed a Fannie Mae and Freddie Mac bailout that will convert this "implicit guarantee" to an explicit one, putting taxpayers potentially on the hook for unknown billions. Even before this bailout, Fannie Mae and Freddie Mac enjoyed special benefits from the taxpayers. In addition to their lines of credit at the U.S. Treasury, for example, they were also exempt from state and federal taxes.

The proposed bailout will give the federal government the authority to buy stock in the companies and to increase the easy federal credit extended to them.

The bailout is needed, it is argued, because Fannie Mae and Freddie Mac have used their government-favored position to dominate America's secondary mortgage market. "Together, the two companies touch more than half of the nation's $12 trillion in mortgages by either owning them or backing them," the New York Times reported.

The collateral economic damage caused by their failure would be too great. We have no choice but to save them, it is argued.

How did we get to this place? It is part of a cultural and political transformation that is changing the meaning of the American Dream.

Our federal government was chartered to have strictly limited authority, primarily aimed at defending our liberty. It was designed to protect us from foreign enemies and to preserve our God-given rights.