- The Washington Times - Thursday, September 11, 2008

Maybe the real estate party isn’t over yet after all. After months of speculation and with the stock prices for Fannie Mae and Freddie Mac having plummeted from more than $60 a share in 2007 to less than $4 this year, the federal government is taking them over.

In his subsequent statement, Treasury Secretary Henry M. Paulson Jr. promised that under contractual agreements, “Treasury will ensure that each company maintains a positive net worth.” Really? Forgive me if I don’t break out the champagne and caviar.

Before we consider the likelihood of this promise being kept, let us recall the promise and the purpose of Fannie and Freddie: to make home ownership more affordable. Some might argue that because more people own their homes than ever before, the government-sponsored enterprises (GSEs) have been a success.

However, the fact that many people own their homes doesn’t mean they can afford to own them. The real-life result is that millions of folks were scammed into taking out mortgages on homes they couldn’t afford.

In 1970, the median house price was about 250 percent of median yearly household income; now, even after the falling prices we have experienced recently, that figure is still more than 410 percent. A price that rises from 250 percent to more than 410 percent of yearly income does not equal an increase in affordability.

Also, as recently as the late 1980s, the average homeowner had about 70 percent equity in his home - now that figure is less than 50 percent. This is not a good track record. Nevertheless, instead of allowing the GSEs to fail, Treasury is stepping in to keep them going.

Now let’s consider the value of promises made by Treasury and its fiscal agent - the Federal Reserve System. Have they maintained the U.S. government’s positive net worth? No. The government is essentially bankrupt. We run a larger budget deficit every year and need to borrow $2 billion every day just to pay the bills. The long-term situation is far worse, with Dallas Federal Reserve Bank President Richard Fisher recently pointing out that the unfunded liabilities of Social Security and Medicare are $99 trillion. That’s $330,000 of debt for each of us.

The Fed and Treasury have presided over the negative net worth of the average Joe, too. Americans had an average personal savings rate of 12 percent back in 1975, but since, then it has fallen steadily to zero. On the debt side of the ledger, most of us are in hock up to our eyeballs. I seriously doubt that Treasury can ensure Fannie’s positive net worth when it already has failed to do so for the government and nation as a whole. History shows that government rarely fixes itself. It just gets bigger and then makes even bigger mistakes.


Brookeville, Md.

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