The Bush administration’s action in taking full control of mortgage giants Fannie Mae and Freddie Mac Sunday is filled with uncertainties and ironies.
Treasury Secretary Henry M. Paulson Jr. made the announcement Sunday. The move flew in the face of the professed minimum-government, free-market philosophy of Mr. Paulson and his boss, President Bush, who is nearing the end of his second term.
Indeed, after Mr. Bush came into office in January 2001, he practiced greater hostility to federal government regulation and intervention in the U.S. economy than any president since Calvin Coolidge, who left office in March 1929.
Coolidge’s successor, Herbert Hoover, while popularly remembered as a disastrous, do-nothing president during the Great Depression, in fact raised taxes dramatically, vastly expanded the role of the federal government and imposed a catastrophic wage-and-price freeze in his unsuccessful efforts to roll back the Depression.
If Fannie Mae and Freddie Mac had collapsed, more than two-thirds of home loans in the United States would have gone with them. The housing crisis, with the high cost of loans to buy homes, has been like an enormous anchor dragging the U.S. domestic economy deep into the depths of the ocean.
Bold action was certainly needed, and the Bush administration is finally providing it.
What they are doing, however, marks the greatest extension of the domestic economic power of the federal government in three-quarters of a century.
As The Washington Post’s Steven Pearlstein noted Monday, “Not since the early days of the Roosevelt administration, at the height of the Great Depression, has the government taken such a direct role in the workings of the financial system.”
Mr. Paulson’s move is even more epochal than that. For, essentially, Fannie Mae and Freddie Mac will be transformed from gigantic corporations that operate in the free market, even with some U.S. government support and guarantees, into public utilities.
The housing industry of the United States, in effect, is going to be nationalized by the most avowedly conservative administration in 80 years in order to prevent the entire housing/construction sector from going belly up and taking the rest of the U.S. economy with it.
In the short term, mortgage rates are expected to drop dramatically. Mr. Paulson and his planners hope this will pump-prime a renewed surge of investors into the housing market who will be willing to invest in the newly restructured, government-run mortgage giants.
But the initiative is still filled with vast uncertainties. No one knows yet how Wall Street and international investors will react in the coming months.
Also, during Mr. Bush’s eight years in office, the U.S. government went from enjoying its largest budget surpluses in more than 40 years to the greatest annual operating deficits in its history.
The value of the dollar has been plunging precipitously over much of the year, though it has stabilized somewhat in recent weeks. And the annual U.S. balance-of-payments deficit remains, in both dollar and absolute value terms, by far the highest of any nation in recorded history.
At such a time, the vast increase in governmental responsibilities and budgetary commitments that the Fannie Mae-Freddie Mac bailout will require could dangerously weaken whatever is left of international confidence in the fiscal stability of the U.S. government and its currency.
Further, even if the federal ship of state remains fiscally seaworthy over the next few months, it will be left to the next Congress, which will only be elected in November and then take office in January, to approve or modify the terms of the mortgage giants’ takeover.
That means a high degree of uncertainty is going to hang over Mr. Paulson’s bold action in the political arena, as well as the financial unknowns that are involved.
Mr. Paulson’s move may ease the pressure on Republican presidential nominee Sen. John McCain, as the outgoing administration from his own party is now seen to be at least trying to take the domestic housing market in hand.
But it also deals a devastating blow to the credibility of the smaller-government, conservative doctrine that has dominated American business and economic as well as political life in the 28 years since President Reagan was elected.