The news has been slow for a couple of days. The stock market did a frantic dive and recovery. Mortgage interest rates hit a new low for this year. So let’s visit an economic conspiracy theory. The United States government continues to bail out banks as a matter of policy using GSEs.
GSE’s are government sponsored enterprises. The two being linked in the conspiracy are Fannie Mae and Freddie Mac. Here’s the link to some of the discussion.
The argument goes that Congress is letting Fannie and Freddie lose money to prevent banks from losing money. And, the taxpayer gets the bill.
It could be true. That makes it a great conspiracy theory. For it to be true, here’s what has to be going on.
Banks have to be selling off existing bad loans and mortgage based derivates. Fannie and Freddie have to line up for the sales and buy anything and everything at the asking price.
But here’s what we know is already going on with Fannie and Freddie. These two GSEs do NOT loan money to individuals to buy houses. The GSEs directly own some mortgage loans. In addition to direct ownership, they insure mortgage loans owned by banks and private investors. Here’s a link to a Fannie Mae FAQ page and a link to a NYT story. The NYT has the neat graphics and was written in 2008. Kind of a look back to before the bailouts.
Back to the conspiracy versus reality comparison. As of 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) owned or guaranteed about half or 56.8% of the U.S.’s $12 trillion mortgage market. That’s a lot of risk exposure, $6.72 trillion dollars. And it doesn’t go away by snapping our fingers. That exposure to risk continues until all the loans are paid off.
Let’s put a finer point on it. In 2004, Fannie and Freddie had $2 trillion of the $4 trillion in outstanding mortgages. By 2008, they had $6.72 trillion of $12 trillion. So housing debts increased $8 trillion dollars in four years. That’s a WOW! Half of the increase was the government making home loans to people who couldn’t pay the money back. OPS! None of the increase was in loans being made by Fannie or Freddie since they don’t make any loans.
Fannie and Freddie did loan money to private banks. The private banks made some bad loans. Lots of them. Fannie and Freddie got stuck when the loans to the banks went bad, the mortgages started going bad, and when the derivative market crumbled under corruption.
Then, in 2008, the government aka the Treasury Department took Fannie and Freddie into conservatorship. Bush signed a law that protected upwards of $800 billion of bad mortgages held or insured by our GSE’s.
Are you getting bored yet? Just checking. It’s dull stuff to unravel conspiracy theories. Much more fun to invent one or two.
So the losses at Fannie and Freddie continue to grow. The conspiracy says from making more bad loans, buying more bad loans, and making under the table bailouts to banks.
So … which banks are getting free money? Do you own any stock in them? Why aren’t the stock prices of those banks shooting skyhigh?
Maybe … just maybe … all the bad loans made by private enterprises are still going bad. And the taxpayers are getting hurt. But can anyone show us a bank balance sheet or income sheet with billions of cash coming from Fannie and Freddie?
Well, that’s the weird conspiracy theory, isn’t it? The taxpayers are getting hosed by Congress. Again. And that’s probably ‘true’ on any given day.
But no one can show us that an entirely new scheme is benefiting banks. It just that we can’t get our minds wrapped around the idea of $12 trillion dollars in mortgage loans and the current foreclosure rate.