Fannie and Freddie: a problem, not the problem

The FT reports today that two Republicans in the House, Darrell Issa and Jim Jordan, have called for an investigation into the use of US government funds to bail out Fannie Mae and Freddie Mac, the two mortgage companies that were taken into government “conservatorship” in September 2008. The congressmen’s call comes in response to treasury secretary Geithner’s announcement last week that the administration will wait until 2011 to put forward proposals to restructure the companies.  

An editorial in today’s Wall Street Journal highlights that that Geithner’s stalling on Fannie and Freddie stands in contrast to his argument that “it’s essential to re-regulate the rest of the financial services industry right now, without delay.” The Journal calculates that the total government losses associated with the two firms are so far $126.9 billion – and likely to escalate further, as the administration has ordered the two companies to modify mortgages to avoid foreclosures.

There are many valid criticisms of Fannie and Freddie, and the Obama administration has failed to address their inherent contradictions, even after they blew up. The duo – longstanding public-private hybrids - are a good counter-example to those who say that the financial crisis has been the simple result of an out-of-control “free market”, and to government officials in particular who argue that bankers are to blame (thus absolving themselves of any responsibility).

But it is equally wrong to claim, as some Republicans do, that Fannie and Freddie were the sole or the most important contributors to the meltdown. Their pre-occupation with Fannie and Freddie is also one-sided (it also evinces a short memory: over the years, Republicans have been just as supportive of Fannie and Freddie). The crisis has been system-wide: it has revealed a failure of both the market and the state. Any proposed solutions have to address both.