I had a discussion with someone about Freddie Mad & Fannie May. This person’s opinion was that the problem is that they were “privatized”. So my question is this: just HOW private are they (if at all)? What exactly is their relationship with the federal government?
They are government sponsored enterprises (GSEs). They may be private, but it was understood that the US Government would not let them die, and as we are seeing right now that is true.
From Wikipedia:
The two largest housing GSEs of Fannie Mae (FNMA) and Freddie Mac (FHLMC) own and/or securitize upwards of 70% of the residential mortgage loans in the United States. Ginnie Mae (GNMA) is a government corporation that performs a similar function to Fannie and Freddie, and has the explicit backing of the full faith and credit of the United States government, although there is a perception (and a political reality) that Fannie and Freddie are "too large to fail" and, therefore, will be bailed out by the government should they get into financial trouble. This perception is reinforced by their line of credit with the U.S. Treasury and other benefits of GSE status, such as exemption from state and local taxes and use of the Federal Reserve as a transfer agent.
A GSE bond is perceived to have the same risk as a government bond, which is essentially near zero risk. While GSEs clearly state their securities are not backed by the U.S. government, the market largely perceives them to have an implicit government guarantee. This is demonstrated in the financial markets, where Fannie and Freddie debt trade at spreads much lower than the safest (AAA) corporates and only slightly above comparable Treasury securities. See, for example, GAO GGD-96-120 or CBO’s Federal Subsidies and the Housing GSE’s.
Basically, regardless of their label as “private” and claims of their debt not being backed by the government, nobody believed that to be true. Freddie and Fannie were also two of the largest spenders on lobbyists and it showed with their preferential treatment from politicians.
The problem wasn’t that they were “privitized,” the problem was that they were ever created by government in the first place and always had the government’s implicit backing, as well as many other government privileges.
I once heard the ridiculous claim that when you call for “deregulation” you’re really calling for nationalization because that is what government will ultimately do. But whose fault is it that they’re nationalized? Not mine, nor is the fault of people who call for actual free and deregulated markets (which, we are nowhere, nor have we ever been, close to having). Since when do we accept by default that government must bail out and nationalize failing firms? Why not just let them fail? Oh right, you’re all idiots and are manipulated by the government’s and Wall Street’s propaganda.