According to the Bureau of Economic Analysis, the United States ’ Gross Domestic Product (GDP) increased three and two-tenths percent in the first quarter of 2010; this was the third straight quarter of US
Since it is a commonly touted maxim that ‘those who don't know history are destined to repeat it’, it would, accordingly, if for no other reason, certainly be a grave mistake not to explore the causes of this economic calamity.
Most economists would agree that the 2008 to 2009 recession was perpetuated by a home loan crisis, brought on by the burst of the ‘housing bubble’ which had come into being in 2004 and 2005 due to low interest rates.
When interest rates rose in 2006, there was a wave of foreclosures which caused heavy losses for banks and hedge funds which had holdings in the ‘secondary mortgage market’ or ‘mortgage backed securities exchange.’ This secondary market was managed—in great part—by the firms Fannie Mae and Freddie Mac
Thus it is clear that the firms Fannie Mae and Freddie Mac played a somewhat significant role in the economic downturn in that, collectively, the two firms perform most of the repackaging of mortgage backed securities for sale on the secondary market. It would be assumed then, that these two companies, at least, would have benefitted from the transactions leading to the recession even if no others did. But, alas, this is not the case.
By August of 2007 many banks had cut lending in order to cut their losses, leading to the bankruptcy and nationalization of several corporations involved in the secondary market; Fannie Mae, Freddie Mac, and four other companies (Bear Stearns, AIG, Indy Mac Bank, and Washington Mutual) received government bailout packages totaling approximately $700 billion.
Since it is obvious that a corporation would never act in a way that did not benefit its self interest, the situation at hand begs the question: What could have motivated Fannie Mae and Freddie Mac to adopt policies such that they perpetuated their own demise? That is quintessential to understanding the cause of the recession on the whole.
To answer that question, it must firstly be noted that Fannie Mae and Freddie Mac were created and authorized to handle the secondary market by the 1968 Charter Act; the intent of this act was to unlock loan funds, normally held by banks, for lending to homebuyers. This governmental imposition on the banking industry, however, in accordance with Adam Smith's contention that there has never been much good done by those who affected to act for the public good, led to an unanticipated, negative effect—the elimination of the need for disciplined lending practices.
Secondly, the further involvement of the government in the corporations through regulations place upon their lending practices must be considered. Through the Housing and Community Development Act of 1992, the Office of Federal Housing Enterprise Oversight (OFHEO) was established to monitor the activities of Fannie Mae and Freddie Mac. The act subjugated the two corporations to the control of the US Department of Housing and Urban Development’s (HUD) secretary and mandated that the two companies make mortgages available to low-income borrowers.
Thus, the government effectively made a break with the free-market, laissez faire system upon which the American economic system, capitalism, is based. The mandates and regulations placed upon these companies directly violate this essential tenet of the capitalistic model.
It is not, however, the role of government to obstruct the industry of the people—which was the effect of such regulations in that they led to the bankruptcies of the companies involved—but to promote industry and the free market through the administration of justice and the building of infrastructure. Thus, the government clearly overstepped its boundaries at the time.
Why then, did the companies not protest?
Why then, did the companies not protest?
In a 2000 press release by the HUD about the increases in federal legislation of Fannie Mae and Freddie Mac’s lending practices, Andrew Mark Cuomo—then Secretary of the HUD—said, “This rule will greatly expand the supply of affordable housing across the country, giving millions of families the opportunity to buy homes or to move into apartments.” The report went on to expound on the need to help low income families and, particularly, to raise the homeownership among under-severed minority Americans. Furthermore, the report stated that if “Fannie Mae and Freddie Mac fail to make a good faith effort to achieve the Affordable Housing Goals set by the HUD… [they would face] penalties of up to $10,000 for each day the failure occurs.” The response, by the people, to this legislation was overwhelmingly positive.
There are no good choices when one faces either cooperation or being demonized and penalized—both paths are seemingly self-destructive.
The government and the many supporters of this move— and previous moves in this direction—did not realize that in trying to help the citizenry, a system was being created which would eventually yield more harm than good. While the end of government is to protect private property and, accordingly, to protect the right to freely exchange said property, it is not the job of the government to provide this property. That is a responsibility the one desiring property has to himself.
The government and the many supporters of this move— and previous moves in this direction—did not realize that in trying to help the citizenry, a system was being created which would eventually yield more harm than good. While the end of government is to protect private property and, accordingly, to protect the right to freely exchange said property, it is not the job of the government to provide this property. That is a responsibility the one desiring property has to himself.
In the end, the effects of government involvement in economic matters shows itself to be detrimental to the wellbeing of all involved in that—through the foreclosures that hit the housing market after the bursting of the housing bubble—low income and minority households were the hardest hit. Thus, it is clear that-- as Ronald Regan once put it-- “government is not the solution to our problem; government is the problem."
The essence of the situation was best described by the House Committee on Oversight and Government Reform, which issued the following statement:
