The one-two punch of Freddie Mac and Fannie Mae was the accelerant at the core of the recession of 2008. This recession will spill over into 2009 and could get pretty ugly before things turn around. Freddie and Fannie were the vehicles for the largess in the home mortgage business. They socialized the risk of private investments and removed a fundamental tentent of capitalism - the penalty for a poor or undervalued assessment of risk. Freddie and Fannie operated with the full credit of the US Government and facilitated the house of cards, backing mortgages that should not have been made to people who could not pay them back. They fostered the credit default swaps that have essentially imploded and left banks and investors with assets of dubious or at least almost indiscernible value in an arms-length transaction.
In the midst of this economic turmoil, I wonder...what is George W Bush had fought for reform and oversight of Freddie Mac and Fannie Mae five years ago with the same resolve he fought the war on terror? I can imagine two conflicting results, one which may have overwhelmed and the other and rendered it moot.
First, if Fannie and Freddie had been out of the business of guaranteeing loans of questionable value, we would likely have avoided the recession of 2008 or at least would be looking at another brief and shallow recession. Now, I also understand that if the excess in the housing market facilitated by Freddie and Fannie had been curtailed, we would likely have seen less strength in the economy of the past 5 years. The excesses of the housing bubble, fueled by Freddie and Fannie clearly provided an unsustainable and fundamentally unjustified economic stimulus. Cracking down on the actions of Freddie and Fannie would have kept a lid on some of our economic growth, however, the growth we realized would have been sound, justifiable, and sustainable growth - the kind that makes for long economic expansions and shallow recessions.
I also am certain that if George W had gone after the activity of Freddie Mac and Fannie Mae as well as the housing legislation that pushed bankers to make loans to customers who could not pay them back, he would have been branded a cold hearted, out of touch wealthy fraternity boy standing in the way of average citizens trying to realize the American Dream. He would have been deemed a racist who only cared about his rich buddies from Yale and Texas oil barons. He would have been beaten to a pulp by the economically illiterate mainstream media for giving tax cuts to the rich and denying home ownership to the poor. One can only speculate about the economic ramifications of an aggressive and successful crusade to reign in Freddie and Fannie, but there is no question that President Bush would have been crucified by the media for his actions...it would have been a unmitigated open season on the President....as if it wasn't already.
It is possible that the media circus around a reform effort would have over whelmed the president and the economic benefits he could have delivered. However, President Bush took a beating for the war on terror, the war in Iraq and has been steely in his resolve. Maybe he could have weathered the storm and kept us out of this economic mess. If he had, it would have been a project that turned him into an already strong media headwind. The President has his critics, and some of his criticism is justified. However, I believe if he had committed himself to the reform of Freddie Mac and Fannie Mae the way he has to the war on terror, we might be handing over a far more robust economy to the Obama administration.
