Geithner suggests more multiplexes, admits GSE role in meltdown

Secretary of the US Treasury Tim Geithner testified before the House of Representatives Committee on Financial Services on Tuesday. Geithner’s remarks suggest the government will get behind the idea of increasing multiplex housing units. What’s even more interesting, however, is that a top ranking Democrat finally admitted the significant role of Fannie Mae and Freddie Mac in the financial crisis.

Franklin D. Roosevelt created Fannie Mae in 1938. The GSE started with $1 billion but Time reported needs increased so drastically President Lyndon B. Johnson took the debt portfolio off the government balance sheet in 1968. This photo shows Roosevelt in 1920 at a gathering of society elites when he was assistant secretary of the US Navy.(Photo from US Library of Congress)Fannie Mae and Freddie Mac are two government sponsored enterprises (GSE) that along with the Federal Housing Administration and Ginnie Mae guarantee more than 9 out of 10 new mortgages. That staggering figure is the result of private capital fleeing the mortgage market. Most taxpayers hear the names of those GSEs without realizing the consequences of programs begun during the Great Depression. The government quietly and gradually assumed control over the mortgage market. The end result was a taxpayer-funded bailout and red ink for years to come. But the GSE fiscal follies didn’t stop there.

Bloomberg said, “A 2012 budget estimate predicted that taxpayer aid to Fannie Mae and Freddie Mac could total $224 billion by the end of 2012, of which $55 billion will be returned in dividends.”

The Bloomberg article suggested the GSEs’ health is improving. It’s hard to know whether to trust the figures considering the scandal-ridden history. After all, GSEs in the past used creative accounting to put large bonuses in government-subsidized corporate crony pockets. Not a single Democrat ever criticized those corporate bonuses—as a matter of fact, two key players during that scandal season have served on President Barack Obama’s team.

Geithner suggested a gradual drawdown of the GSEs after admitting, “For decades, the government supported incentives for housing that distorted the market, created significant moral hazard and ultimately left taxpayers responsible for much of the risk incurred…”

Time has an interesting brief history of the GSEs. President Franklin D. Roosevelt created Fannie Mae in 1938. It seemed like a good idea to the liberal president, but like many liberal ideas, the consequences were not considered. Over time the program grew and spawned a sibling, Freddie Mac. What was the reason? So the government wouldn’t have a monopoly. That statement would sound ridiculous even to my hound dog snoring at my feet. He’s sleeping in this morning.

Geithner acknowledged the government should help people find a place to live, so the next bubble in my opinion will be multiplexes. Administration cronies will be able to go forth and secure loans to build cheap housing in blocks and we all know what comes after that.

In other news, Geithner divulged the cost of FHA mortgage insurance will increase. He also said the new Consumer Financial Protection Bureau, a bureaucracy that will add hundreds of federal employees to an already labor heavy government, will protect consumers. Isn’t that what state consumer bureaus are for? Not to worry—the taxpayer will fund the labor and infrastructure costs for that new agency.

Bottom line: the government will attempt to extricate itself from the GSEs and turn attention from individual homeownership to building more low cost multi-unit housing. For the potential honest homeowner, the price of a mortgage will rise and for those underwater, it will be long time before you see equity in your property. In other news, the foreclosure assistance program has been called a failure by media like the Associated Press because so many borrowers fled.

Meanwhile, no one thought to help those homeowners who made their payments on time and watched their equity disappear. The words “under water”—a big overlooked donkey in the room—were not part of Geithner’s lexicon on Tuesday.

Sources and Related Stories

Testimony by Secretary Timothy F. Geithner before House Committee on Financial Services
Full text of Geithner's remarks at the US Dept. of Treasury website

Congress refuses hearings on Freddie Mac and Fannie Mae
A 2008 article at The US Report.

(Commentary by Kay B. Day/March 2, 2011)