Fannie, Freddie, and the Destructive Dream of the 'Ownership Society'

Unwinding the mortgage giants won't cure Americans of their desire to own a home, whether they can afford it or not.
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Reuters

More than four years ago, President Obama assumed office promising dramatic reform to the housing market. After all, it was the housing market that triggered the financial crisis, and the vast proliferation of low-quality loans that had fueled the housing bubble. But politics delayed those reforms, and now the president is reopening the issue with a call to wind down the two main federal mortgage agencies, Fannie Mae and Freddie Mac. "For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag," the president said this week. "It was 'heads we win, tails you lose.'"

Well, not entirely. The U.S. government and taxpayers did rescue these agencies in 2009 (to the tune of nearly $200 billion), and, after injecting them with capital and essentially nationalizing them, these companies started to turn a profit as the housing market slowly recovered. This month, they contributed more than $15 billion to the U.S. Treasury, and have been one factor in sharply reducing government deficits.

Even more, Obama's targeting of Fannie and Freddie is part of a larger narrative -- on both the left and the right -- that banks and government colluded to produce the financial crisis and the continuing drag on the United States. To be fair, Obama in the same speech this week acknowledged that much of the housing crisis was the product of "banks and the government...[making] everyone feel like they had to own a home, even if they weren't ready and didn't have the payment." But that chord is a decidedly minor one in a general atmosphere of blame.

Over the past decade, we have collectively spun a story of the financial crisis. It goes something like this: in the 2000s, government regulation of the financial system loosened as large banks, in collusion with free-market ideologues in government, convinced regulators that risk was a thing of the past. They then took advantage of easy money and lax regulation and began to push mortgages to speculators and low-credit individuals, who bought homes they couldn't afford. Those mortgages were then packaged and used as the fodder for financial derivatives, which turned bad loans into a global crisis. Meanwhile, millions of people lost homes and jobs; the government spent hundreds of billions to bail out the banks, and those millions of citizens were left with shattered credit, no employment, and fractured communities such as Detroit.

There is much that is true in this story. Its basic contours were repeated this week in the Justice Department case against Bank of America over lax lending practices in 2008. And Fannie and Freddie, independent agencies backed by the government, were the linchpins, buying up those mortgages and providing a seemingly endless backstop.

What's missing from the story is crucial, however. Obama alluded to it in his speech, but he buried the details. Often neglected is the degree to which so many felt that they needed to own a home. That wasn't created by banks and government, even though it was encouraged. The "ownership society" had been touted not just by President Bush in the 2000s, but by Clinton, Reagan, and by Americans of all parties and ideologies since the founding of the republic. There is nothing more "Jeffersonian" than owning your own land and home (and slaves...but that is another issue). The United States pulled immigrants in part because of the availability of land and the promise of independence that owning land afforded. Freed slaves after the Civil War were promised -- though not actually granted -- "40 acres and a mule" because having land was seen as a necessary component to liberty and freedom.

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Zachary Karabell is Head of Global Strategy at Envestnet, a financial services firm, and author of The Leading Indicators: A Short History of the Numbers that Rule Our World. More

At River Twice Research, Karabell analyzes economic and political trends. He is also a senior advisor for Business for Social Responsibility. Previously, he was executive vice president, head of marketing and chief economist at Fred Alger Management, a New York-based investment firm, and president of Fred Alger and Company, as well as portfolio manager of the China-U.S. Growth Fund, which won a five-star designation from Morningstar. He was also executive vice president of Alger's Spectra Funds, which launched the $30 million Spectra Green Fund based on the idea that profit and sustainability are linked. Educated at Columbia, Oxford, and Harvard, where he received his Ph.D., he is the author of several books, including Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It (2009), The Last Campaign: How Harry Truman Won the 1948 Election, which won the Chicago Tribune Heartland Award, and Peace Be Upon You: The Story of Muslim, Christian, and Jewish Coexistence (2007), which examined the forgotten legacy of peace among the three faiths. In 2003, the World Economic Forum designated Karabell a "Global Leader for Tomorrow." He sits on the board of the World Policy Institute and the New America Foundation and is a member of the Council on Foreign Relations. He is a regular commentator on national news programs, such as CNBC and CNN, and has written for The Wall Street Journal, Newsweek, Time, The Washington Post, The New Republic, The Los Angeles Times, The New York Times, and Foreign Affairs.

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