Lois & Clark Forums Forums General Discussion Off Topic Possible reason for Wall Street crisis

This issue is getting more and more complex. I read that Forbes article that Alcyone gave us a link to. Although I took a fairly basic course on economy more than thirty years ago, much of today's more technical economy-talk is, well, Greek to me. But I did what I do when I try to wrangle meaning from the astrophysical papers I sometimes read: disregard the lingo and the details and try to focus on what the broader question is about.

All right. Fannie Mae, or Federal National Mortgage Association (FNMA), was founded in 1938 as a federal agency which operates with a congressional charter to help lower- and middle-income Americans buy homes. In other words, Fannie was originally a sort of big-government agency whose sole object was to render housing help to lower- and middle-income Americans. It was, therefore, the sort of government agency that I approve of, the kind that exists to help the less fortunate citizens in a country.

But in 1968, Fannie became a for-profit company. Suddenly the agency had two aims. One was to help non-rich people get mortgages. The other one was to make a profit. Which of these two aims would be the most important? And indeed, are these two goals even compatible?

Bottom line, I don't think they are compatible. A federal agency whose aim is to serve the public should concentrate entirely on that. The people running the agency should receive a fixed pay from the government. If, on the other hand, the aim of the agency is to make a profit, then I think that its dealings with the public will eventually become of secondary importance. After all, for such an agency the public is basically a means to an end, the means that the agency needs to make a profit.

If a society is ruled by relatively collectivist ideals, then I think it is easy to argue that an agency like Fannie should have only the best interests of the public at heart. But in a society where Reaganomics has taken a firm hold, where profit is king and self-interest is promoted as the road to collective blessings, serving the public becomes equivalent to selling vacuum cleaners or or drilling for oil or getting yourself a stable full of racing horses: you do it to make a profit, and if you are unsuccessful you can hopefully sell your business and find a more profitable means of making money instead.

I think there is ample evidence in that Forbes article that Fannie started using the public as a means to an end, where the end was to make a profit. According to the article, Federal Reserve economist Wayne Passmore wrote in 2003 about GSEs, Government Sponsored Enterprises, of which Fannie is a prime example. According to the Forbes article, Passmore said that

In other words, servicing the public by securing more and better mortgages for lower- and middle-income Americans was no longer much of a priority for Fannie. But the agency sure made money, all the same. So where did that money go? The Forbes article says,

Right. Fannie sure made a profit, or at least, it most definitely had the ability to give its top executives nice bonuses.

Not only Fannie's own executives were happy. So was Wall Street. When Fannie came under fire for shoddy and downright illegal accounting from Armando Falcon, a Texas Democrat who had been appointed head of the Office of Federal Housing Enterprise Oversight (OFHEO), several Wall Street executives rushed to Fannie's defence:

Wow. The Forbes article is dated January 24, 2005. Its author, Bethany McLean, had no way of knowing that Lehman Brothers and Bear Stearns would be two of the first casualties of the Wall Street crisis. Yet she picked them out as two of the staunchest defenders of Fannie. McLean also points out in her article that in 2005, Fannie was still "one of the Street's top fee-payers". So Bear Stearns and Lehman Brothers rushed to Fannie's defence. Yes, making a profit is what matters. Or rather, making money for oneself.

To be sure, the Democrats also did their level best to defend Fannie. Because Fannie used to be an agency that served the public. When it became an agency that was allowed to make a profit - indeed, when it was allowed to expand wildly to make grotesque profits - the Democrats still defended the Fannie because of what it had been, and because of what they hoped it could still be, a symbol of federal aid to poor people.

And maybe they also defended Fannie because it was so big and mighty and so associated with the Democratic Party - it must have been founded by FDR, after all - and it is nice to have something that is so big and mighty on your side.

What interests me is not so much if people call themselves Democrats or Republicans. The people who defended slavery during the Civil War almost all called themselves Democrats. I don't care what people call themselves. I care about what they really believe in, what they want to fight for. Do they believe in a measure of collectivism, so that the problem with Fannie was that it forgot its duty to the public in order to make a magnificent profit? Or do they believe in Reaganomics and the total rule of the free market, so that the problem with Fannie was that it received government support?

I think that so much of today's crisis has its roots in the belief that the unchecked rule of the free market will make everybody richer and happier. Of course, the people at Fannie Mae tried to have it both ways, as they asked for government support to make a profit. The way I see it, however, the sins of Fannie Mae was that it put the interests of the public second and the interests of its own executives and Wall Street executives first.

Ann