Lest it fade from memory amidst almost daily violations of our rights by the federal government, let us consider some possible implications of the housing bill passed almost one month ago. Since then, the shares of Fannie Mae and Freddie Mac have plummeted yet again, and at this point, the “bazooka” that Treasury Secretary Paulson said he would likely never have to use is certainly loaded and ready for firing. In case you have forgotten, the urgency behind passing the housing bill, and the stated reason for President Bush withdrawing his veto threat, was the need to keep the two Government Sponsored Entities (GSE’s) from imminent bankruptcy. Paulson said that he needed vast powers at his disposal (the bazooka), including the statutory authority for the federal government to buy shares in Fannie and Freddie. He said at that time that he didn’t anticipate ever having to use the bazooka, but needed to have it to “boost confidence.” He was either lying or a fool.
It is apparent by now that the bazooka is not going to inspire investors to buy back into Freddie and Fannie. Shares have been as low as $3 and $4, respectively, in the past week, down from highs of $69 and $68 over the past year. They literally have trillions of dollars worth of bad mortgages on their books and no way to cover their obligations. While there is some justifiable outrage over the use of public funds to backstop these firms (although not enough), it doesn’t seem that the great majority of people see where this scenario is likely headed.
The U.S. government is going to have to buy a substantial portion of Fannie and Freddie, because no one else will. Of course, that will push up the price of their shares artificially, as the market has decided (rightly) that these companies are worthless. It is not out of the question that the federal government will acquire a controlling interest or all of the shares of the two GSE’s, perhaps with the stated intention of selling them back into the public sector after they have stabilized under the federal government’s “astute management.”
What happens then? Well, the tsunami of mortgage defaults continues, and another 2 million people walk away from their homes. However, these homes are not now owned by private sector banks, who must sell them at pennies on the dollar, if necessary, to recoup as much of their losses as they can. No, these houses are now owned by the federal government, for whom market forces do not apply. Of course, the government would want to get what they could out of these assets, but they have another alternative that is not available to the mortgage lenders, who cannot lose money indefinitely (in theory).
Before considering the government’s “other option,” let us take a step back and consider the bigger picture for a moment. It is obvious that the bursting of the housing bubble is symptomatic of a much bigger, more systemic problem for the U.S. economy. After decades of consuming more than it produces, its productive structure decimated by an increasingly predatory and parasitic government, the U.S. consumer economy itself is poised to collapse. Already, retailers are going bankrupt at an alarming rate, and despite the stock markets’ refusal to face reality, the U.S. economy no longer has the productive means to mount a recovery. The Federal Reserve has done everything it can do other than inflate further, which is what it will do, further destroying the U.S. currency. By this time next year, Americans will be looking into the abyss of an unprecedented economic disaster. We have had double digit unemployment before – this time it could be worse.
Of course, if government has proven one thing, it is that they will never learn that intervention into the marketplace never helps. After some inspiring speeches, our new, first-term president will declare war on the problem. That’s when things may really get ugly.
Just what could the federal government do with 30 million unemployed people and 7 million empty homes? Enter the Public Housing Administration and Section 8. Of course, there will need to be a “catchy” new government name to spin the new program to not sound like welfare. Perhaps “America Lives Together,” or “Communities in Progress” or some such nonsense. What is important is that the federal government will REALLY be in the housing business now, and not just for those below the poverty line. Average Americans will now be living in government-owned homes and paying rent directly to the government. Eventually, the rent payments could be incorporated into their payroll withholdings. One thing is for sure, once a federal government program is started, there is one thing it always does and one thing it never does. What it never does is go away. What it always does is grow larger.
Of course, this is not meant as a prediction, but merely one possible scenario among many that could result from America’s economic day of reckoning. However, while 40 years ago average citizens living in government housing was confined to the dark visions of Orwell and Burgess, today the unthinkable shouldn’t surprise us when it comes to any aspect of our society. We are presently giving serious consideration –in “the land of the free” - to socializing medicine, nationalizing the oil industry, and ending the rights of inheritance forever. A nation of socialized housing would complete that picture very well. Perhaps that America is still a few years off. On the other hand, we have been promised “change” during this next presidential term by a candidate with the most socialist platform we’ve seen in decades. Let’s hope it doesn’t look like this.