First You Borrow, Then You Beg…

By Alyssa Eggebrecht

Many private banks and financial institutions are in trouble because they supplied the market with too many sub-prime mortgages. However, what has not been well understood is the Federal government’s mechanism for over stimulating sub-prime lending through government-sponsored enterprises like Fannie Mae and Freddie Mac, which together now back $5.3 trillion of mortgage debt.

Sub-prime mortgages became a viable financial tool in the U.S. due to declining levels of domestic savings and investment over the past thirty years. This type of loan allowed those with little or no savings to borrow on homes they otherwise could not have afforded. The cycle worsened as banks and financial institutions recapitalized their positions by selling off their conventional loans to Freddie Mac and Fannie Mae, which they in turn created mortgage-backed security bonds that proliferated in the financial markets. When the economy declined, homebuyers couldn’t leverage their mortgages due to a lack of equity, and banks scrambled for more capital.

The crisis in the real estate market is largely a result of trying to purchase a home solely with credit rather than a portion of accumulated wealth and savings. Government-sponsored Fannie Mae and Freddie Mac, rather than helping, have been a part of the problem. Instead of bailing them out, the government should allow Fannie Mae and Freddie Mac the opportunity to dig themselves out of their own hole.

Alyssa Eggebrecht is a research associate at Cascade Policy Institute, Oregon’s free market research center.

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Posted by at 06:00 | Posted in Measure 37 | 29 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jerry

    Exactly. These government morons trying to increase home ownership by granting loans to people ill-prepared to take them on is the whole problem. If anyone should get a break on their mortgage it is someone who has successfully had several in the past. Not the first-timer.

  • John Fairplay

    Efforts at this kind of “social engineering” have been notable failures in the U.S. This crisis was caused by the Party of Do-Gooders, and they should be held accountable. The “bail-out” is only going to make the problem worse. Sometimes Freedom means the freedom to fail.

  • Crawdude

    All this bill does, is give a group of people who mismanaged their finances and lived above their means more money to mis-manage.
    They will refi their home, continue on with the habits and in 5 years be foreclosed on, only this time the taxpayers not lenders will be paying the costs.

    What is quietly not being talked about is the debt ceiling. Right now, the debt ceiling is 9.85 trillion, the Feds owe 9.5 trillion. Note, they are 350 billion under the ceiling! With this bailout it raises the debt ceiling to 10.6 trillion.

    This is yet another socialized government mistake ………..people, eventually that debt is going to come due. We’re not only passing it on to the next generation, were increasing it to the point it can’t be paid.

    The Federal goverment is bankrupt, the state governments are bankrupt, the local governments are bankrupt. We have a consumer based economy, people have been living off credit for too long. Our government just gave the worst offenders a free pass to continue offending.

    Whats going to happen when the bill comes due?

  • Rupert in Springfield

    Just a cheerful little reminder from the way back machine. Does anyone remember the Savings and Loan crises from the 80’s? Remember what a whopper it was? People were really pissed off we were going to bail out the banks. Boy were they mad. I sure was. Just for perspective, I remember the figure being bandied about that had people so upset. It was $100B. It finally wound up costing taxpayers $150B or so.

    Now this mess is up to something around $1T if we go with CD’s numbers?

    Times do change don’t they?

    One does wonder at what point people will get sick of the “but we only did it with the best of intentions” excuse. Look, I don’t care about your intentions. Your mommy cares about your intentions I don’t. Especially when it is about yet another zany government program that we all get put on the hook for. Why the hell is the government in the mortgage business anyway? Great, so yet another time we get to say to the children “I’m sorry honey, sometimes just good intentions just aren’t enough”. Maybe its time junior spend his own allowance on his good intentions, and leave mommy and daddy to do the grown up work at hand.

    • Crawdude

      Yes, and that one bailout heralded in the start of the major deficit spending that has done nothing but increase since.

      If we don’t learn from our mistakes, we are destined to repeat them……that is exactly what we are doing. Since this can’t herald us into the deficit spending era…………it can only herald us into the bailout era. Can anyone say GM? Ford? Chrysler? At least one of these companies (GM, my prediction) needs to fail for the others to survive but we’ll bail it out and doom the entire industry, watch and see.

  • Crawdude

    “The Founding Fathers knew a government can’t control the economy without controlling people. And they knew when a government sets out to do that, it must use force and coercion to achieve its purpose. So we have come to a time for choosing. Public servants say, always with the best of intentions, ‘What greater service we could render if only we had a little more money and a little more power.’ But the truth is that outside of its legitimate function, government does nothing as well or as economically as the private sector.”

  • eagle eye

    Interesting that the S+L crisis originated in the Reagan/Bush1 days, and the Fannie/Freddie stuff lies at the doorstop of the George W. Bush White House.

    Perhaps the “conservatives” talk a good game but can’t really be trusted with our finances?

    Perhaps a little more Clinton-style financial management is in order?

    I hate to raise these possibilities, but a lot of erstwhile conservatives must be asking these questions in their quiet moments.

    • Alyssa Eggebrecht

      The Congress controls the purse strings, so when Democrats make up the majority, the government ends up spending more than what is fiscally conservative.

      • eagle eye

        Pretty lame to me. The Republicans were in control of either the House or Senate or both during most of that time. And there’s an outfit called the Federal Reserve for which the President and the Executive bear some responsibility. And where was Bush’s veto pen? Who financed a war on money borrowed from abroad? And who originated the largest increase in entitlements since the beginning of Medicare?

    • dean

      Eagle…I’m glad you, as a Republican said that. If I said it I would be voted off the Catalyst island. Come to think of it, I probably already have been voted off the island, but I paddle around it in my kayak anyway and send unwelcome mesages in bottles.

      Both parties are complicit, but there should be little question that Republican governance, from Reagan onward has been anything but fiscally conservative. Fiscal conservatism = Republicans is a myth that needs puncturing before we can have a rational debate about government finances.

      Beyond that, allowing Fannie and Freddie to go under is playing Russian Roulette with our entire financial system. It would cause the international investors to finally sell of their dollars and take their losses, and we will be a large Argentina with nukes. Bernanke is a student of Deptression era bank failures adn knows what is at stake. My own grandfather lost his life savings when his bank closed in 1931. It took him 10 years to recover and get back into business. I say bail away and then re-regulate more seriously this time.

      • Alyssa Eggebrecht

        Historically, large spending programs and bailouts have come about through Democratic Congresses and Presidents if one takes time to review the Great Depression and the New Deal.

        Milton Friedman stated that Government spending where the private sector could have more of a role is detrimental to a society, because it forces Government to increase taxes. Foreign investment has picked up the slack, because Americans can hardly afford the opportunity to invest for themselves. The Federal Reserve has done an incredible job keeping inflation down while spending, financed by debt, has increased. Friedman stated that Foreign investors will not sell their dollars, because American debt is the safest to hold – these investors are in the position they want to be in – a safe risk. The only thing that would jeopardize this balance is an increase of inflation, which the Federal Reserve is carefully monitoring. A bailout would not be good for the economy, because it would increase the supply of money and therefore give rise to more inflation. Lets hope that Freddie Mac and Fannie Mae can raise capital in the markets.

        • dean

          Alyssa…”historically” the Republican party once was fiscally conservative. In contemporary times they are merely rhetorically conservative.

          “Hope” is not a strategy. One does not gamble the financial structure of the nation on “hope” that already over leveraged institutions that hold something like 50% of the entire mortgage debt of the nation will be able to raise sufficient capital if there is no net beneath their high wire act.

          If they go down, the banking system goes down, home equity goes down to a nubbin, and we will be looking at a serious national and possibly international depression, not just a recession or a temporary inflation. This is no time to play ideology. It is time for pragmatic macro economics and pragmatic politics.

        • eagle eye

          Sorry, but Milton Friedman is gone, the Great Depression, even Medicare happened a long long time ago. The Fed is doing a great job on inflation? Even the Wall St. Journal — change, that, to their great credit, the vigilant Wall St. Journal has been hammering for years on the danger of renewed inflation. On the danger of the devaluation of the dollar. On the irresponsibility of the Fed, the Administration, and to be fair, Congress (in both the Republican and Democrat flavors). Now the bills are coming due, in spades.

          The Republicans and some of the erstwhile conservatives seem to be determined to deny reality, all the while writing backward-looking, reactionary books such as the one by Jonah Goldberg on whether the New Deal was fascist, or the one by Amity Schlaes on whether FDR had good economic policies. Like King Lear or something, the worse things get under their auspices, the more they retreat into ruminations over things that were basically settled decades ago. I mean, it’s not 1964 anymore, Goldwater is gone, even Reagan, who actually never renounced the New Deal, had left this behind.

          They are beginning to sound like the paleocons who are still questioning whether the war against Hitler was a good thing, even like the ones who still mutter about whether Lincoln and all that were a good thing.

          If they keep it up, they’re going to come to be viewed as hopelessly out of it, irrelevant, passe. It’s closer than they think, because they don’t seem to know.

          I agree, Freddie Mae and Freddie Mac are a big part of the problem. It’s too bad the Republicans/conservatives helped make it so.

          It’s almost as if they think that by proving their incompetence to run the government, they are advancing conservative or libertarian principles.

          It’s not working .

    • Crawdude

      George Bush is no conservative, thats the whole problem with him. Neo-cons aren’t conservatives, they are ideologs. Much like a few liberals on this sight, they only see what they believe as right. They believe they must save us, despite our wishes.

      As for the banking issues, the Fed sets rates and allows the banks to lend. They are given 1% of each dollar they print, to manage the countries finances. They have done a terrible job!

      This country is now to far into debt and our government is way to corrupt to ever expect the current course to be changed willingly. Maybe not in yours or my lifetime but collapse is inevitable on a worldwide scale. Each billon more in debt we go, so goes the rest of the world. We are 15% of China’s GNP, when we quit consuming their economy crumbles and with it, Asia, domino effect after that.

      ANSCHLUS, the populations of the world continue to increase. Its a matter of time before those who need land take it from those who can’t stop them. It may be long into this century but I believe it will happen.

  • Rupert in Springfield

    >Interesting that the S+L crisis originated in the Reagan/Bush1 days, and the Fannie/Freddie stuff lies at the doorstop of the George W. Bush White House.

    Are you saying if something happens while a president is in office, then he is solely to blame for it? That sure makes things simple. Global warming? All Clintons fault then.

    >I hate to raise these possibilities, but a lot of erstwhile conservatives must be asking these questions in their quiet moments.

    While “erstwhile conservative” do blame Bush for not vetoing a single spending bill until his latter days, I doubt many of them leap to the conclusion that Bush is to blame for the fundamental problem that lead to the current bank crises. Some might wish to return to the Clinton days, but not due to his fiscal policies. Lets face it, the guy was crazy for deficit spending and sent up $300B deficits as far as the eye could see after the 1994 elections. Clinton left the deficit cutting to the Republicans with that maneuver and it happened. The difference was, then Republicans had a spine and held the presidents feet to the fire to cut spending. Now they don’t.

    • dean

      Rupert…you are kidding right? Like Jerry? Ha ha. Another Catalyst satiryst?

      Clinton and the Democratic Congress raised taxes absent a single Republican vote in 93. That plus an expanding economy plus a reduction in defense spending (supported on both sides of the aisle due to the East block collapse) plus welfare reform (proposed by Clinton, passed by a republican congress, and signed by Clinton) led to annual budget surpluses that began in 97 and managed to last until…lo and behold, we elected both a Republican preseident AND retained the pre-existing Republican Congress. What did we get? Tax cuts, an unecesary and unfunded war, an expansion of old guy programs, and a bridge to nowhere. And now…teetering on the edge of complete fiscal collapse.

      Sorry….not my party’s fault. Take responsibility for your own people Rupert. Or were you only joking?

  • Alyssa Eggebrecht

    You are right Dean. I don’t need a strategy based on hope. Realistically, it is in the best interests of the shareholders of Freddie Mac and Fannie Mae to raise capital in the financial markets. Why, because if they don’t and government steps in to bail them out, the first in line to recoup profits will be “Taxpayers.”

    Its not like the assets Freddie Mac and Fannie Mae own are worthless. In fact, they are “prime” assets, because they not only back $5.3 trillion dollars of mortgage debt, but they back the most solid and financially secure debt. Their assets only comprise conventional loans. If I were an investor and Freddie Mac and Fannie Mae were not GSEs, I would have made a bid to simply take them over. However, they are GSEs and this type of financial maneuver is not available in our current market. Why? Blame government intervention and agencies like SEC.

    • dean

      Shareholders Schmareholders. I’m talking about the financial underpinnings of our national economy. I don’t give a fig about the shareholders, and neither should you. We have trillions upon trillions of personal wealth tied up in residential real estate in this country. That is the house of cards we built through deliberate public policy since the end of the Second World war and the advent of the GI Bill and the interstate Highway system.

      We can restructure. or allow the private market to restructure the way mortgages are written and take the government completely out. A likely result would be a much larger proportion of renters and a much smaller proportion of home buyers. An immediate consequence would be a further devaluation of home equity, since far fewer buyers would drive prices way down, thus increasing defaults, thus resulting in more bank faliures. In the end we could have a nice free market and a smoldering ruin of an economy.

      Are you willing to take that risk for Milton Freidman’s legacy? I’m not. Bail away Feds, and right quick.

      • Alyssa Eggebrecht

        You want to talk about financial underpinnings, and dismiss shareholders? Dean, it seems to have eluded you that in the United States, our financial markets are based on the concept of capitalism. Whether a company is a sole proprietorship to a corporation, the underpinning is that there is a shareholder that is not the Government. When Government starts becoming a greater shareholder in an economy, that is when the smoldering and ruining takes place. Socialized economies are on their way out, because they are not sustainable. When government tries to, “do it all,” it robs people of their opportunity. Why work hard if you know that the Government can muscle its way into every economically viable opportunity? The answer is people don’t try, and they become apathetic. Before you mention Sweden Dean, even that country has begun to change its economic programs and I refer you to their eminent scholar Johan Norberg.

        • dean

          Alyssa…you are talking about abstracts and I’m talking about Fannie and Freddie and their unique position in the national financial structure. I was not dissing shareholders in general or capitalism in general. I meant I don’t care about what is best or worst for the particular shareholders of Fannie and Freddie. I care about what the risk is to everything else if the federal government fails to put a net under them.

          Your example of Sweden is appropriate. Democratic socialist countries that over reached are scaling back in order to get more dynamism in their economies. We are a democratic capitalist nation that in my opinion has “under reached” with respect to regulating the financial system and providing social services. Every nation strives for a good balance between too much dynamics and too much regulation. Socialism is not on the way out. It is being readjusted, as is capitalism. Both will be with us for many decades to come.

  • jim karlocik

    Don’t forget the part that *smart growth* had in the bubble. See:

    Serious Bank Crisis –
    Yes, Smart Growth Caused the Mortgage Meltdown —


  • Rupert in Springfield

    Dean – Why do you always make it so easy to prove you wrong, time and time again?

    >Rupert…you are kidding right? Like Jerry? Ha ha. Another Catalyst satiryst? Clinton and the Democratic Congress raised taxes absent a single Republican vote in 93

    Nope, I just know my history a little better than you. I also am a little more logical than you, as if you had thought this through you would see how easily this argument is defeated.

    Clinton submitted $300B deficits as far as the eye could see in 94. So much for your little tax hike. Was the Clinton tax increase responsible for getting rid of the deficit? It sure is hard to argue that when in 94, after your tax hike, he submitted nothing but deficit spending. So much for that little theory of yours. I don’t know why you stick to it, since I correct you every time on it. Don’t you think its time you tried something that wasn’t so easily disproven?

    >plus welfare reform (proposed by Clinton, passed by a republican congress, and signed by Clinton)

    Uh oh, you need a real reality check. Clinton proposed nothing of the sort of the kind of welfare reform he was dragged kicking and screaming to eventually sign. Were you out of the country then or what? How do you explain your completely missing the actual facts on this one? Did you miss the whole Contract with America? It was item number 3, the personal responsibility act. You might also remember the Democrats ran against the contract with America, calling it the contract ON America.

    >Tax cuts, an unecesary and unfunded war, an expansion of old guy programs, and a bridge to nowhere.

    Since when have tax cuts ever led to a deficit?

    What planet are you on?

    You really have no knowledge at all of tax revenues in relation to tax cuts do you? Why do you continually make an ass out of yourself every time on this issue? Does it do something for you to constantly be corrected on this very point every time you make it?

    Oh, that’s right, Dean never admits he is wrong, even when shown the treasury department numbers on this very issue you get wrong every time.

    >Sorry….not my party’s fault. Take responsibility for your own people Rupert.

    I do, continually. Your problem is two fold: you simply cannot read ( I think I even said in this thread that Bush deserves blame for signing any spending bill that came his way ), and you simply do not understand tax revenues ( you constantly seem to be under the impression a tax cut results in deficits, something that is entirely wrong).

    Now, since you are so big on responsibility, please take the blame for the deficits of your party. Namely entitlement programs, start with Medicare and SS. Those are the ones passed by your party and never funded. Boy your party really screwqed the country when Medicare wound up costing ten times the projections. Care to take responsibility for that?

    Not so easy now is it?

    Ok, Ill make it easy for you. Lets see you take one small step and if you cant blame the Democrats for anything, ever, lets see you at least praise one budget buster the Republicans managed to stop, expansion of the SCHIP program. Yep, Republicans did a lot of spending, unlike you. I criticize my party when its wrong. Lets see you give the Republicans credit for stopping some deficit spending that would have resulted from SCHIP expansion from two times to four times the poverty rate.

    Go ahead, if you demand responsibility on things done wrong, lets see you praise responsibility on things done right.

    You cant though can you, there isn’t the same partisan advantage is there?

    Prove me wrong and lets see you type the one line

    “yes, the Republicans did show fiscal responsibility in stopping SCHIP expansion, at least they deserve credit for that”

    You cant can you?

    So, we are done, and stop your silly holier than thou attitude on deficits. I know its BS and unless you can admit the Republicans were right as above, now everyone knows you are full of hot air.

    • dean

      Rupert…presidents do not “submit” budgets years in advance. They predict budgets years in advance. Clinton’s predictions in 94 were conservative. Economic growth after his TAX RAISE was far higher than he had predicted, and combined with some spending restraint resulted in a budget surplus. That is history. It is not your history or my history. Its history.

      Clinton ran partly on reforming welfare. Newt saw his reform and lowered him. In the end they compromised a bit and passed a bill that he signed, but most democrats opposed. Also history.

      I’m on Earth. When have tax cuts led to a deficit? Oh…I dunno. There was Reagan, who increased the deficit after his tax cut. Then he raised taxes back but not enough to close the deficit. And there was Bush 2, who squandered a surplus and got repeated deficits after his 2 large tax cuts.

      If you are trying to sell supply side, Laffer curve economics to me, forget it. Even he does not believe in it. I’m surprised you still buy it.

      Show me the numbers Rupert. We have had one string of surplus’s in America in the past 30 years and they were several years after after the Clinton tax raise. Show me a budget surplus or reduced deficit that followed a tax cut since 1980.

      I am in favor of expanding SCHIP, so bad example. I can hardly blame the democrats for attempting to pass what I support.

      But ok…I’ll give the Republicans credit for preventing the expansion of health care to more kids. There…I did it.

      But bottom line, and you can’t hide from this, is your party had 6 straight years of Congress plus president and went from surplus (under a democratic president) to perpetual deficits. That’s reality, its the record, and there is no escape.

  • Chris McMullen

    “I am in favor of expanding SCHIP, so bad example. I can hardly blame the democrats for attempting to pass what I support.”

    Of course you do, Marxist. You aren’t the one paying for it. Only those you and your ilk pejoratively call the “rich” pay the vast majority of taxes.

    Moreover, you’re still blind to the fact the federal debt INCREASED EVERY YEAR CLITON WAS IN OFFICE.

    But it’s obvious all the facts in the world won’t keep you from being a Marxist troll.

    • dean

      Chris…first off how do you know I’m not rich? Rob Reiner is rich and he keeps calling for a raise in taxes, as does the senior Gates and Warren Buffett. (We are all part of the same secret rich guy cabal by the way).

      Second…your Clinton comment is a canard. Clinton came into office and inherited a budget deficit of $290 billion from Bush 1. That annual deficit decreased every year until 1997, when a small surplus was acheived. When he left office in 2000 the surplus had GROWN to $236 billion. George the 2nd immediately squandered it, ran the deficit to minus $412 billion by 2004, and has managed to break his record this year, with worse to come.

      If you add up the total budgets of all the Clinton years you have a net deficit. But that is because of the imbalance he inherited that took his first 4 years to close. The so called acturarial accounting that suggests the debt increased even during surplus years due to future obligations has been shown to be false. You only believe it because you can’t face the truth that one Democratic administration managed to do what 2 Republican administrations could not or would not. Balance the dang budget. Grow up.

      These are the facts and they are not in dispute.

      • Bad Man Jones

        Hey Dean! – I have a few words of wisdon for you. First and foremost, Rob Reiner is a complete ass. he knows NOTHING about economics and spent several million dollars of other people’s money a couple years ago on a ballot Measure in California that failed badly. As for Warren Buffet and Bill Gates, both of those people can pay all the extra taxes they want. Just keep their hands out of my pocket.
        Also, Buffet’s day as a first rank money manger have been over for most of the past year. He made most of his money in the bull markets of the 1980s and 1990s; when anyone with a pulse could make a killing. Many of his consumer companies and insurance assets are sucking gas badly and Berkshire Hathaway stock is NOT coming back anytime soon.

        • dean

          BMJ…I was using Reiner as a joke. I knew his name would push a few buttons. Larger point….I could be rich. Other than that, maybe Buffett’s star is fading, maybe not, but he sure had a good run.

          • Bad Man Jones

            News Flash Dean! – Unlike yourself – I actually AM “RICH” by most people’s deffinition. I don’t need to try to BS people about it – since I can merely wake up in the morning knowing that I can pay any and all expenses with no worry about the future. And as an active investor, I can tell you that Buffet’s stocks are no longer worth having. Earnings are weak and not likely to recover anytime soon. He’s made too many bets on fading industries.

          • dean

            Mazeltov to you then! Since you are rich you should make up a more happy sounding alias, otherwise what is the point?

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