In 1938, then, as the years of the Depression dragged on through a lackluster recovery, that good idea was good economics, good sense, and good politics, and so the Federal National Mortgage Association, now known as Fannie Mae, was born.
Good ideas don't have an easy time in Washington, D.C., though. It's a pretty rough crowd. Fannie Mae survived, but in the late 1960's President Johnson was trying to fight the Vietnam War without anyone's noticing the size of the bills pouring in.
Near its thirtieth birthday, then, Fannie Mae found itself and its belongings on the street, evicted from the government's books in order to reduce the apparent size of the federal budget.
Of course, it wasn't just any street Fannie Mae landed on. It was "The Street," Wall Street, and the mortgage operation was being sold to private investors.
The feds and Congress didn't let go completely, however, and preserved their right to meddle in the organization. One result of this legal structure was to provide a model for the "privatization" of the U.S. Postal Service that is working out so well. Another was to enable the management structure that catalyzed the financial collapse of 2008 as well as the laggardly recovery that still inflicts pain on so many.
Forty years after that, close to its seventieth birthday, Fannie Mae, and its step-brother, Freddie Mac, are declared insolvent and they are hauled into the crowded federal lifeboat.
Now, five years later, in a speech in Phoenix, Ariz., President Obama said that he wants to "wind down" both institutions, which is to say in effect, tow them down the Potomac and out to sea; then scuttle them as part of an artificial reef.
It sounds like a good idea and it is. The president's use of "wind down" was judicious, and echoes Federal Reserve Chairman Bernanke's use of the same phrase to describe how they will gradually end the $80 billion per month Treasury bond purchase program.
Even if wound down over time, though, we need to give some thought to the impact that Fannie Mae's disappearance will have on the housing market and the questions that it will raise about our economic policies.
Fannie Mae really created the secondary market for home mortgages through its guarantees, loan specifications, and credit standards. The secondary market allowed banks to manage their liquidity and investors to feel confident in financial assets (Collateralized Mortgage Obligations, or CMO's) that, as individuals, they had no capability to verify. This allowed Fannie Mae to leverage its impact on housing far beyond what it could afford if it made the loans itself.
It is difficult to imagine a private sector institution that might be able to play that role in the economy. This will leave the banking system with crowded balance sheets and constrained commercial lending capabilities, a 1938-like situation that will put a chill in our economic growth.
We can all appreciate the President's goal of the government's playing what he described as a "limited government role" in the housing market. There are several good reasons for this, including the federal government's being pretty much tapped out.
The U.S. government has spent billions of dollars covering the obligations of Fannie Mae and Freddie Mac. In the end, though, most of that money will eventually be returned and the U.S. Treasury may actually make a few dollars in the process, just as it did in the conceptually similar TARP program with commercial banks.
The only disturbing part of President Obama's speech was when he said, that instead of repeating the mistake of excessive promotion of home ownership, " let's invest in affordable rental housing. And let's bring together cities and states to address local barriers that drive up rent for working families."
Government investments in affordable rental housing have a history of disappointment and failure (and rodents, large numbers of rodents), and while not as spectacular as the collapse of Fannie Mae and Freddie Mac it would not stretch the facts to call them mistakes. Let's not repeat those, either.
The President is right about winding down Fannie Mae and Freddie Mac, but this still leaves us some considerable distance from having a housing policy. Presidential speeches, by their nature, do not deal with the nuts and bolts of economic policy, but we need to start thinking about those things before Fannie Mae and Freddie Mac begin providing housing for snapper and flounder.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.
MORE HBJ HEADLINES
Ford plans long-range electric car to compete with Tesla, GM Russia launches 1st rocket from new space facility Fiat Chrysler, Google in self-driving car partnership talks Minimum wage hike hits L.A. apparel firms Dunkin’ targets Starbucks by highlighting espresso drinks Jobless claims in U.S. hover around lowest level in four decades