Wednesday, September 09, 2009

Fannie Mae And Freddie Mac: Examples Of The "Public Option"

As President Obama prepares to pound the table for the so called "Public Option" using his bully pulpit later this week and the debate rages on about what said "option" would do to the private healthcare insurance market, TILB believes we need look no farther than the public "option" that already exists in the conforming mortgage market.

Fannie Mae, Freddie Mac, and the FHA (collectively the GSEs) were created in spite of what had been - over time - a competitive, functioning home mortgage lending market called "banks". You may have heard of these companies. At one time, these so called "banks" made things called "loans" and kept the risk of these "assets" on their balance sheet in an attempt to earn an acceptable risk-adjusted "spread" between their cost of funds and their earning assets. The federal government (aka FD Roosevelt) did not appreciate the slow evolution of these private market lenders (which already are subsidized in many ways) and thus felt they needed public "competition" to spur them on.

As such, the GSEs are, in substance, the public option for conforming residential mortgages. If you are interested in borrowing to acquire a house and both you and your desired loan qualify for GSE standards ("conforming"), there is a 100% chance you will be rolled into a GSE product.

100% marketshare? Now that is a display of some awesome competitive power! These must be really well run businesses to drive their "competitors" completely out of the market. Hell, not only that, the GSE standards serve as a vortex that sucks all other "non-conforming" products toward GSE them. Amazingly good work, dear Fred and Fan!

As this Washington Post article highlights, not only do the GSEs have 100% market share of the conforming mortgage market, they have 90% market share of the entire mortgage market.

Luckily for us citizens, these wholly apolitical entities have managed to be purveyors of good and stability for our society...

....I mean, other than when they create the occasional systemic economic collapse leading to periodic multi-trillion dollar public bailouts.

The GSEs have been manipulated for political gains again and again creating a lollapalooza of unintended consequences that ultimately led to one of the greatest borrowing orgies of all time. Not surprisingly, this led to a period of horrific malinvestment and indescribably bad human behavior that subsequently was followed by the greatest financial collapse our nation has seen since the Great Depression. Luckily, the public option for healthcare will be magnificently better.

We at TILB are convinced that as politicized as housing (and thus the GSE system) has been, healthcare and the human behaviors associated with it will be totally outside the political spectrum and that the results of this socialist experiment will be grand indeed. There will be no political meddling. The natural short termism of man will not be made worse by election cycles and desires to buy votes with handouts. The seemingly good intentions of the public option's creators will never be replaced with the less good intentions of their future political replacements. The public option will endeavor to earn an acceptable commercial return on capital that puts it on even footing with private options. It will not lead to malinvestment and unusually horrible human behavior. It will not crowd out private capital and, most importantly, it will lead to improved healthcare outcomes.

How could the Public Rainbow Special Happy Happy Friendly Love Your Neighbor Option not accomplish all these wonderful things when Dear Leader says it will?

Just because every other socialist experiment in history led to less freedom, less productivity and a slew of negative unintended consequences does not mean that this will be the same.

In fact, we have been assured that "this time is different."

Back in the world of sanity, logic and reason, we suppose the "good" news is that because the proposed socialist health care system is clearly untenable in the long-term, we can trust that it will ultimately fail leading to a subsequent increase in freedom. Sadly, the long-term can take a long time indeed and our liberty can be taken from us for the duration before that welcome collapse and rebirth into an actual commercial and thus tenable solution takes hold.

In any case, we look forward to hearing The Administration's attempt at mass assimilation. Don't worry, dear reader, I'm sure it will sound wonderful. Just sit back, relax, and enjoy the tales of pixie dust and Tooth Fairy economics.

"Resistance, is futile. Your life, as it has been, is over. From this time forward, you will"