Congress Will Regret Writing A Blank Check To Fannie And Freddie
November 7, 2009 by admin
Filed under Mortgage Mess
The United States Constitution Article 1, Section 8 puts Congress in charge of the national checkbook. Legislation enacted over the years however, has created loopholes big enough to drive a semi through. This may end up being one of the biggest ones:
The credit crunch has displayed yawning democratic deficits, like the inability of Congress to get a proper handle on the Federal Reserve’s emergency lending programs. But with Fannie and Freddie, it is the Treasury that gets to freely commit massive amounts of money. Both companies have bought most of the mortgages written in America this year and are modifying large amounts of loans to keep people in their homes.
This matters to investors. From a macroeconomic perspective, it is unhealthy when the government faces few checks when pouring billions of dollars into one sector of the economy, in this case, the housing market. The Treasury has committed up to $400 billion to keep Fannie and Freddie solvent. The two have already received or requested over $110 billion of that total.
Legislation passed last year puts no dollar limit on how much the Treasury can plow into Fannie and Freddie. Granted, Congress signed off on that bill, and the Treasury does have to explain its injections to Congress. But legislators may look back at one of the biggest blank checks they have signed.
What’s more, a possible accounting-rule change could force Fannie and Freddie to consolidate trillions of dollars of assets and liabilities early next year. Since Uncle Sam controls the companies, that would effectively balloon the government’s balance sheet.
Accounting rule changes only seem to serve as rose colored glasses anymore. It’s hard for me to believe that an accounting rule change that would make the government’s balance sheet look worse will ever happen.
What is far more likely than the accounting rule change is that the Treasury will continue to pour money down the dark hole of the GSEs in the name of stabilizing housing. Someone needs to point out to Congress that the Constitution is intended to promote the GENERAL welfare, not the CORPORATE.
