Blackburn: Easy-money shell game ended

WEST PALM BEACH, Fla. — In retrospect, it might have been better for President Bush to tax the gizzards out of people instead of giving them tax breaks in the faith that they would spend the money better than the government. Without the money people kept, there might not have been enough fuel for this housing/credit mess.

The tailspin that led to last week's federal takeover of the last two standing mortgage lending giants started when people with tons of money to play with fell for a shell game played with mortgages. Fannie Mae and Freddie Mac didn't invent the scam; they bit on it. Some of the bright folks on Wall Street, like Bear Stearns and Lehman Brothers, bit harder.

Fannie and Freddie bit because of what they saw as their first duty as private companies: to maximize returns to stockholders. Their stockholders expected some of what the bright folks were getting.

The companies were stockholder-owned, but everyone assumed that Uncle Sam stood behind them. That proved correct. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke asked Congress in July for standby authority to pump in some tax money, hoping to calm investors.

It didn't work. Fanny and Freddie stocks tanked. American lenders, suffering from the shell game, balked at Freddie's bonds. National banks and investment funds of the oil states, Asia and Russia cut back on buying the bonds. China lectured us on fiscal responsibility. We borrow $2 billion a day from those sources to support the public and private debts of our Bush-Cheney lifestyle. If they mutter, we care.

So last week, the government took control of what it backed. It is a classic case of private profits and public losses. Taxpayers are now on the hook for up to $200 billion. But it is generally agreed that Paulson did what he had to do. With $5.3 trillion in debt, Fannie and Freddie sinking would set off a tsunami that would swamp economies around the world. It would amount to the United States defaulting.

"It is exactly the kind of event we warned about and tried to prevent over the years," White House Press Secretary Dana Perino scolded. Warned, yes. Tried to prevent? Not hard enough. Bush appointed Bernanke in February 2006 and Paulson four months later. If he had an intuition, he could have stressed it in their job interviews.

Bush did seek stricter supervision of the two companies earlier, but Republican Congresses turned him down. He got tougher supervision from a Democratic Congress two months ago. How's that for hitting the brakes after the crash?

Over the years, Fannie and Freddie were amazingly good at lobbying both sides of Congress. The supervision that Bush wanted to bulk up had been run down by the Republican reformers of the previous decade in bills signed by President Bill Clinton.

If they survive, Fannie and Freddie will have to be either a federal agency or honestly private. That is, if they survive. Hardly anyone in a position to influence what comes next is talking about it because they are all holding their breaths.

Problem is, if Fannie and Freddie didn't exist they would have to be invented. If you ever had a mortgage, one of them was involved. If it didn't issue the mortgage, it bought someone's paper from your lender so your lender would have money for you. Whether anything else could do all that is debatable.

Had the shell game not caught on, Fannie and Freddie probably would have survived the logical and economic inconsistency in their charters as they had for decades. Thrilling ventures with big returns and ignored risks are all right for people luxuriating in huge tax cuts and nothing more pressing to do with their money. When there is a lot of money for discretionary spending, scams arise to part fools from their money. It always happens. Fanny and Freddie lost in somebody else's game.

Tom Blackburn is a former member of The Palm Beach Post Editorial Board.