The Government to the Rescue - Again

So the Bush administration wants Congress to approve a rescue plan for Fannie Mae and Freddie Mac, and not that officials are nervous about the future of the two firms or the state of the housing market or anything -- but they actually worked on a Sunday to come up with it, The New York Times says. Under the plan, the government would be able to buy billions of dollars of stock in the two companies, and it would expand its line of credit should the mortgage giants need it.

No doubt part of the plan is to avoid another debacle on Wall Street today, when Freddie Mac debuts an expected $3 billion debt offering. But this one also falls into the too-big-to-fail category, one that seems to be in expansion mode these days; hardly anyone thinks the mortgage markets have a prayer of avoiding a complete and total free fall should Fannie Mae and Freddie Mac go under.

Still, it's worth it to step back a moment from all the cliffdiving scenarios and look for a little perspective. Here's our first MBA president, a champion of free enterprise, a believer in the invisible hand, with an anti-regulatory bent, who finds himself at the helm of yet another unprecedented government rescue of a major player in the financial system. Where are the conservative voices decrying the interference with capitalism's survival of the fittest philosophy? If the quasi-governmental structure of Fannie Mae and Freddie Mac has been such an annoyance to its critics over the years, why not just let both of them fail, to be replaced by something else that doesn't have an implied guarantee from the government? And speaking of that guarantee, here's how The Times explained things:

Now, in the face of market turmoil in recent days, a quiet yet dramatic policy shift has occurred. Government officials no longer deny the existence of a guarantee. Instead, senior officials at both the Fed and the Treasury have been talking in recent days of possibly taking steps to “harden the guarantee.” Motivating the change was the central role of the two institutions and the depth of ownership in the paper they have issued. Every major bank, and many mutual funds and pension funds and foreign governments, hold significant amounts of securities issued by Fannie and Freddie, which have been viewed over the years as being almost as safe as treasury securities. A default by either one of the companies could be catastrophic for the financial system.

Ok, so now the same proponents of unfettered markets who complained that Fannie Mae and Freddie Mac had an unfair advantage over the competition with their implied guarantee now not only support the guarantee, they want to make it stronger! There's some serious backpedaling. It's more entertaining than the Tour de France, watching these people throw their principles out the window. Better that than letting laissez-faire economics bear some blame for the housing meltdown and the wrecked economy. Here's something Bush said in 2002, in honoring Milton Friedman with a lifetime achievement award:

"Milton Friedman has shown us that when government attempts to substitute its own judgments for the judgments of free people, the results are usually disastrous. In contrast to the free market's invisible hand, which improves the lives of people, the government's invisible foot tramples on people's hopes and destroys their dreams."

I think we all know just where that foot is now! Try to keep a straight face in Minnesota in early September, when those folks take the podium to extoll smaller government and the ability of the markets to self-correct.

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