You Pick Up the Tab

Uncle Sam: Subprime Lender
An ill-conceived plan to place taxpayers atop the housing bubble.
This week the House of Representatives overwhelmingly approved a plan to erase billions of dollars of subprime loan defaults in the private mortgage industry. How? By making taxpayers responsible for future losses… The Wall Street Journal, Sept. 22,2007

The Baltimore Sun
What will we do if big two go bust?
By Rolfe Winkler
January 4, 2008
They don't know it, but taxpayers stand to lose billions as the housing bubble bursts.
And in a bipartisan effort to "do something" to save the housing market, President Bush and the Democratic Congress appear set to put taxpayers on the hook for billions more.

Until now, losses in the housing world have been confined to homeowners, mortgage lenders, banks and investors in toxic mortgage securities. But by virtue of the implicit federal guarantee backing mortgage giants Fannie Mae and Freddie Mac, U.S. taxpayers may be one of the largest mortgage lenders in the world - set to lose billions, like all the others.

Between them, Fannie Mae and Freddie Mac back more than $4 trillion in mortgages. If they fail, it could force an unprecedented taxpayer-funded bailout. And they are much closer to failure than most people realize.

Some saw this coming, including presidential candidate Ron Paul. As far back as 2002, Mr. Paul - whose candidacy I'm not actively supporting - predicted the Federal Reserve would blow up the housing bubble.

Besides the Fed's low-interest-rate policy, which encouraged excessive borrowing to buy homes, its refusal to regulate mortgages gave lenders license to sell whatever mortgage products they could dream up, no matter how risky. Mr. Paul was dead-on with his prediction that the Fed was blowing a new bubble and that it would burst violently.

Another Paul prediction, that Fannie and Freddie will go bust, forcing a taxpayer bailout, remains controversial because few think the housing crash could be that bad…

In 2005, Mr. Paul introduced an amendment in Congress to end the implicit taxpayer guarantee backing Fannie's and Freddie's debt. He said at the time: "I hope my colleagues join me in protecting taxpayers from having to bail out Fannie Mae and Freddie Mac when the housing bubble bursts."

It's a shame others in Congress weren't listening to Ron Paul in 2005.

http://www.baltimoresun.com/news/opinion/oped/bal-op.fannie04jan04,0,1654729.story