Prof. Richard Wolff explains that Trump’s plan to re-privatize the mortgage loan companies Freddie Mac and Fannie Mae opens the door to the factors that caused the 2008 financial crisis
Story Transcript
GREG WILPERT: Welcome to The Real News Network. I’m Greg Wilpert.
The US Treasury Department is proposing to end federal government control over the Federal Mortgage Association and the Federal Home Loan Mortgage Corporation, also known as Fannie Mae and Freddie Mac. The two entities have been under federal conservatorship since the 2008 financial crisis. This has meant that the federal government observed their losses, amounting to $220 billion for Fannie Mae and $72 billion for Freddie Mac, since then. However, since the end of the housing crisis, the two corporations have returned to profitability, and the same amount of profits has been returned to the federal government. According to Treasury Secretary Steven Mnuchin, his proposals will “protect taxpayers and help Americans who want to buy a home.”
Joining me now to examine what this means for home buyers and for the economy more generally is Richard Wolff. He is Professor Emeritus of Economics at the University of Massachusetts, Amherst and the New School University. He is the author of many books, including Capitalism’s Crisis Deepens: Essays on the Global Economic Meltdown. Thanks for joining us again, Richard.
RICHARD WOLFF: Glad to be here.
GREG WILPERT: So first, before we get into the heart of the effect of this Treasury Department proposal, we need to clarify for our viewers exactly what is the function and importance of Fannie Mae and Freddie Mac. What do they do and why are they important? And why did the federal government take them over into conservatorship in 2008?
RICHARD WOLFF: Well, the important thing about Freddie Mae and all of these kinds of programs is that people understand where they began. The federal government, in the depths of the Great Depression, 1938 to be precise, understood that one of the ways out of the Depression was to give people the chance to buy a home, because that would provide work for everybody who would build a home and provide the furnishings for it, and so on. But in the depths of the Depression, nothing was more obvious than that people didn’t have the money to buy a home, and therefore couldn’t buy one. So what the government did to stimulate the economy was to create a federal insurance program.
And here’s how it worked. The government went to the bank, all of them in America, and said, “If you lend money to a homeowner, and you follow certain basic rules, you will be able to get, in effect, an insurance policy. We the government will, in effect, guarantee that mortgage.” The financial details aren’t important. The idea was that the bank could now take the risk of lending to American working people money that they would never have lent to them before because it would have been too risky, because the risk was now gone, because the government stepped in and said, “We will guarantee,” very clearly, if the person who took out the mortgage cannot keep the payments going, the government will step in and do it for them, thereby removing the risk for the banks. We did it first in 1938. We did it again in the 1950s.
And it’s an important fact to understand, that the housing business in the United States that we’ve become used to over the last half century was, throughout that time and to the present, guaranteed by and supported by the government of the United States. The housing industry was never a private enterprise. And until this current proposal, it was understood that it had to be that way, or else the American dream of owning your own home would again become a dream for only the top 10% or 20% of our people.
That’s the first step. Second step, in the great crash of 2008, what happened was, so many people lost their jobs, so many businesses went belly up, that millions of Americans could not repay their mortgages. And as a result, the government had to step into these special things— Fannie Mae, Freddie Mac, and so on— and basically take them over because they didn’t have the money in them, as half-private enterprises, to cover all of the mortgages they were technically responsible for. So the government stepped in with literally hundreds of billions of dollars to bail out the housing industry that they had always supported. So as of 2008 and 2009, the government didn’t have an independent group of companies, Fannie Mae and Freddie Mac. It simply took them over and did directly, what it had before done indirectly.
The problem here is that it puts the government in a position of having, in a way, the last word in the housing business. Because whatever the government charges— either the private banks or anybody else— to play in this game, they don’t want to be charged by the government. They want to control it themselves. So what Mr. Trump and Mr. Mnuchin have done, as they have done across the board in deregulating every other aspect of our economy, taking away the role of the government to protect us, and giving us back to the private enterprises that got us into the Great Depression in the first place and into the Great Recession in 2008. We’re going backwards to re-establish the private control that led to the creation of these “special entities,” as they are called, in the first place. So think of this simply as a big fat regressive going backwards for the benefit of private finance, at the expense of government control.
GREG WILPERT: Give us a little bit more detail as to what that would mean. I mean, the proposal itself has something like 50 different elements, which are actually all quite complicated, but I think there’s two that really stand out, one of which you already mentioned, which is the return to private control. Now, one could say that the interest rates are very low at the moment, this actually shouldn’t have much of an effect, perhaps. What’s your reaction to that? I mean, one of the things that Mnuchin, as I mentioned earlier, said, is that this would actually benefit the consumer. What do you think?
RICHARD WOLFF: I think if you take what he says seriously, it means you’ve never understood the history of the American banking system. When the government stepped in to take over Fannie Mae and Freddie Mac back in 2008 and 2009, it made exactly the same statement. What they were doing was guaranteeing that the American dream would not get lost, that American homeowners could continue to buy and own their own homes. Mr. Mnuchin And Mr. Trump, going in exactly the opposite direction, make the same promise. It has no value in the first case, and it has none now.
Let me explain the specifics. When you go to a bank and get a mortgage, okay, you believe, in your mind that you are borrowing money to buy your home and that you’ll make a payment every month. What actually happens is that the bank turns around and sells the mortgage, your obligation to pay, say for 15 or 20 years or whatever it is, they sell that, usually to a bank. The bank puts it together and calls that a security, a mortgage-backed security. It is now a piece of paper like a share of a company, but instead of having a share of a company, what you have is a share of all those mortgages. And as each of us pay our monthly to the bank, the bank turns around and shifts that money, keeping a little bit for itself, to whoever put those mortgages together into this mortgage-backed security.
And the bank that does this then sells those securities to rich investors around the world who like to do that because the rate of return you get on that kind of a security is better than many other options you have, so it’s attractive. And what really makes it attractive, and here we go now, is that Fannie Mae and Freddie Mac were these agencies that guaranteed to pay off … if the mortgage couldn’t be paid, the investor will have no risk because these were quasi government-backed entities that would guarantee that the risk was low. When that was private enterprise, it was still guaranteed by the government because everybody believed the government would step in, in the event that the mortgages weren’t being paid and that actually happened in 2008. The government stepped in and what they want to do now is to go back to what it was before, which leads any reasonable person to say, “Well, if it got us into terrible trouble before, why would we want to go back to what it was then that got us into this great difficulty?” Number one.
And number two, the simplest answer, nobody knows, if you give this back to the private companies, if Freddie Mac and Fannie Mae become private, what the new arrangements will be, how much they will charge for the banking that they do, how responsible they’ll be. All I can suggest to your audience is, we know that the crash of 2008 had to do with extraordinary gimmicks developed by banks, CDOs, mortgage-backed securities, debt swaps, that got us into an unbelievable crash, the second worst in the history of capitalism. Turning housing from the government back into the hands of people who have performed this badly, the same banks that have been fined for money laundering, for excessive fees, for manipulating international interest rates, this is an extraordinary vote of confidence in a banking industry that should have deprived itself of confidence by what they’ve done in the last 10 years.
GREG WILPERT: Now, another element of this deal, or this proposal, is that Fannie Mae and Freddie Mac would pay the government a sort of insurance policy. That is, in other words, they would basically be bailed out if they get into trouble again, and in exchange for that, they would pay the government a certain fee, which presumably would cover that. Now, shouldn’t that allay some of those fears that you’re talking about of a possible bankruptcy should there be a new downturn in the housing market?
RICHARD WOLFF: It should make you very, very afraid. And let me tell you why. Banks, in case folks are not familiar with them, are entities that are privately-owned capitalist firms. Their first responsibility, or they like to call it their “bottom line,” is profit, and returning, profitably, dividends to their shareholders, and capital gains to their shareholders, and so on. They will, therefore, turn around, if and when they pay a fee to the government to be the insurance policy, as you describe it, they will turn around and do in the future what they did in the past, which is charge the homeowner a fee, or to raise the interest rate, or however they plan on doing it, to recover that money, and probably make a little profit off the whole arrangement on top of it.
That’s why any promise by Mr. Trump or Mr. Mnuchin that the hustle that they’re perpetrating will, in the end, make it more affordable for Americans to own their own home, that is almost certainly not true. Because what we can count on the banks doing, because they do it in every other line of business, is squeezing as much profit as possible. And that includes recouping any insurance payment they make to the government for a future eventuality by charging us, the homeowners, more in closing fees, in points, as it’s called in some areas, or in the interest rate itself. The money is to recoup anything that they pay to the government.
GREG WILPERT: Well, we’re going to leave it there for now. I’m speaking to Richard Wolff, Professor Emeritus of Economics at the University of Massachusetts, Amherst, and also host of the YouTube program, Economic Update. Thanks again, Richard, for having joined us today.
RICHARD WOLFF: Thank you, Greg. And best to you.
GREG WILPERT: And thank you for joining The Real News Network.
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