This morning we discussed how the size of the bailouts of Fannie Mae and Freddie Mac already dwarfs the benefits the supposedly accrued to home buyers. Over the entire course of their existence, Fannie and Freddie may have saved homeowners $100 billion in mortgage interest. The government, however, has now had to pledge $400 billion to rescue them. $60 billion of that has already been withdrawn.
Our argument this morning demonstrated that the GSE’s were colossal policy failures. But we were assuming then that the policy goal was something as benign as delivering tangible benefits to the American people. If you take away that assumption–that is, if you allow for the idea that the GSE’s were cynical rent-seeking operations to begin with–you can see that they may actually have succeeded.
The key to understanding the GSE’s success is to realise that the savings and the costs were born by different groups of people. Most of the mortgage interest savings took place in the past, while the costs are being born now and, since much of the money used to rescue them needs to be borrowed, in the future. If the goal of the GSE’s wasn’t to provide a net savings but to transfer wealth from future generations, they seem to have succeeded wildly.
Another way of putting this is to look at what it means that the costs of rescue are approaching the total mortgage interest benefit from the GSEs. In short, it means that this was a zero sum game. There was no free lunch or extra value or savings created by the implied government guarantee. Instead, the liability for the interest supposedly saved was just pushed forward in time. And now it has come due.
That’s right: the GSE’s operated on the same basis as an exploding mortgage. Low interest at first, with a huge balloon payment at the end. And like a borrower victimized by a predatory lender, we just hadn’t paid enough attention to the details to realise that this is how this deal would work out.