Contrary to popular economic wisdom, the collapse of the appallingly named American welfare lenders 'Fannie Mae' and 'Freddie Mac' would not be a disaster to be measured against the Vandals' sacking of Rome, as some breathlessly illiterate commentators suggest.
These two government-created behemoths "own" ninety percent of America's "secondary" mortgage market -- in other words, cheap credit doled out to make up the difference between what house-buyers wanted, and what they could really afford. This is the junk mortgage market primarily responsible for creating the housing bubble with the money pumped out by the Federal Reserve's printing presses, which have been running hot for a decade.
Without all this extra credit, created by 'The Fed' out of thin air, and without these two bloated bureaucracies, created way back in the thirties by Franklin Roosevelt's 'New Deal' panjandrum, the housing bubble would likely never have happened as it did.
The counterfeit capital doled out through Fannie Mae (the Federal National Mortgage Association) and the Federal Home Mortgage Corporation (Freddie Mac) amounts to middle class welfare for house-buyers . The delusion of inflationism -- the process by which prosperity is 'assured' by expanding the money supply while strangling production -- allowed everyone to believe this was sustainable.
It isn't. The $5 trillion bubble is about to burst. The real disaster, as Lew Rockwell points out, is not the bursting but the politicians who want to bail out the bubble with even more printed money -- as if the salve of ever more printed money will be able to turn stones into bread, or bubble into balm:
Here is John McCain:
"Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes, and they will not fail, we will not allow them to fail … we will do what's necessary to make sure that they continue that function."
Not a single Democrat disagrees.
As with the S&L fiasco from years ago, the case of the housing bust followed by the trillions in taxpayer liabilities for the disaster will again be cited as a case of "the shock doctrine" and "disaster capitalism" in which the elites make fantastic amounts of money at the expense of the little guy. The critique will be mostly solid but for the one most important point: this kind of fiasco would not happen in a free market. It happens because government, through credit creation and guarantees, makes it possible.
It was not capitalism that created this mess, it was the vial of government poison that everyone has been drinking. Time to go cold turkey, not to keep brewing more.
UPDATE: The bailout of Freddie and Fannie has got investor Jim Rogers outraged.
The U.S. economy is in a recession, possibly the worst since World War II, Rogers said. "They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson "are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this, and 6 billion people in the world who are going to have to pay for it.''
See him explain it all in his usual colourful fashion at the Mises Blog.