Pretty much everyone not hopelessly lost in fantasy land admits that the government-run mortgage giants Freddie Mac and Fannie Mae were at the heart of the housing bubble that set off the current financial crisis. Even Timothy Geithner, during Senate testimony, admitted that, “Fannie and Freddie were a core part of what went wrong in our system.” But then he went on to claim that regulators simply didn’t have enough time to devote to the problem (oh well, maybe next time).
But last week they did have the time. On Tuesday, congress voted on a bill that would end the Government Sponsored Enterprise (GSE) status of both institutions, removing the central line of taxpayer money that currently sustains them. But in a telling vote that was split very neatly along party lines, Democrats blocked it. Future bailouts now seem likely to continue without end, and will add to the current $145 billion that the US Treasury has already thrown into the black hole of Fannie and Freddie so far.
So why, when bailouts are so unpopular, did congress cast a baffling vote to prevent any meaningful reform for the worst offenders of all, an action that will undoubtedly lead to future huge bailouts?
Dan Henninger of the Wall Street Journal provided perhaps the best analysis so far of why such a baffling vote is actually imminently understandable:
We’re sitting here trying to struggle to figure out how this could be. The way I think you can best understand it is by looking at the Democrats as kind of like a lost tribe in Star Trek. If they voted against this stuff, they’d be cutting off their oxygen supply. Housing is like an alternative economy for the Democrats. You’ve got construction unions, you’ve got developers, you’ve got local housing authorities. This is something they control. This is a source of patronage, it’s a source of contributions. And they simply are not going to kill it. They’d be killing themselves.
