Measured by the dollar amount involved, the nationalisation of the mortgage guarantors Fannie Mae and Freddie Mac, announced today by the Bush Administration, is the largest in history. No less than $5 trillion of assets and obligations have been taken over by the US government in one hit.
Of course, that debt had long been regarded as having an implicit government guarantee and the companies involved were quangos (in the original sense of quasi-NGOs) rather than genuine private firms. Fannie was a government agency privatised in the 1960s, and Freddie was created to provide competiion for Fannie. So even though the US government will now guarantee virtually all new mortgages, this is more an admission of existing reality than a big step towards socialism.
The significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.
While the quasi-governmental status of Fannie and Freddie was always problematic, this wasn’t the main reason for their problems. Rather, they were pushed to accept increasingly bad loans made by the private sector. And when their difficulties became acute, the most satisfactory solution, under normal conditions, would have been to formalise the government guarantee of their existing obligations, then put them into run-off mode, writing no new business.
It’s the impossibility of doing that, thanks to the near-total breakdown of the markets for securitised mortgage obligations (other than those coming with a government guarantee) that has necessitated the acceptance of open-ended liabiliities by the government.
The fact that the credit crisis has reached this point marks the failure of the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state.
In the boom that created this crisis, every part of the financial system (retail banks and mortgage businesses, major investment banks, the financial engineers who designed new securitisation assets, investment funds, ratings agencies and bond insurers) had a major role to play. All have failed miserably, even though most will get to keep the rich rewards they received when things were going well. The financial sector triumphalism that dominated the 1990s looks pretty silly in retrospect.