When Shrinkage Means Expansion
The election is over and as the nation advances toward the “fiscal cliff” many assume that the mortgage and financial crises are over. Some review is clearly in order.
In September 2008 the federal government took over the mortgage giants Fannie Mae and Freddie Mac. During the 2012 election campaign, the U.S. Treasury Department issued a press release titled “Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac.” This document that claimed the mortgage-investment policy of these agencies would be scaled back at a rate of 15 percent per year, more than the previous claim of 10 percent.
The news prompted Forbes magazine to proclaim a “victory lap” for President Obama. Economist Vern P. McKinley, on the other hand, took the trouble to cross-check the Treasury claims against the annual and quarterly reports Fannie Mae filed with the Securities and Exchange Commission.
As McKinley noted in the Wall Street Journal, when Treasury bailed out Fannie and Freddie, part of the deal was a cap on the mortgage assets they could “own.” Fannie’s cap of $729 billion represents only a small portion of the $2.9 trillion in mortgages on Fannie’s balance sheet. And the 15 percent shrinkage remains a theory at best. Freddie Mac, meanwhile, achieved only slight reductions in its mortgage portfolio.
McKinley also cross-checked the SEC reports on claims of staff shrinkage and found that Freddie Mac dropped 90 employees. Fannie Mae, despite media claims of mass layoffs, bulked up from 5,800 employees in 2008 to 7,000 in 2012. So government conservatorship produced an increase of 1,200 employees. “These facts,” concluded McKinley, “expose the Treasury announcement as misleading at best, and confirm that the wind-down mission has not been accomplished.” The lesson should be clear.
When the government claims shrinkage, the reality is likely to be expansion. Indeed, the federal government has exploited the entire financial crisis to launch the Consumer Financial Protection Bureau, (CFPB), a new federal agency of dubious utility. That is not a new dynamic, as Robert Higgs outlined in Crisis and Leviathan. Anyone concerned about the fiscal cliff should cross-check that reference carefully.
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