Fannie and Freddie

Anatole Kaletsky in the Times, who should know better, has written the most extraordinary piece of tosh linking the bail out of Fannie Mae and Freddie Mac in America to the end of capitalism.

These two institutions were unique, set up by the Federal Government (just try launching a corporation in the USA with ‘Federal National’ in the title). They were there to provide liquidity to the mortgage market by buying packages of loans from the mortgage banks. When in the 80s and 90s the commercial market became clever enough to do this itself (remember the Special Investment Vehicles in Northern Rock?) Fannie and Freddie were not closed down. Their importance now was to support the redlining regulations – making banks lend to the poorer parts of town, not in what we would call a ‘postcode lottery’. Their other importance was to give jobs to political apparatchiks who needed paying off.

So by definition Fannie and Freddie were Government run institutions used to prop up anti-market regulations and were directed by people who were in the way anywhere else. It is not surprising they went bust and not surprising they were bailed out.

It does mark a halt to the banks’ relentless drive for capital, but only for a couple of years, in my view. The markets will revert to type: always have done, always will.