Fannie Mae and Freddie Mac are the quintessential federal government boondoggles.  Created in 1938 by FDR, the two institutions’ function is to buy mortgages and provide guarantees for the same in order to make homeownership more likely for more Americans.  Like many government programs, Fannie and Freddie’s objective is noble, but at the same time inappropriate for government to undertake.  The current subprime crisis accentuates this statement and provides an excellent opportunity for Uncle Sam to get out of the mortgage business since there are substantial reasons for its withdraw.

In the first place, and this should come as no surprise since Washington has meddled in areas prohibited to it by the Constitution for a long time, Fannie Mae and Freddie Mac are unconstitutional.  The words bank, lending, mortgage, or anything related cannot be found in the Constitution.  James Madison, the Father of the Constitution, fought bitterly on constitutional grounds against incorporation by the Congress of a national bank.  If the Father of our Constitution knew a national bank was unconstitutional then logically mortgage services would also be proscribed by the document.

Another important reason for Uncle Sam’s withdraw from the mortgage business has to do with conflicts of interest.  Even though Fannie and Freddie were originally set up as government sponsored enterprises (GSE), Presidents Johnson and Nixon made them publicly traded companies with authority to sell shares of stock.  The problem is that as a GSE the shareholders of Fannie and Freddie enjoy several big advantages over their competitors – a guaranteed line of credit with the US Treasury, cheaper borrowing costs, lower capital requirements, and an implicit federal guarantee against failure. 

Additionally, Fannie and Freddie have for some time now used taxpayer money to lobby for perks and privileges not afforded to their private sector competitors like exemptions from paying local and state taxes.  If that is not bad enough, Fannie and Freddie lobbyists have infiltrated this year’s presidential campaign.  Twenty or more of John McCain’s fundraisers have lobbied on behalf of Fannie and Freddie.  His campaign manager, Rick Davis served as president of an advocacy group led by Fannie and Freddie that lobbied for the duo against regulation.  Perhaps these contacts explain McCain’s recent remarks and his zeal for using taxpayer money no matter what the cost to keep Fannie and Freddie from failure. 

“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.” 

John McCain, July 2008

The bottom line is that Fannie and Freddie are very adept at using their government status to their advantage.  That is the price to be paid when government is allowed to incorporate a business.

Lastly, the federal government should unload Fannie and Freddie because they are bailout prone.  They have been allowed to play fast and loose with taxpayer money and now face insolvency.  Combined, both institutions own or have guaranteed $5.1 trillion in mortgage debt.  This number is more than half the national debt of $9.5 trillion.  The figure represents more than half of all mortgage debt in the U.S.  With the current subprime crisis, it seems just a matter of time before one or both of these mortgage banks will face liquidity problems.  But, according to Ben Bernanke, neither bank is in danger of failure.  But how does he know that for sure?  No one has ventured any guesses as to when the current credit crunch will be at its bottom.  If neither bank is in any danger then why has there been a government bailout plan developed that includes even more extended lines of credit and gives authority to the government to buy shares in each company?  With $5.1 trillion in mortgage backed securities, even a small percentage of write downs will amount to a lot of money.  As inflation continues to soar, a Fed bailout will benefit Fannie and Freddie’s stockholders at the expense of the rest of us.  How just is this?

What should be done?  I have a suggestion that I am sure will go over well.  All the politicians and their corporate buddies that love Fannie and Freddie so much should pool their resources and purchase the institutions.  They could set up a truly private firm by selling stock and playing by the same rules as their competitors.  Certainly, with so many valuable assets in the control of politicians, selling stock in the new companies will be no problem.  Better yet, the federal government will be out of the mortgage game and the American taxpayer will be liberated from the conflicts of interest, violations of the Constitution, and bailouts.     

Kenn Jacobine teaches History and English for the American International School of Lusaka, Zambia.  Send him email at lovesliberty@gmail.com.

Sure enough, the politicians are at it again.  This week cries went out from presidential candidates to Congressional leaders that something must be done to alleviate the ill effects of high gas prices on the economy.  Of course, instead of being honest and considering what Washington has done to create the problem, the politicians are focusing on oil companies and a gimmick.

The gimmick was originally proposed by Republican presidential candidate John McCain and usurped as her own idea by Hillary Clinton.  The proposal is to temporarily suspend the federal gas tax during the high travel months of June, July, and August.  The concept behind it is to give consumers a break by lowering the price of gas per gallon by eighteen cents.  For every ten gallons purchased, Americans would save $1.80.  This savings then would allow them to purchase Big Gulps and snack treats, thus providing a boom to the convenience store industry.  In all seriousness, the proposal is an election year gimmick – a shell game if you will.  The minimal relief that consumers will experience will be more than offset by the inflation caused by the Federal Reserve printing additional dollars to make up for the gas tax shortfall estimated at twelve billion dollars for the three months.  So while politicians will take credit for “helping” consumers in their time of need by providing “cheaper gas” this summer they won’t mention the hidden tax they are imposing on us through the Fed’s inflationary printing of money.

Then there is the more direct focus on oil companies with talk of reenacting our old friend the windfall profits tax (WPT).  Jimmy Carter imposed this tax on oil companies starting in 1980 and it lasted until 1988.  Carterite candidates Clinton and Obama want to reenact it today to get oil companies to pay their “fair share” and help those hurt by economic hard times.  The WPT was and is a tax on business entities that experience both “abnormally high and unanticipated profits”.  Other than who decides what “abnormally high and unanticipated profits” are, there are two other problems with the tax scheme.  First, forty-one percent of oil company stocks valued at over $267 billion are currently held in various forms of pension plans and retirement accounts.  As dividends and the share price of oil stocks decrease because of the WPT will Washington implement another program to help retired Americans with the losses or is it believed that they also need to pay their “fair share” to support the less fortunate?

Secondly, as Ronald Reagan use to say, “When you tax something, you get less of it”.  According to the Congressional Research Service, the 1980 windfall profits tax reduced U.S. domestic oil production by three to six percent.  This happened because the tax increased the marginal cost of production, thereby reducing the quantity of gasoline produced.  Cutbacks in domestic production now will only worsen the price situation.  This, of course, will give Washington another opportunity to legislate and help us again.

So where do we go from here?  What is a constitutionally proper course of action for Washington to pursue in dealing with the current high price of fuel?  First of all, the U.S. should completely pull out of Iraq.  By pulling out of Iraq, we lessen the possibility of a wider Middle East war (e.g. Iran and Syria) and probably lower violence in Iraq because al Quada and Iran will not have the Americans to fight.  These developments will calm speculators and stabilize the price of oil.

Next, Congress should move to abolish the Federal Reserve.  According to Ron Paul, the Fed has roughly tripled the amount of dollars and credit in circulation since 1990.  Because oil is priced in dollars worldwide, by looking at the current price of a barrel of crude one can plainly see the damage done by the Fed’s inflationary policies.  The high price of oil is directly related to the low value of the dollar.  In other words, it takes more dollars to buy the same amount of gas than it did in 1990.  Question is: why are the politicians ignoring this issue and proposing a phony gas tax holiday and a harmful to the middle class windfall profits tax?

The bottom line is that we have a better chance of seeing lower gas prices by eliminating speculation, uncertainty, and the political whims of a central bank then we do through fake government gimmicks and schemes.  Contrary to popular belief, Americans are not entitled by birth to cheap gas.  If we had a true free market and the price of gas was still high, then nature would be telling us something – “supply is low and endangering your environment, so maybe you should use the genius of your species, you know the one you have always used in the past to progress and survive to come up with a new technology to make life happen”.

Kenn Jacobine teaches History and English for the American International School of Lusaka, Zambia.  Send him email at lovesliberty@gmail.com.

Recently, I received an email that requested I boycott Exxon and Mobil stations in order to help bring the current high price of gasoline down.  Here is the thinking behind the email:  because Exxon Mobil is the largest oil company in America it can set industry prices at the pump.  In other words, because of its size, it can set prices artificially high to maximize profits knowing full well that smaller gasoline retailers, who are also interested in big profits, will set their prices commensurate with Exxon Mobil.  By boycotting Exxon Mobil, demand for its gasoline decreases thus forcing the company to cut prices.   As Exxon Mobil cuts prices, so must others to remain competitive.  The hope is that the lowering of prices at the very least puts a halt to rising prices at the pump and ensures that Americans can purchase gas this summer for less than four dollars a gallon. 

The originators of this movement should be commended for their clever idea and for taking matters into their own hands instead of instinctively turning to the federal government to solve their problem.  However, their attention is mis-directed as it should be focused on the U.S. government and not Exxon Mobil as the cause of high gasoline prices.

For instance, in 2002, the year before the U.S. military invaded Iraq, crude oil prices were $22.81 a barrel (see chart below).  Today they are around $118.00 a barrel.  The cause for the dramatic rise in price (the largest one in such a short period of time in history) certainly has more to do with the war in Iraq than anything else.  As the war drags on and America’s presence in Iraq becomes more entrenched, the price of crude increases even more.  Investors are concerned that at some point the violence in Iraq caused by the U.S. invasion will spread to other Middle East oil producing nations thus cutting off worldwide supplies.

A perfect example of this fear happened last Friday.  Oil prices per barrel reached a record high of $119.55 on the news that a U.S. military ship fired on Iranian ships in the Persian Gulf.  This, of course, is not the first time that the U.S. military has had a confrontation with Iran near the Gulf.  As the Bush Administration continues to instigate armed conflict with Iran, the price of crude will continue to rise on the fear that the Persian Gulf soon will be filled with missiles instead of full oil tankers. 

Then, there are taxes.  The average price of a gallon of gasoline in the U.S. right now is $3.60.  According to government statistics, federal, state, and local taxes make up twenty percent of the price of gas.  Do the math.  Without any taxes, the price of gasoline would be approximately $3.00 per gallon.  Eliminating taxes would provide a significant $6.00 savings for every ten gallons purchased.  Imagine how much money could be saved per fill up by owning an SUV?  Now, I do not condone eliminating gas taxes.  After all, they are technically user fees, which I support over taxes. They go to repairing roads, which people who buy gas and pay the taxes use.  But, it should be noted that a large portion of the price of gas goes to the government at all levels and not the oil companies. 

Finally, the price of gasoline has been affected by the value of the dollar.  The value of the dollar has been dropping for some time due to the Federal Reserve Bank printing too much money.  Investors sense rightly that we are on the verge of inflationary times, because of the Fed’s actions, so they have been dumping their dollars in favor of commodities.  One commodity they are buying to hedge against inflation is oil.  Money flowing into oil makes its price rise.  The dollar’s performance last Thursday speaks to this truth.  The value of the dollar improved on Thursday based on speculation that the Fed is concerned about inflation and may not cut interest rates further.  At the same time, oil dropped by $2.24 a barrel.  However, as mentioned earlier, conflict in the Gulf the next day, spiked the price to its highest level ever. 

We are all concerned about the rising price of gasoline and how it makes us all feel the pinch.  The politicians and media want us to believe that the oil companies are to blame.  The proof is clear: the blame for higher gasoline prices should be placed on Uncle Sam.

source: InflationData.com

http://inflationdata.com/inflation/default.asp

Kenn Jacobine teaches History and English for the American International School of Lusaka, Zambia.  Send him email at lovesliberty@gmail.com.

CNN recently aired a program entitled “Mortgage Meltdown”.  The show featured panelists sitting at a card table in a casino discussing the subprime crisis.  As they talked about the various culprits responsible for the current financial mess, three recurring themes were evident – easy money, fraud, and stupidity. 

Stupidity – This was possessed by the millions of borrowers who signed their names to loans they should have known they could not pay back.  These include people who bought more house than they needed.  In the show they featured a truck driver struggling to pay a mortgage on a six bedroom house she purchased even though she was single.  Then there are the stories of borrowers who after getting into their homes face major repair expenses and begin to fall behind on their mortgages.  Folks who live paycheck to paycheck should know better than to get involved in a huge obligation like a mortgage.  Generally speaking, the ultimate underlying problem here is stupidity.  Instead of watching TV or shopping at the mall, Americans need to use their brains more.  I just bought a home last summer and I admit that I did not read all of the fine print, but I know what I signed, how much my closing costs were, how much my initial payments and escrow were and how much I will pay when my rate adjusts in two years.  This is just not hard and with laws on the books, public libraries, and the internet, consumers have more than enough material to read to educate themselves on probably the biggest thing they will buy in their lifetimes. 

Fraud - According to the CNN Special Report, loan officers of many primary mortgage lenders used fraud and deception to secure large loans for their clients.  This included fudging the numbers and outright falsification of incomes and other important information on loan applications.  You see, these first tier lenders were only concerned with consummating the deal and not whether the loan made sound financial sense.  After all, most of these loans got bundled into packages and sold to such market stalwarts like Bear Stearns.  These savvy financiers are smart enough to know that enough bad loans will eventually trickle down to hurt the whole market.  Of course, they got their commissions first and so everything is right with the world.

Easy Money – If you’ve read my previous blogs then you know, without question, I place the biggest blame for the current crisis and several others, including the Great Depression, on the Federal Reserve.  According to the CNN Special Report, Alan Greenspan as chairman of the Fed. for close to twenty years embarked on a policy of easy money – low interest rates and expanding money supply.  According to one panelist, Greenspan was like the parent who just could not say no to their child.  Americans wanted continuous growth without pain and Greenspan determined to make it happen at all cost.  The dot com bubble of 2000 foreshadowed what is happening today in the housing market. Did the Fed. pay heed then?  The answer is an emphatic no!

So, what should be done to remedy the current circumstance?  The President and the Treasury secretary want to give even more power over the economy to the Fed.   Our government is always willing to put more gasoline on the fires it starts.  I want the Fed. to have more power to fix the mess it caused about as much as I would want the stupid borrowers or fraudulent financiers to have that power.  Sorry, but I care more about those of us that are innocent in causing this fiasco.  Those of us that neither through our actions or brain lock had anything to do with the crisis.  First of all, the FBI should investigate those cases of fraud perpetrated by both lenders and borrowers.  Those found guilty should be prosecuted to the fullest extent of the law.  Second, whether there was fraud or not, those borrowers that have lost their homes or will lose their homes should suffer that fate as a consequence of their stupidity.  The government should provide no aid to them and should make it clear that the days when bad decisions are rewarded are over.  Lastly, and most importantly, the Fed. should be forced to sell the gold it originally confiscated from the public when we went off the gold standard to compensate for damages caused by its member banks in making the bad subprime loans.  Beyond this, the Fed. should be abolished and a one hundred percent gold standard should be instituted to prevent the manipulation and depreciation of our currency in the future.

Kenn Jacobine teaches History and English for the American International School of Lusaka, Zambia.  Send him email at lovesliberty@gmail.com.