The Fannie and Freddie mess will be a litmus test for politicians. It is huge, arguably the focal point of the financial crisis and cannot be solved without pain. How it is dealt with will provide an early signal as to whether much has changed as a result of the 2010 election.
The WSJ headline, GOP Shifts on Fannie, Freddie Overhaul is not encouraging. It is a sign that no “revolution” has come to Washington:
Earlier, leading House Republicans proposed to privatize mortgage giants Fannie Mae and Freddie Mac or place them in receivership starting in two years. Now, as Republicans assume control of the House, their tone has shifted. They aren’t in a big a rush, cautioning that withdrawing government support in the housing market should be gradual.
The housing market is deemed too weak for major change. It is weak, although that is not a proper reason to defer reform. In the eyes of politicians, there is never a good time to take something away. For them, the housing market will never be strong enough to do eliminate these twin boondoggles.
The reality is that feckless politicians are quick to dispense pleasure and never want to dispense pain. That cowardice is what has characterized past Congresses and appears likely to describe the new Congress. That cowardice is also what produced our current governmental insolvency.
It is likely that Congress will put on its usual show, discussing the issue and then pronouncing the problem cured as a result of some new legislative trickery they pass off as a solution. This behavior is ingrained in the politician. It is nothing more than pretend and extend, the avoidance of a problem by pushing it ahead in time. The problem that current politicians face is that real action is necessary. This can and so many others has been kicked down the road so many times that we have run out of road.
The Washington scam, be it Fannie and Freddie or innumerable other frauds, is coming to an end. The money is gone and the options are few. Whether politicians act or not, markets will. Markets will mercifully kill these two agencies. Unfortunately, their demise will not come via a measured surgical strike, but as a result of the collapse of the Federal government.
