What Socialized Banking Means for Homeowners
U.S. Treasury Secretary Henry M. Paulson recently made the rounds on the Sunday talk show circuit in another attempt to reassure consumers and the financial markets that the bank system is secure. In the wake of the failure of IndyMac and the takeover of the institution by federal regulators, many consumers are understandably nervous about the security of their assets.
These concerns are further heightened by the unstable financial situation of Freddie Mac and Fannie Mae, which guarantee about half of the nation's $12 trillion mortgage debt. The rapid sale of Freddie Mac and Fannie Mae shares by investors in recent weeks is evidence of this concern. The federal government has previously responded and is planning future responses.
Government intervention
This past spring, the government attempted to infuse money into the economy by giving it directly to consumers in the guise of an economic stimulus package. According to Secretary Paulson's comments on Sunday, he believes this infusion has created 500,000 to 600,000 new jobs. It was announced last week that no property owned by IndyMac will be sold for the time being. What this means in practical terms is that a buyer who is in the process of purchasing a property owned by an IndyMac Bank will not be able to complete this transaction for the time being.
As for Freddie Mac and Fannie Mae, the government is planning on dramatically raising their ability to borrower money from the Treasury Department. While these three measures on their face seem to be positive steps to try to steady a turbulent economy, they also represent a deepening involvement by the government.
While the government has traditionally had oversight and regulatory control, their recent moves give them more control over both financial institutions. Will the Treasury Department become the 'national bank'? If you think about the acquisition of IndyMac and all of its holdings, including revenue generating divisions, then you realize that the government is already engaged in direct consumer banking. In addition to this, the government will now have an enormous stake in Freddie Mac and Fannie Mae.
In most investor relationships, this stake would be seen as an ownership interest. This is potentially more than a deepening of the control and oversight of banking institutions by the government. This appears to be actual banking. When you send in your mortgage payment for your IndyMac loan, it is the government who is not only getting the interest you pay, but also deciding where and how this revenue source is utilized. So how might this move towards socialized banking effect you the consumer?
Consumer impact
Traditionally the government has not been in the business of generating revenue. When it has made money, it generally returns it to you the taxpayer in the form of a social service, program, or more recently a stimulus check. Banking is an enormous source of revenue. Think of the amount of money that has to be generated to make the purchase of that huge bank building in your city a financially sound decision. If the government is moving towards a type of 'national bank' and is not going to be generating revenue to the degree of current banks, then the interest rates could be considerably lower.
This is, of course, a best-case scenario. On the other hand, once the politicians get hold of such a huge revenue-generating apparatus, the continued revenue could support all of their pork projects. I am quite averse to any move towards socialized banking as the government is not good with money management. As a free market society, we must rely on competition to set the standards not the government. This also means that we must deal with the highs and lows associated with a free market. In difficult financial times, people do clamor for assistance, and we as a compassionate society want to offer assistance. My warning would be, know who you are inviting into your financial home and at what cost.
How do you feel about the government's involvement with IndyMac Bank and proposed bailout of Fannie and Freddie?
Rich Dansereau, Mortgage Expert
Comments
Rich, great article. You hit on several main points of the market today. IndyMac fell and no one knew it. Fannie and Freddie are having their issues now, but I think that they will pull it out.
Ha! And your treacherous lending industry has been a model of sound money management? Keep in mind that it was largely the free-market-thinking lenders and their shameless free-market greed that got us into this mess in the first place. Right now, a little "socialized banking" to keep you guys on a shorter leash doesn't sound much like a bad a idea.
I agree with Jennifer L. Let's see, who should I trust with my money? Greedy, self-serving capitalist pigs who care more about the bottom line and less about the people they put in jeapordy of losing everything they own while they spend consumers money fighting regulation, or.... a national bank which is forced to have TRANSPARENCY based on the fact that it serves the public. Sure politicians will want the money for their pork projects, but politicians are accountable to the voters and can be removed and their can be rules that govern exactly what national bank profits can be spent on. It's time to realize that the abuse of capitalism has created the end of the free market. Rest in Peace. You greedy idiots deserve none of my taxes, I'd much rather have a national bank, and for that matter, let's nationalize oil companies while we are at it. Those profits would certainly allow us to lower or get rid of taxes all together!
Danny - I agree that because the federal lending window is now open with NO limits for Freddie and Fannie, that they will probably be fine. Jennifer - By you guys, I would assume you mean lenders. I see a new whipping boy has emerged because of all this mess. I would caution that not all lenders can realistically be lumped together. Stereotyping is a dangerous and unforgiving road to navigate. I, and most actual mortgage professionals, are not opposed to regulation that is helpful. As many realize, most legislation now will not have any real effect on the current situation. Instead it will hopefully prevent a future occurrence. Ed - Transparency in government would indeed be a novel approach. I think that is more of an oxymoron than bearing any resemblance to reality. Voting turnout is historically so dismal that the belief that voters actually reign in politicians is just not true. I do hope that capitalism is NOT dead, nor fatally wounded as I believe that capitalism encourages innovation and progress.
Transparency... as in not lying about 40 acres and a mule from Mr. Raines who should be investigated to the hilt. We are seeing an end of democracy and we are entering into socialism or worse. Don't keep more than $90,000 in any bank account. Fannie & Freddie should be busted up in 5-6 pieces and sold. Government shouldn't be involved in the housing business.
Jan - It appears today's (09-08-2008) move by the Federal Government to now takeover as conservator of Fannie and Freddie will cost taxpayers untold money. This move is also seeing the installment Herbert Allison, former CEO of TIAA-CREF, as new CEO of Fannie and David Moffett, former vice chairman and chief financial officer at U.S. Bancorp will take Freddie as the government's hand-picked heads. I am nervous that this slippery slope has now become even more precarious with the Federal Government not only taking control but installing its own successors. While the former CEO's of both Fannie and Freddie needed replacement I am not sure that the Federal Government needs to be the one calling all the shots. While the demise of Fannie and Freddie would be difficult, the Federal Government has a regulatory place in retail banking, not an operational one; and certainly not on this large of a scale. The government already cannot manage money and balance budgets, I think today's move, while well intended, will not help current homeowners who are struggling; it will help the two largest lenders who have contributed to the mess. We must remember that these two companies set the guidelines and now they want a "do over" at taxpayer expense! NO THANKS! The government should be helping homeowners, not the corporations who fostered the problem!
Boy, congratulations... you hit the hammer on the nail! Sometimes, I get so frustrated, I just throw my hands up..... What to do!?!
Equal Housing Opportunity