So Much for Cutting the Deficit

By Doug Bandow

Alas, the president’s campaign to cut the deficit isn’t going well.  Reports the Washington Times:

A recent move by the Treasury Department to remove $200 billion caps on assistance to Fannie Mae and Freddie Mac eliminates any doubt that taxpayers will pay for all their losses for the next three years and appears to be a major step toward formally nationalizing the housing enterprises, analysts say.

The government took control of the companies, and effectively much of the U.S. mortgage market, in September 2008 and started purchasing all their mortgage-backed securities. But the Treasury previously used the $200 billion caps on aiding each company to try to limit taxpayer exposure to their mounting losses.

Republicans charge that Treasury has given the Depression-era companies a “blank check” to pay for burgeoning losses on defaulting loans.

The two housing enterprises last year guaranteed and secured nearly 70 percent of new mortgages, primarily made to “prime” borrowers with the best credit ratings, while the Federal Housing Administration insured most loans to subprime borrowers, leaving only a tiny share of the mortgage market in private hands.

In its Christmas Eve statement announcing the little-noticed changes, the Treasury insisted that it wants to preserve “an environment where the private market is able to provide a larger source of mortgage finance.”

But analysts say Treasury’s move may push off any return to a normal mortgage market for years – possibly forever. Treasury removed the liability caps for three years and loosened restrictions on Fannie’s and Freddie’s purchases of their own mortgage securities – enabling them to maintain their dominant share of the mortgage market.

Lesson one for the president.  If you want to cut the deficit, step one is to stop spending and lending.

Doug Bandow, American Conservative Defense Alliance

View the original article at Campaign for Liberty

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