Do we never learn?
In the 1980s, Congress, for what seemed good reason at the time, deregulated the thrifts — savings and loan institutions — and what followed were several intense years of wildly risky speculation in real estate and development, fueled by the creation of new and at the time exotic financing like brokered deposits and the bundling of mortgages for sale to Wall Street.
The inevitable bust cost the taxpayers about $125 billion but they and their lawmakers could do little but sigh, write the checks and vow it would never happen again.
Once again, a real estate boom fueled by exotic and risky investments has gone bust and the taxpayers are again being asked to step in and pay for the mess. The head of the Congressional Budget Office has warned Congress that propping up the federally chartered mortgage giants Fannie Mae and Freddie Mac might cost $25 billion or, worst- case scenario, $100 billion. Remember, we’re already on the hook for the $30 billion the Federal Reserve poured into the Bear Stearns bailout.
CBO director Peter Orzag told the lawmakers that there’s better than an even chance that the taxpayers won’t have to step in. Somehow, having one of the nation’s top numbers crunchers quoting odds on the health of the nation’s largest mortgage holders is not all that comforting.
Treasury secretary Henry Paulson is urging Congress to act quickly on a support package for the two secondary mortgage holders. Between them, they own or guarantee almost half the country’s home mortgages, which they have resold in the form of $5 trillion in debt. Over half of that is held by U.S. financial institutions, the rest by foreign investors.
It’s fair to ask how our lawmakers and regulators could let federally chartered institutions get caught up in a speculative boom, especially with such clear-cut precedents. For now, we can only sigh and write the checks.
Maybe next time we’ll have learned.