We Hate to Say We Told You So, but...

This week, the U.S. federal government has seized control of the country’s two major home-mortgage funding agencies, the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.

We predict lots of disagreement in coming days over whether or not the feds should have taken this action. After all, the two agencies have not yet failed, and have both claimed sufficient liquidity to handle existing obligations. And the result of the fed’s actions is the disappearance of billions of dollars in shareholder value, which we're guessing won't happen without an outcry.

(Don't forget, if you have a 401k or an IRA, the odds are very strong that you owned stock in either or both Fannie Mae and Freddie Mac.)

But regardless of whether or not you agree with federal seizure of control, the action was the endgame of a dramatic policy failure with regard to the two institutions. And, we hate to say so, but as today's edition of the New York Sun points out, we told you so.

All the way back in 1992, economist Tom Stanton published a study with IPI entitled Taxpayers at Risk: The Moral Hazards of the New Mercantilism, in which he warned that taxpayers were on the hook for as much as $1.2 trillion (at that time) in liabilities should the loans fail.

And in 1994, Stanton wrote Till Debt Do Us Part: How Government Has Wed Taxpayers to a $15 Trillion Liability, in which he again warned that federal backing and the implicit federal guarantee distorted the mortgage market, crowded out competition, and created a “too big to fail” institution living on taxpayers’ backing.

Finally, in 1995, Stanton described how Freddie and Fannie could be completely privatized in Saying Goodbye When the Job Is Done: The Coming Privatization of Government Sponsored Enterprises (GSEs). Although, in retrospect, Stanton and IPI were too optimistic in our choice of titles.

Essentially, Fannie and Freddie are not government institutions, as some of our friends are now saying. They are something even worse— private institutions that operate in an extremely favorable competitive position by government regulation and support. If you hate monopolies, you should have been foaming at the mouth about Fannie and Freddie.

The failure of our elected officials to listen to wise counsel, from us and many others, and address these policy failings has now resulted at the very least in massive losses to investors in these two institutions, as well as whatever taxpayer liability eventually results from the government seizure.