Friday, April 3, 2009

Big Subsidy

Given the Government and media's fixation upon referring to every industry with the prefix "Big", followed by a generalized word used to describe that industry's product (i.e Big Oil, Big Pharma), we thought it might be appropriate to coin a similar phrase of our own. As this article's title would suggest, the phrase we would like to introduce into the vernacular is "Big Subsidy", hereafter referred to as "BS"(not intentional). In addition to the fact that BS is entirely a creation of the Government, it can be distinguished from other major industries by pointing out that BS does not actually produce anything. Hence, the reason for insertion of "Subsidy" where in previous examples an actual product is described.  We will now move on to an industry profile.

The BS industry is comprised of every Government agency/entity/quasi-corporation ever created for the purposes of subsidizing the housing market. Several of these players, such as Fannie Mae and the FHA, emerged from the Depression, and the prevailing wisdom of that era. Others, such as Freddie Mac, were not spawned until the 1970's.

Lately, BS has found itself in quite a bit of trouble. Fannie and Freddie have been effectively nationalized and reduced to Wards of the State; there is nothing Quasi about them anymore. Standing next in line for a bailout is the Federal Housing Administration. The FHA's failure has become such a sure thing, that federal officials have eliminated their use of subterfuge when discussing the agency's prospects. In front of the Senate yesterday, the HUD Inspector General had the following to say regarding the FHA's potential bailout needs:
"Based on the numbers we're seeing, I think it's going in the wrong direction"
Of course, given that the FHA's purpose is to provide mortgage insurance on loans made to borrowers who can only pony up a 3.5% down payment, one might expect there to be some credit quality issues inherent in the agency's pool of insured mortgages as a whole.

We would hold that one of the greatest challenges the Government faces in the coming years is figuring out how to restructure/unwind the major BS players. In their present state, Fannie Mae and Freddie Mac are a mammoth strain upon the Federal Government. Keeping these entities on life support for an indefinite amount of time is not a viable solution. Unfortunately, as long as Congress remains panic-stricken by the collapse of the housing market, it is unlikely that the failed Quasi's will be unwound in an orderly fashion. We can only hope that Members of Congress, despite their Profound Obtuseness, are able to comprehend the long term consequences of allowing these bloated beasts to remain on Uncle Sam's balance sheet indefinitely.
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