The Man Paying the Bill Gets to Determine Who's for Dinner

In this case, it is Rep. Barney Frank. Of Wall Street bonuses, he says, "There should be a moratorium on bonuses." Just who is Barney Frank to tell private American businesses how much to pay their employees?

Well, he is the spokesman for their new minority owner, the federal government. As Chairman of the House Financial Services Committee, he gets to tell these companies what to do. So does any other politically ambitious petty bureaucrat and tyrant who wants to loudly score political points at these companies' -- and the American economy's -- expense.

What unleashed these ignorant clown-bullies on America's leading corporations is their partial nationalization orchestrated by President Bush, Treasury Secretary Paulson, and endorsed by Republicans and Democrats in Congress.

The real price of the $250 billion partial nationalization of America's leading financial firms will be much larger than just this dollar amount. We are only seeing the first signs of it now. Barney Frank and his minions are just fashioning the bibs to their bellies. Their feasting on America's leading banks and investment banks -- starting with Goldman Sachs, Morgan Stanley, JP Morgan, and Citibank -- has just begun.

Barney Frank claims to pay the bill for this dinner, but it is all of us who will pick up the tab. How much will it cost, not just in money, but in terms of our freedom?

From De Facto to De Jure: The Nationalization of Fannie Mae and Freddie Mac

The weekend nationalization of Fannie Mae and Freddie Mac is nothing new. From their creation in the 1930s, these entities were government controlled. Whether government controlled them outright or had partially privatized them, government always called the shots. Government set terms on what types of mortgages they could offer, to whom, and in what amount. Most importantly, government provided a widely understood “implicit” guarantee of the debt issued by these entities. Unlike other financial institutions, Fannie Mae and Freddie Mac could issue debt (which was then lent out to mortgage borrowers) with the backing of the U.S. Treasury and Federal Reserve. That gave Fannie and Freddie an edge over private banks in making mortgage loans, by design. Reportedly, 50% of all outstanding mortgages are guaranteed by Fannie and Freddie, and as much as 75% of all new mortgages in recent years were issued by these agencies.

The government’s purpose in forming these entities was to make mortgages more widely available. Absent Fannie and Freddie, the other way to get mortgages has always been from private, profit-seeking banks, banks that had to safeguard their credit by striving to lend their money only to creditworthy borrowers. The only way Fannie and Freddie could out-compete these banks was by doing the one thing its government backing enabled it to do: lend to less creditworthy borrowers. This is a case of the bad credit driving out the good credit. In the space of 70 years, millions of uncreditworthy borrowers got mortgages as these government agencies pushed out the more prudent private banks and gained the largest market share in the mortgage market.

Now the loans are being called. The credit and stock markets are calling these loans en masse. The sheer weight of thousands of deadbeat borrowers has created a crisis that even the implicit guarantee of Fannie and Freddie’s debt by the U.S. government cannot ameliorate. So, this weekend the implicit guarantee has been made explicit.

That should make it fully clear to everyone, if it wasn’t during the past 70 years of the “implicit” guarantee. The lender to all these deadbeat borrowers, borrowers who didn’t qualify to get loans from private banks, is you, me, and everyone else in this country. We are all on the hook for the bad loans to our neighbors. That is socialism, and now it has been made explicit.