Fannie, Freddie, and Failed Economies

While there has been a recent uprising of frustration against Wall Street, big companies, and the wealthy in our society, many people are ignoring or forgetting the fact that the U.S. government has done nothing to fix one of the main underlying causes of our economic downturn: Fannie Mae and Freddie Mac.

The huge government-run corporations began in 1938 during the Great Depression as part of the New Deal under Roosevelt. Their purpose was to back up banks in their mortgage loans by taking on 80% of the risk. In other words, the sibling corporations would take 80% of the loss on any unpaid loans that the banks wanted to make.

Prior to the 1990's, banks had a standard that must be met for people to receive a loan; namely, a job and an appropriate amount of income for the amount that they were borrowing. However, the government decided that anyone should be able to get a loan, including those without jobs or an income. Through Fannie and Freddie, the government forced banks to make unwise loans and backed these loans that were sure to fail with taxpayer money.

With this sort of history, it is not surprising when we saw the housing bubble of the '90s and early 2000's burst. The loans were obviously left unpaid. And who was left with the bill? The taxpayers! In 2008, the banks began declaring bankruptcy because of the number of toxic loans they were forced to sustain. The rest can be clearly seen today's poor economy.

These government agencies had a great purpose: help everyone achieve the American Dream. But their method of achieving this goal failed miserably. Instead of helping decrease the gap between the poor and the rich in America, they made it wider. Instead of seeing an increase in the number of families in homes, the increase has been in families without homes due to the large amounts of foreclosure. If Fannie Mae and Freddie Mac have done us and the American economy such damage, why are they still around?