Fighting Words

What Will The U.S. Do With Fannie And Freddie? Take Their Money, Of Course

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The surplus the United States government magically conjured up for the month of April has created a media maelstrom. A portion of the surplus was on behalf of higher tax receipts following tax season. Another part was a surprise influx of cash from Fannie Mae and Freddie Mac -- to the tune of $95 billion. So it would make sense for the U.S. government to keep Fannie and Freddie as long as possible, to serve as a profit engine to zip up its deficits.

Think about it. At the moment, the government has Fannie and Freddie in conservatorship. And for the time being, it’s unknown whether shareholders will be entitled to future profits -- all profits currently go to the government. There is also rumor that the two companies will be consolidated into a single entity.

Meanwhile, the Federal Reserve is buying $40 billion worth of mortgage-backed securities per month to keep credit markets flush with credit. Effectively, the Fed is injecting $40 billion of new money into the economic system.

It's also propping up the housing market by keeping mortgage rates low, fueling the housing recovery, and spoon-feeding $40 billion worth of business to Fannie Mae and Freddie Mac every month. Basically, Fannie and Freddie make the bonds and the Fed buys them.

Fed critics are worried that this hyper-aggressive method of propping up the economy will create inflation, in the form of too many dollars chasing too few goods.

Flash back to a month ago. A convenient commodities crash in April sent oil prices plummeting, taking the price of gasoline down with it. As a result, the U.S. saw a 0.4 percent drop in inflation for the month. An inflation breather is exactly what the Fed needs to justify its unjustifiable bond-buying program that.

Combine this temporary price control with the prospect of a stronger dollar, via smaller deficits, and you suddenly have a perfect situation: The Fed printing money with Fannie and Freddie creating securities in exchange for the money it prints. Then you have the potential for smaller federal deficits with the help of the money Fannie and Freddie makes and hands right to the government.

Better yet, you have a dollar that's weakened by money printing and then simultaneously strengthened by budget surpluses. That is, if we ever achieve consistent surpluses.

Put simply, the government is controlling the housing market and profiting from it. It’s a three-part Rube Goldberg device that prints money, feeds it into the U.S. economic machine, and spits out smaller deficits. If the housing recovery continues to dig in its heels, it could be very profitable for Uncle Sam in the future. It’s not enough to save the sinking ship that is the U.S. economy, but it helps, and it does create a benevolent cycle of recovery and debt reparation.

Of course, you can’t save a ship that’s simultaneously on fire and sinking by just plugging up the holes. But the government has absolutely no reason not to keep Fannie and Freddie as its own private cash cow.

Why would it throw away the one entity that makes Quantitative Easing semi-OK? The Fannie-Freddie dynamo is the one ace in the hole the Fed can use to defend the heavily criticized Quantitative Easing Program, now in its third installment.

The government will likely keep the once-public companies all to themselves as long as possible, for reasons none other than for its own good. Only time will tell what will become of the once all-powerful monsters of housing.

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