Capitalism has triumphed everywhere, but it's time to dust off an old socialist slogan. When it comes to housing finance, the commanding heights of the economy must be nationalized. Last night's statement from Treasury Secretary Hank Paulson was designed to look statesmanlike and measured, but it misses an opportunity.
You can understand why nationalization is not Paulson's first choice. Fannie Mae and Freddie Mac, the two monster housing-finance companies, between them owe trillions to their bondholders. Nationalizing that exposure would appear to inflate the federal debt, and there's been talk of damage to the nation's credit rating. Moreover, Fannie and Freddie have made or guaranteed almost half of all loans to American homeowners. Can it be healthy to have the government control that much lending?
Of course not. But nationalization is healthier than the other options.
Start with the fact that, despite loud official denials until last night, the government will have to inject money into the mortgage lenders. Intervention may be precipitated as early as today if Freddie has trouble with its plan to borrow $3 billion in the markets. Even if the lenders escape the bond market equivalent of a bank run, which is what destroyed Bear Stearns, they are likely to succumb to a variant that might be called an "equity run."
Investors know that Fannie and Freddie need to raise fresh capital, diluting existing shareholders. So they have been marking the shares down, which means that, to raise any given sum, Freddie and Fannie must sell an even greater percentage of themselves to new investors.