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One year ago Monday (Sept. 7) the federal government took over mortgage giants Fannie Mae and Freddie Mac because then-Treasury Secretary Henry Paulson – in what would become his mantra – argued that the failure of these two companies would be too cataclysmic for the U.S. to withstand.

“A failure by either one of these companies would cause a great havoc in the economic system,” Paulson said. “It would be a big blow to the average American, affect their budget and their ability to get a consumer loan, a car loan.”

What failed for Fannie Mae and Freddie Mac serves as a blueprint for what will fail with health care reform this year.

With the creation of a government-run health insurance option, President Barack Obama, Health Secretary Kathleen Sebelius, ranking Democrats, the AFL-CIO and other health reform advocates want the government to effectively take over health care. Here’s the logic: The evil insurance companies just block people’s efforts to get the care they want, they need, they deserve, reform advocates say. Health insurers companies charge too much to doctors, take too long with bills and don’t put out candy for Halloween. They are evil. If the U.S. doesn’t get into the game and create a public option or government-run health insurance program to compete, reform advocates say, then the insurance companies will continue to hurt the very people they are supposed to be helping. We cannot allow them to continue because, to quote Paulson a year ago, “it would be a big blow to the average American.”

Yet, a year after Freddie Mac and Fannie Mae received about $100 billion in government aid – with another $300 billion waiting for them, if the need arises – private mortgage lending has slowed dramatically, according to an NPR report. In other words, faced with two competitors who have government backing, private mortgage lenders have become more selective and less receptive toward making mortgage loans.

The same approach will yield the same result for health insurance. If the government option is approved, private insurers will back away from markets where the government – through accepting the lowest bid, cajoling and old style wrangling – has a distinct advantage. That’s smart business: compete where you can win; avoid where you know you will lose.

Of course, once the insurance companies start pulling out of markets, then reform advocates can say more government intervention in health insurance is needed. People can’t get the care they need, reformers will say. The door will open wide to the real prize for reformers: a single-payer system. But government control of all health insurance decisions will never, ever, ever be better than private companies. The Fannie Mae/Freddie Mac story proves that.

7 Responses

1. Graham'sConscience Says:
   September 8th, 2009 at 10:49 am

   It may well be the case that government run health insurance option will not be able to deliver as promised. How would we know? You provided no information at all. We can certainly count on private health insurance companies to compete for health market dollars and not compete to inusre our health. As you say “That’s smart business: compete where you can win; avoid where you know you will lose.” It is not about our health is it Bob, it is about insurance company profits, survival cold cash for out hot bodies and for putting your two cents in to fight against the evil empire. Your smug assessment is mere ideology and smacks of your personal security and position. You do not speak for millions without health insurance who suffer greatly because of it. Your ideas are like that of a graham cracker, dry, bitter, and tasteless. The taste of humanity is missing, Bob. Your opinion is mimicry at best of the worst ons-sided pundits out there. Shame on you for being a parrot and not a man.

2. John Fitzgerald Says:
   September 8th, 2009 at 1:09 pm

   The recent government intervention was after Fannie Mae and Freddie Mac, stockholder owned, privately run institutions, failed.

   The recent events effecting the decision making process of private mortgage lenders include a severe recession, the ownership of toxic assets and current mortgages that are highly risky due to the current recession, and a host of other factors that have nothing to do with “two competitors”.

   Fannie Mae isn’t a competitor in the mortgage lending market. Fannie Mae purchases existing mortgages and securities them. Freddie Mac also doesn’t make mortgage loans. They purchase mortgages and sell them as mortgage backed securities. Neither of these stockholder owned private companies compete in the mortgage lending market.

   To draw the conclusion that, “What failed for Fannie Mae and Freddie Mac serves as a blueprint for what will fail with health care reform this year.” is logically and reasonably absurd. It is a conclusion that clearly doesn’t follow from the given, and completely incorrect, statements. If, perhaps, there is information that might back up this comparison, it certainly exists only in the mind of the writer, not in the article.

   This would be like concluding that a car accident that occurred a year ago, driven by a drunk teen, at 2:00 AM, at an intersection somewhere in the city serves as a blueprint for your neighbors ability to drive to work because his route takes him within a mile of the location of the accident.

   The reasonable and logical conclusion, that must first be considered, is that the failure was in the institutions that made the loans, not in the institutions that latter purchased and repackages loans, which they had reason to believe were sound.

   One would have to look at the internal assessment model of risk that led them to believe that the mortgages that they were purchasing were indeed sound. Certainly, this is an appropriate avenue to follow. And, I suspect, one will find that there are specific reasons that Fannie Mae and Freddie Mac executives failed, in the same manner that AIG and many other institutions failed.

   Once these mechanisms for failure are known, it becomes possible to fix the problem rather than, as my mother would say, “throw the baby out with the bathwater”. Indeed, the failure of the financial markets, when it came to mortgages and insurance on those mortgages, was simply state by what Greenspan called, “A flaw in the model”. His mistake, he admitted, was “in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions.” The real shame is that many years before, Greenspan coined the term “Irrational Exhuberance” which tells us that he and everyone else was well aware of the very nature of the failure in the system. The problem is that so many believe in the Holy Grail of the free market, pointing to every free market failure as a failure of the Government because the Government didn’t do something about it.

   This same failure mechanism is the fundamental mechanism that makes insurance and credit so different from other free market products. There are two deeply connected issues whereby they cannot function appropriately in the free market.

   The second issue is the disconnect between the two sides of the transaction in the market. A loan is given now and the money paid back later, in the case of mortgages and credit. In the case of insurance, the money is provided now and the product is delivered later. Each has that inherent assessment of risk embedded in the transaction. And it is in this inherent risk assessment that the irrationality becomes evident.

   The fundamental failure is in the willingness to understand and accept the reality of the statistics that describe the products. Most ignore the subtle lesson that statistics point out, that [expletive deleted] happens and more often than we feel. The “Perfect Storm” while unlikely, is not as unlikely as people want to believe and it is certainly not impossible. The simple exercise of coin flipping will demonstrate how deeply flawed is our perception. It is very common, in a series of coin flips, to get a run of five heads in a row. And tail is not “due” on the sixth flip. The “Perfect Storm” can happen, at any time. And it did happen with even more likelihood because the behavior of the individuals and companies in the free market acted in a manner to actually create it.

   People have demonstrated their irrationality in the market of direct transactions. The very nature of the auction guarantees that the winner will pay more than the fair market value.

   The market of indirect transactions is inherently flawed. One simple problem is that the person selling the mortgage or mortgage insurance gets his commission now while the funds are collected over the ensuing years or the claims on the insurance are make years later. The seller has no stake in the failure of the market because she has already reaped the benefits years before the failure occurs. The belief that a corporation or company will learn from it’s mistakes is an absurd extension. A corporation doesn’t have memory. The memory that a corporation may have is called regulations. And the individual employed by the corporation, faced with a regulation that keeps him from reaping the benefit of a sale, will be quickly bypassed if not enforce by an independent entity like, dare I say it, the government.

   Now, nobody likes government regulations. Everyone would like to have complete individual control. But intelligent and rational people, who face their own irrationality, do create rational rules that they often will reluctantly follow because they know that, in the long run, it keeps them from making stupid mistakes. And intelligent people are quite willing to debate and argue in the political area in the refinement of government regulations. They do not throw out government intervention as somehow inherently bad any more than they would throw out the automobile because some bad drivers have accidents. Neither would they throw out the free market because an unregulated market inevitably leads to monopolies and other abuses. Rather, they recognize that in the case of products like insurance and credit, there are inherent failures in unregulated free market. They are willing to address the appropriate balance between free enterprise and social responsibility.

3. donclampett Says:
   September 8th, 2009 at 1:37 pm

   Funny! We have a Gov’t that has most all it’s subjects hooked on gimmicks, gimmies, and give-a-ways. Why people continue to fall for this keynesian double-speak is beyond me. All I can think is: Wait ’till they (we) get the bill! We’re talking about trillion dollar deficits for the next 10 years. Do any of you pea-brained liberals have a clue as to how big this is?!!! OK – to put it in perspective, it’s about $28,000 of additional taxes per year per taxpayer. That’s not your total, it’s in addition to your current taxes. And since when has your gov’t been the model of efficiency?

   Oh! But you don’t have to pay it now. Just shove all this off on your children and grand children. You liberals are nuts!

   And another thing: In the not too distant future you’ll be able to get your health care at your Dept of Motor Vehicles. What a deal!!!! “Would you like your licence renewed with the kidney transplant?!”

4. donclampett Says:
   September 8th, 2009 at 2:05 pm

   John, John, John!!!! Quit babbling like an idiot. Of course Fanny and Freddy aren’t competitors in the mortgage industry. They are there to grease the wheels of mortgage lending by underwriting loans. Back in the 90′s, HUD forced them kicking and screaming into the sub-prime and Alt-A markets in the thinking that this would make housing more affordable for poor folks. To further mitigate risk for the mortgage bankers, they got Fanny and Freddy to package loans for the securities markets.

   ‘Nothing like a little Gov’t manipulation to really mess things up. Of course all our elected officials would love to have you believe that it’s all those naughty bankers and greedy CEO’s who are the bad guys.

   So now that our Gov’t has totally messed up the mortgage industry, it’s all quite boring to them now. Instead of fixing things why not just leave Fanny and Freddy on an IV drip (of taxpayer money) and move on to bigger and better things like socialized health care and free give-a-ways for car buyers. Wow! Thank you Santa! Sure, I’ll vote for you again!

5. Graham'sConscience Says:
   September 8th, 2009 at 4:04 pm

   donclampett: We are not one year away from an 8 year government administration that allowed the existence rampant violations in banking, business and stock market operations. The result of that laxity and consistent errors of judgement are the economic problems that what we have to deal with now. It is not a partisan issue. It is human failure all the way around at all levels. We let it happen. We elect officials, we buy houses and take mortgages. We allow ourselves to be abused and others take full advantage of it. Same old story. The incredible debt we have today and will continue to have into the distant future is result of our government’s effort to save the U.S. economy from imploding on the spot and the continued bailout that we are undergoing is simply more of the same to deal with the results of individual and corporate greed and stupidity. There is no choice in the matter now. We either have these bailouts and new regulations to manage the flaws in human character and judgement at the instituitonal level or face a total collapse of the U.S. economy. If you think that U.S. corporations care about the U.S. populace first and are willing to have their own survival second or third on a list of their priorities, then you have not yet learned the history of corporate power, structure and organization and its relation to consumers and the U.S. government. Business is about profit and power just like Graham said. Government is about power and control. Profit, power, and control leaves little room for consideration about us “consumers” and “subjects” as you call us. Get your head out of you [expletive deleted] Don and see things as they are and stop repeating the mindless diatribe you have heard from talk show pundits. Grow up, be a man, and think for yourself. Use you brain instead of letting it be a sponge for idiocies

6. Mark Stewart Says:
   September 10th, 2009 at 12:58 pm

   What I love, and what I continually see happening, is I see an article I want to comment on to state my disagreement, but once I look through the comments, I see others have done a much better job than I could have. Way to go John and GS!

7. Jephron Says:
   September 15th, 2009 at 5:31 am

   More spurious correlations built on a foundation of pure ideology. Start with the foregone conclusion that a public health option represents socialism, and that socialism is inherently bad, and then go looking for ways to support it.
   If you’ve ever been so poor that you can’t afford health insurance, and allowed your health to suffer because of this, you know that all of these theoretical polemics are red herrings, and that the real issue is very simple: the working and jobless poor in this country deserve a break. We consistently fail our poor communities in a way that no other industrialized nation would deem acceptable. Saying no to the public health option means condemning the poor to shorter, more difficult lives.
   We’re talking about a “market” that has been abandoned by insurers for decades, man. Sheesh.

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