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Don't Buy Fannie-Freddie 'Big Lie'

While the Fed and the Obama administration insist that recovery is moving forward, the pattern of inbound data produces the same, queasy sensation as their denial in the fall of 2007 and the summer of 2008.

New unemployment insurance claims hit a one-year high, to 500,000 last week. There was no dramatic spike, just steady deterioration. The Philadelphia Fed index yesterday stunned the remaining optimists: Expected to rise from a weak 5.1 in June, it fell to negative 7.7, weakest in new-order and employment components.

The definitive 10-year T-note broke last weekend from the 2.7 range to 2.59 percent, and is still hovering there, but mortgages are under upward pressure from refinance volume that doubled since April, and from the Fed’s halt in buying mortgage-backed securities — it is buying Treasurys now. Purchase applications are dead flat.

The apparent failure of all traditional recession-fighting measures has unleashed a policy free-for-all. Absent any tested theorem for what to do next, the gates of every economic lunatic asylum are wide open, the rational indistinguishable from the mad.

Crazy people are often cheerful, giggling sorts, but this crowd ambling through the countryside conceals a homicidal fraction bent on settling old scores. The oldest feud in finance festers between the “no government” and interventionist mobs, and the former have out the long knives, hoping to finish off forever the hated twin Frankensteins of intervention: Fannie and Freddie.

The long knife of choice is propaganda, “Big Lie” leapfrog, “dezinformatsiya,” (a reference to disinformation tactics employed by government agencies in the former Soviet Union). They demand a return to the good old days of a private-only mortgage system: 20 percent down and the end of all federal involvement, which they say is the sole source of our current trouble.

The last all-private mortgage system in the U.S. had been in place until 1929. Downpayments were 20 percent or more, but the loans were short-term, often callable or balloons, and only about 40 percent of Americans owned homes.

In the greatest financial collapse of all time, from 1929-32 the combination of mortgage default, foreclosure, and falling values collapsed half of the nation’s banks and extinguished deposits, money and credit. Private markets were utterly unable to stop their impulse to liquidate.

That self-reinforcing downward spiral was stopped by government-guaranteed restoration of credit: the Federal Home Loan Bank system in ’32 began to provide liquidity to savings and loan banks, the Federal Deposit Insurance Corp. in ’33 guaranteed deposits, the Federal Housing Administration in ’34 brought the first 30-year fixed-rate mortgages, and Fannie in ’38 became the “secondary” conduit.

The “20 percent down” fable sold by deceitful Wall Street Journal op-eds does not survive the facts. G.I. loans, 1944 to today, have been zero-percent-down; the FHA since then in a range of 3 percent to 5 percent down, both with rigorous underwriting.

In 1972 the private market brought the innovation of mortgage insurance, and 5 percent to 10 percent conventional downpayments.

The S&L disaster was a government failure in two stanzas: The clumsy deregulation of deposit costs put all loans underwater as to rate in 1979 (they were good loans, though); then the grant of commercial/development lending powers, instead of “growing out” of trouble, caused the credit disaster of the ’80s.

All bipartisan work, by the way. As was allowing private interests to seize control of the Fannie-Freddie public-private partnership: bloated portfolios were never intended, and the end result resembled governance by theft.

The “no government” disinformation says that leftish community reinvestment and affordable housing loans wrecked Fannie and Freddie, and in turn caused the whole current disaster.

Not so: The deed was done by private-motive overextension. However, the political drive to extend homeownership to the unprepared was a terrible mistake.

The Big Lie conceals the really big truth: The worst mortgage losses — subprimes, Alt-As, option adjustable-rate mortgages, and second loans — were all private creations. FHA and VA loan programs still stand. Lehman and Bear Stearns do not. Bank of America, Chase and Wells Fargo still choke on their private trash.

There are right and wrong ways to rebuild government support for mortgages. However, just as war is too important to be left to generals, mortgages are too necessary and too dangerous to be left to nouveau Lehmans, Bears and Countrywides.