The Elephant in the Room: Fannie, Freddie get a pass

Democrats want to expand the nanny state, not fix what broke the economy.

By Rick Santorum

Over the past year, Americans watched President Obama and congressional Democrats use caustic anti-business rhetoric to rally support for nationalizing major parts of the auto industry, increasing government involvement in health care, limiting executive compensation, and abolishing much of the private sector's role in student loans.

Next up, Democrats have set their sights on the financial-services sector. One would think that reforming the government-created entities at the epicenter of the 2008 crash, Fannie Mae and Freddie Mac, would be first on their agenda. One would be wrong.

Why? Because these quasi-governmental entities were created and are controlled by Democrats in Washington. If Fannie and Freddie were a creation of the marketplace, Democrats would have made them public enemies Nos. 1 and 2 long ago.

Congress created Fannie and Freddie in 1938 to provide the affordable housing that Democrats thought the market was incapable of providing. In the 1990s, the Clinton administration pushed the mortgage giants to take on more subprime debt - and therefore risk - to accomplish Democrats' affordable-housing goals.

As Fannie and Freddie grew in size and risk profile, I and some of my Republican colleagues attempted to restrict their growth and reform them. Democrats opposed us, and they prevailed until it was too late. In 2008, Fannie, Freddie, and the real estate bubble burst.

Even though Fannie and Freddie are now in conservatorship, they have become even more important players in the home mortgage business. They have gone from facilitating affordable housing to servicing the bulk of the housing market. As much as 75 percent of new mortgages today are owned or guaranteed by Fannie or Freddie.

While Congress wants you to focus on Wall Street bailouts, the most expensive bailouts have been for Freddie and Fannie - at a cost to the taxpayers of about $146 billion and growing.

Are Democrats concerned? No. In a partisan vote last week, Senate Democrats defeated a Republican amendment to reform Fannie and Freddie. But they did adopt their version of rigorous government reform: a study.

So what is in the 1,565-page financial-reform bill that's up for a vote this week in the Senate?

At the start of this needed reform effort, Democrats criticized a so-called alphabet soup of multiple financial regulators. Does this bill consolidate and rationalize those regulators? Nope. It expands most existing regulators and creates new ones.

My favorite among the bill's assaults on free enterprise - and, more important, individual liberty - is the proposed Consumer Financial Protection Bureau. This latest concept to come from the Obama administration's ivory-tower types is not your run-of-the-mill bureaucracy. The theory behind it is behavioral regulation. The academic-turned-bureaucrat who came up with the bureau is Assistant Treasury Secretary Michael Barr, who has penned such articles as "Behaviorally Informed Financial Services Regulation."

Wonder what might be in store? Think czar for checking accounts and credit cards. According to Barr, "... regulatory choice ought to be analyzed according to the market's stance toward human fallibility." That's right: He thinks our market-based economy is composed of businesses designed to bilk people by exploiting their flaws. I assume his research shows that government bureaucrats don't share that human fallibility.

How would the Consumer Financial Protection Bureau come to know you and what financial products are best for you? It would be given the power to collect information on businesses and individuals. It would even be able to require you to answer questions under oath about your personal finances.

Barr and his nanny-state administration colleagues are working to require that some banks "geo-code" deposits to allow tracking of their origins and provide other information about their accounts. Think Google Earth for all our personal financial transactions. I hope the data are more secure than the Department of Veterans Affairs'.

While the president has deceptively characterized this debate as being about Wall Street vs. Main Street, congressional Democrats have refused to police their side of the street - Fannie and Freddie. Instead, they continue to defy public opinion and push a bill that will further expand government, invade our privacy, and assume even more control over our lives.

Rick Santorum can be reached at rsantorum@phillynews.com.