Fan and Fred: What Would Andrew Jackson Do?

It is a well-known scandal that the Dodd-Frank financial "reform" bill could not find room in its 2,300 pages to address the government blunder at the center of the housing bubble, namely Fannie Mae and Freddie Mac. The current congressional majority and administration have announced they want to reform these two government-sponsored enterprises (GSEs) next year.

Fannie and Freddie's financial implosion will cost the taxpayers much more than did the infamous collapse of the savings and loan institutions in the 1980s. Both the S&Ls and the GSEs were favored in their sunshine days by government policy aimed at promoting housing finance. Both proved to be very costly mistakes.

Because members of the Democratic Party were Fannie and Freddie's principal promoters and protectors, the party's urge to postpone their reform is understandable. Yet one of the fathers of the Democratic Party, Andrew Jackson, understood what was wrong with GSEs as far back as 1832.

In the current failed condition of Fannie and Freddie, we would have to add: But the GSE bondholders do have a claim to the special favor of the government.

The GSE of Jackson's day was the Second Bank of the United States. Like Fannie and Freddie, it had a special federal charter, giving it highly valuable privileges that meant no one could compete with it. It too was conceived as a combination private and public enterprise and was exempt from state taxes. It had numerous friends, sponsors and beneficiaries in the Congress. And it too had major foreign investors who benefited from the favors of the U.S. government.

In 1832, when the congressional sponsors of the Second Bank passed an act to recharter the institution, Jackson vetoed the bill. His famous veto message contained some trenchant and relevant insights into the nature of GSEs for his party's descendants:

"Every monopoly and all exclusive privileges are granted at the expense of the public." This is unquestionably true of Fannie and Freddie.

"The powers, privileges and favors bestowed upon it in the original charter . . . operated as a gratuity of many millions to the stockholders." Absolutely right: only for Fannie and Freddie, we have to make that "a gratuity of many tens of billions to the stockholders" in their arrogant days.

"The effect of the original act could not be certainly foreseen." Disastrous unforeseen effects came with Fannie and Freddie, too.

"If, therefore, [the bank] shall produce distress, the fault will be its own, and it would furnish a reason against renewing a power which has been so obviously abused." The current day GSEs abused their power, and likewise their charters should not be continued.

"It is not conceivable how the present stockholders can have any claim to the special favor of the Government." Right. In the current failed condition of Fannie and Freddie, we would have to add: But the GSE bondholders do have a claim to the special favor of the government. Fannie and Freddie's bondholders are being 100% protected at the expense of the taxpayers.

"More than eight millions of the stock of this bank are held by foreigners. By this act the American Republic proposes virtually to make them a present of some millions of dollars." A slight alteration is in order here: Hundreds of billions of the bonds of the insolvent GSEs are held by foreign investors. The American Republic is presenting them with tens of billions of dollars to make good on the government's implicit guaranty, thereby relearning a lesson about the nonexistence of free lunches.

After Jackson's veto, the Second Bank of the United States became a private bank, shorn of its government privileges. A few years later, unwisely trying to support the price of cotton, it failed. It was not bailed out by the taxpayers.

One can imagine Old Hickory in Democratic Valhalla, stamping with impatience as the members of his party tap dance, offer excuses and procrastinate--instead of confronting the GSE issue of our day.

Alex J. Pollock is a resident fellow at AEI.

Photo credit: iStockphoto/dra_schwartz

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alex J.
Pollock

What's new on AEI

Making Ryan's tax plan smarter
image The teacher evaluation confronts the future
image How to reform the US immigration system
image Inversion hysteria
AEI on Facebook
Events Calendar
  • 25
    MON
  • 26
    TUE
  • 27
    WED
  • 28
    THU
  • 29
    FRI
Wednesday, August 27, 2014 | 3:00 p.m. – 4:15 p.m.
Teacher quality 2.0: Toward a new era in education reform

Please join AEI for a conversation among several contributors to the new volume “Teacher Quality 2.0: Toward a New Era in Education Reform” (Harvard Education Press, 2014), edited by Frederick M. Hess and Michael Q. McShane. Panelists will discuss the intersection of teacher-quality policy and innovation, exploring roadblocks and possibilities.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.