Note: The following article is from the September issue of Townhall Magazine.  To subscribe to twelve issues of Townhall Magazine, click here. 

I’ll bet it came as a surprise to most folks that the financial stability of the world as we know it depends upon the survival of a couple of outfits called Fannie Mae and Freddie Mac. Yet that’s what the so-called experts are telling us. Moreover, we taxpayers are now being asked to guarantee Fannie and Freddie’s tab, one that could make the $124 billion S&L bailout of the late 1980s look cheap.

So how did we get stuck with this bill? Well, Congress wanted to “do something” about what it saw as a “housing problem.” To them that meant that they should create an even bigger problem.

So Congress passed laws that made it easier for hopeful home-buyers to buy houses … even when they couldn’t afford them. Then the Fed and other regulators helped, in the form of easy money and loose credit standards for mortgages.

Not surprisingly demand for houses grew, home prices rose, lenders financed additional questionable mortgages, fueling even higher prices and so on. You get the picture. This is called a bubble.

Then an amazing thing happened – apparently impossible to foresee. Home prices did not continue to rise forever! Home prices came down and easy money dried up, causing the above mentioned cycle to reverse. In other words, the bubble burst.

So you’d think the in-over-their-heads homebuyers and the mortgage bankers would take the hit, and the market would right itself. No reason for an international meltdown here, right?

Not so fast my friends. Years earlier Congress established Fannie and Freddie as purchasers of these mortgages, which they could bundle up, repackage and sell to investors, freeing up more mortgage money. As government creations tend to do, the two companies grew until they either owned or guaranteed about half the nation’s $12 trillion dollars in mortgages.

Fannie and Fred were “government sponsored enterprises” which means heads they win, tails you lose. If they make money stockholders, creditors and Fannie and Freddie employees – some making millions annually – get the benefit. But now that mortgages have hit the skids, with mounting losses, the taxpayers potentially face trillions in exposure. This is because there is an “implicit” (read “actual”) government guarantee of Fannie and Freddie’s obligations and both are now too big to be allowed to fail. This is called the “bailout phase,” which will probably lead to a bigger bubble in the future.

Lost in this immense, complex mess is the root problem most people are missing: the government is gradually becoming the guarantor of seemingly every important aspect of American secular life, creating incentives and bureaucracies that cause failure and invite fraud. Continued...