The Lighthouse^®

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The Lighthouse^® is the weekly email newsletter of the Independent Institute.
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Volume 14, Issue 6: February 7, 2012

1. Fannie, Freddie, and the Aftermath of the Financial Crisis
2. Solving the Federal Land Problem
3. Military Spending and Big Government
4. New Blog Posts

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Fannie Mae and Freddie Mac—officially the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, respectively—played a key role in igniting the unsustainable housing boom that precipitated the recent financial crisis. These government-sponsored enterprises were instrumental in encouraging the funding of risky residential mortgage loans, and they stonewalled efforts to investigate their operations. Why are they still in business? Vern McKinley, a research fellow at the Independent Institute and the author of Financing Failure: A Century of Bailouts, raises this vital question in The Hill’s Congress Blog.

In 2008, then Treasury Secretary Henry Paulson and the Federal Housing Finance Agency (FHFA) moved to place Fannie and Freddie into conservatorship. As McKinley notes, this was a courageous measure, because although the two government-sponsored enterprises were deeply insolvent, they were politically powerful. They had lobbied members of Congress long and hard for special privileges, and they had taken to publicly insulting their critics, calling them “economic pencil brains.” Unfortunately, placing Fannie and Freddie into conservatorship was too little, too late. “Even today, they resist full transparency with the FHFA and its Inspector General and retain elements of their longstanding cavalier approach to risk management,” McKinley writes.

What should be done? Some policymakers have called for fiddling with Fannie’s and Freddie’s governance and operations, but a much better alternative would be to put them into receivership and wind them down. The FHFA has had the authority to do this since 2008. Moreover, there is a historical basis for believing that this could be done effectively: in the late 1980s and early 1990s, the Resolution Trust Corporation succeeded in placing hundreds of insolvent savings and loans into receivership and transitioning them to private ownership. Putting Fannie and Freddie into receivership would allow them to be broken up into smaller companies and transferred back to private hands. Critics argue that doing this would jeopardize the recovery of the housing market, but as McKinley notes, these are the same critics who mistakenly claimed that placing Fannie and Freddie into conservatorship would devastate the housing market. “Given its track record, we have to stop listening to that discredited crowd,” McKinley concludes.

Financing Fannie and Freddie’s Failures, by Vern McKinley (The Hill’s Congress Blog, 2/1/12)

Financing Failure: A Century of Bailouts, by Vern McKinley

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For most of its history, the U.S. government maintained a policy of transferring acquired lands to private owners and to the states. This changed around the turn of the 20^th century, however, as the Progressives preached the “gospel of efficiency,” a doctrine that hailed the scientific management of natural resources by enlightened public servants. But today more and more observers believe that federal land managers have been ineffective, wasteful, and, alas, not very scientific stewards of natural resources, including raw land. Independent Institute Senior Fellow Robert H. Nelson examines these developments in his illuminating new article, “Our Languishing Public Lands,” just published in Policy Review.

The federal government owns about 50 percent of the land in the American West, and its oversight has failed the test of time. Perhaps the main reason, according to Nelson, is that political imperatives have been the primary determinant of the number of cows that are allowed to graze, the amount of roads that are built, the quantity of timber that is harvested, the pool of resources that are devoted to recreational purposes, and other matters. The Government Accountability Office has estimated the economic losses resulting from mismanagement by the Bureau of Land Management ($46 million in 2004) and the Forest Service ($68.3 million in 2004), but the real losses are likely much greater.

Privatizing all federal lands—and using the sales revenue to reduce the national debt—would be desirable, but it’s not politically feasible: ranchers, hunters, hikers, and others who have grown accustomed to decades of access under the current rules would block the complete transfer of public lands to the highest bidder. Thus, Nelson proposes several principles and strategies designed to succeed given current political realities. For example, ranchers could be given 30-year “forage leases” for use on grazing land, in place of the current ten-year permits, and they would be allowed to sell or transfer their leases to hunting clubs, environmental groups, or other parties that would then be free to manage forage resources for their own purposes. In contrast, federal forests, which had always been used by the highest bidder, could be reclassified into a few different categories, each associated with a different type of use and management strategy. Although some lands would be transferred to the private sector, other parcels would be transferred to state or local jurisdictions, which would have stronger incentives to manage the resource efficiently than the federal government possesses. “The final details will have to emerge from the normal give and take of politics,” Nelson writes. “But let the discussions begin.”

Our Languishing Public Lands, by Robert H. Nelson (Policy Review, 2/1/12)

The New Holy Wars: Economic Religion versus Environmental Religion in Contemporary America, by Robert H. Nelson

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The U.S. Defense Department spends about $700 billion—20 percent of the annual federal budget—and other agencies, such as the Energy Department and the National Security Agency, spend additional billions on military programs. Big-government military spending is incompatible with small-government conservatism, but many conservative leaders “go ballistic when anyone suggests that U.S. military spending should be reduced or that the nation no longer can afford to be the world’s policeman,” economist Dominick T. Armentano writes in his latest op-ed.

One reason that big-government military spending conflicts with small-government principles, according to Armentano, is that military spending is spent increasingly on bases overseas. Officially, the United States has 716 military bases in 38 foreign countries, but if you include secret bases and espionage bases in Iraq and Afghanistan the real number is closer to 1,000. Less than half of all U.S. military spending is allocated for personnel, equipment, and bases in the United States.

“Our interventionist foreign policy has contributed to our near-bankruptcy,” Armentano continues. “We have a $16 trillion national debt, tax revenue that covers only 60 percent of current expenditures, and an inability to pay our bills without massive borrowing or Federal Reserve money inflation. Bluntly put, our federal government is broken. Can and should we fund legitimate domestic defense? Of course. But should we continue to pay for so-called ‘wars of opportunity,’ the subsidization of our prosperous European allies, or nation building in Africa or in the Middle East? No way.”

Conservatives in Denial: Military Spending and Big Government, by Dominick T. Armentano (TCPalm, 2/4/12)

Is Leon Panetta the Right Man to be Secretary of Defense?, by Winslow T. Wheeler (Time Magazine’s Battleland Blog, 12/13/11)

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From The Beacon:

From MyGovCost News & Blog:

You can find the Independent Institute’s Spanish-language blog here.

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