Is Congress creating another financial crisis?

Elizabeth Letchworth Former U.S. Senate Secretary
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Since Congress is out for their traditional August break, I thought this column could explore some of the ramifications of the larger pieces of legislation Congress has passed over the last few months. The first one that comes to mind is the financial reform bill that was signed into law mid July, 2010. This bill was two years in the making and caused many GOP lawmakers to balk at the sheer size of the bill, the undefined responsibilities outlined in the bill and the lack of even an “honorable mention” in the bill of the famed Government Sponsored Enterprises we know as Fannie Mae and Freddie Mac. The fact is that we the taxpayer own 80% of Fannie and Freddie, and they are expected to get a total of almost $1trillion dollars of our money. This never ending bailout is needed to keep these two mortgage companies afloat when it is all said and done according to Bloomberg money gurus.  Notwithstanding this glaring omission in the financial reform bill, the bill did talk much about the FDIC and their ability to operate new programs. One such new program that garnered approval from the FDIC on August 10, 2010 was the “Model Safe Accounts Pilot program.”  This FDIC Model Safe Accounts Pilot program is designed to introduce the banking world to the underprivileged which are described as “underserved”, “unbanked” and “underbanked”. These underbanked folks are basically low-income households and minorities. According to the FDIC website, this program will last 1 year and must be subject to quarterly reports. Some of the highlights are:

– Accounts will be largely electronic and paperless

– Accounts will be FDIC-insured w/ reasonable rates and fees

– Accounts will be “checkless” allowing withdrawals only through automated teller machines

– There are no overdraft or non-sufficient fund fees

– Overdraft lines of credit or small-dollar loans are encouraged

At first blush, this pilot program sounds good on paper. However, you might want to consider the history behind the creation of Fannie and Freddie and see if anything sounds familiar. Fannie Mae was created by President FDR in 1938 as part of his New Deal. The Great Depression had caused a collapse in the housing market so Fannie was born by the federal government to provide local banks with government money to finance homes. Because Fannie had the U.S. government’s seal of approval, it was able to borrow money from other countries and then lend that same money for home mortgages at a slightly higher interest rate. Fannie makes its money from the difference between the foreign money and the homeowner’s loan. By 1968, Fannie Mae was a giant in the mortgage market so Freddie Mac was created in 1970 to prevent a complete monopoly of the housing market. Congress still has the ability to direct Fannie and Freddie and as a result, they ran these two government sponsored enterprises into the ground.

Now let’s look at a few of the buzz words from the FDIC’s new Model Safe Accounts pilot program. Underbanked or unbanked are key to this new pilot program. Remember that underbanked is code for low income. If you try to imagine Fannie using words like “undermortgaged or unmortgaged” back in the day, you might be able to see a bit into the future. My crystal ball reads that the FDIC “Model Safe Accounts pilot program” could easily become the next failed government concocted financial solution for the low income or minorities just like Fannie and Freddie are today. Stay tuned to see if we can afford a bailout of those “underbanked” who participated in the” Model Safe Accounts program”. Hopefully it won’t be to the tune of $1 trillion like Fannie and Freddie.

Elizabeth B. Letchworth is a retired, four-times-elected United States Senate Secretary for the Majority and Minority. She is the founder of GradeGov.com.