Fannie, Freddie, and Pharaoh

By Joel McDurmon

It was in the midst of a great depression. Famine and drought had swept the land; food shortages squeezed towns and families; prices skyrocketed; the effects were international; complaining echoed across workplaces and markets; social unrest was building. Something had to be done. Everyone looked to the one place which had reserves (built by prior taxation): the government. Even foreigners sought grain from governments abroad, paying a premium just to eat. The general cry was, “Help us! Help! . . . . Save us!” In the public mind, only the government could save them now. The government did, creating programs of massive wealth transfer and popular dependence upon the saving arm of the State.


This could well describe the Great Depression in the United States 1929–1939; or it could equally describe the story of Egypt during Joseph’s tenure under Pharaoh (Gen 41:46–57; 47:13–46). Both scenarios loom as warnings to the present crisis before us.

Sunday morning, September 7, 2008, treasury secretary Henry Paulson announced that the government had taken control of the giant lending institutions “Fannie Mae” and “Freddie Mac.” The boards of these quasi-private enterprises were removed and the companies themselves placed under “conservatorship” of the U.S. Treasury. This is all legalese for “only the government can save the housing market.”

 What is not stated is that these behemoth organizations never were private to begin with. In fact, the first of the two, Fannie, was created in 1938 as a fully-government run monopoly of the secondary mortgage market and was originally on the federal budget. This last point stands out because in the current takeover, the massive $5-trillion debt (half of the nation’s mortgage debt) will not appear on the federal budget (for political reasons?). Yet the fact that half of the nation’s mortgage debt is now overseen by the State is an eerie omen of the nature in which the State can “save” us: the extent of taking ownership due to “crisis,” “emergency,” or “desperation.”

The second of the organizations, Freddie, was created as a “private” corporation over thirty years later in 1970, with the stated goal of creating “competition” for Fannie. Fannie had been “privatized” in 1968. “Privatized” is here in quotation marks because both organizations were still “government sponsored enterprises” (GSE’s): and this latest takeover shows that what the government once sponsors, the government can reclaim with little trouble. “Privatizing” in the interim was an illusion: “out of sight out of mind” government. (Another of these GSE’s is Sallie Mae, which finances billions in student loans—another theater of modern financial woe brought on by misperception, lust, and artificially easy credit.)

The idea that these institutions were in competition is like arguing that Pontiac and Chevrolet are in competition. They are owned by the same corporation under the same umbrella. Likewise for Ford-Lincoln-Mercury and also for Chrysler-Plymouth-Dodge: different name brands, same owner. The illusion is sustained by the popular Pseudonyms “Fannie Mae” and “Freddie Mac.” These cutesy names are derived from their stock ticker symbols FNM and FRE; the actual full names are the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC)—both bearing the name of their maker.

The general justification for the current intervention was that these agencies, comprising half of the mortgage market, were simply “too big to fail.” This “too big to fail” theory apparently means that the bigger a failure you are, the more likely you are to be bailed out by the government. There is no belief in consequences for bad decisions here, only a destruction of incentives for thrift and good ethics. “Who cares? The government taxes us. The government will save us.”

All of this is to say that these organizations have, from their artificial births, never been far from the looming hand of government providence. They were created as people looked to government for salvation. They have never drifted far from this original purpose. This most recent takeover amounts to a nationalization of housing finance in the United States. Does this mean that the government will own newly mortgaged property? Not clearly. But it moves property rights scarily close to the hand of government. Does it mean that future defaults on these properties will transfer ownership to the federal government? This is a perfectly valid question.

My paternal grandfather grew up during the Great Depression. It permanently marked his character: to this day he’ll hardly spend an extra dime on frivolous things, wears the same clothes year to year, and, despite failing knees and everything else, grows his own vegetables (enough tomatoes to supply his neighbors). To eat out at Dairy Queen on Friday night is a luxury. He tells me depression-era stories about horse-drawn carts and hand-harvested corn-fields. Only one neighbor owned a threshing machine, and all the farmers around took turns to use it for their wheat harvest, and everyone helped the others until all were finished.

But in spite of the low level of wealth, they all had something on which to build: they had their own land. Grandpa’s dad—whom I never met—rented a place until he had saved enough to buy land of his own. Instead of seeking for government programs or handouts, they worked through their relative poverty and built their family and farm from the ground up. This is the great American story.

This story is often perverted. The American Dream now simply refers to having the house, car, cable, garden tub, granite counter top, etc., and having the wife and 2.4 kids, etc. It no longer remembers the part about building this dream from the ground up. Today we have tons of credit and government programs for quick and easy financing of our “McMansions” and other things. There is no work or labor involved in getting to that point, it can be obtained almost instantaneously.

At least, this was the case. Things have changed a bit as of late. The realities of recession are setting it. Banks are growing stingier on whom they lend to, credit no longer flows so freely. Production and construction has halted in many places. Here in the counties surrounding Atlanta, there are dozens of subdivisions for new-construction homes that were begun but the homes never built. There are massive fields of stripped red-clay with PVC stubs sticking up at each proposed lot, but no houses—and no work continuing. Many of these operations are now owned by banks that foreclosed on the construction loans. One local builder tells me how his business plummeted overnight. Another builder he knows had $3 million in the bank last year, but just went bankrupt with $47 million in outstanding debts. The projects he borrowed for never completed.

My wife and I just bought a new construction home that was owned by a bank. The builder had been foreclosed on months earlier. We got a good deal because the bank was smart: choosing to unload the liability quickly instead of waiting for the market to “recover,” an event unlikely for at least a year or two. This is one single incident. There are literally hundreds of foreclosed homes for sale in my county alone. The national number is 1.2 million homes. Whence cometh this crisis? There are probably several factors, but cheap and easy credit pushed by the Federal Reserve and government programs are at the base of it. It is a trap created by the lusts of man and it will pull society under the judgment of God.

This is an echo of the crisis that occurred in 1929. The creation of the Federal Reserve in 1913 allowed for the injection of massive amounts of credit into the economy in general. The credit craze took off beginning an “unsustainable boom” that would lead to world-wide crises. The great Austrian economist Ludwig von Mises saw what was coming. Early in 1929 he turned down a job offer from a prestigious bank in Vienna saying, “A great crash is coming, and I don’t want my name in any way connected with it.”1 The bank in question was the first in that country to fold from the pressures of the depression. That was Austria. Their neighbor Germany felt the downturn acutely. People all around called for government to save them. They called for a political savior. One stepped up: his name was Adolf Hitler. The people cheered.

The “government salvation in crisis” theme has a precedent in the story of Egypt. Joseph interpreted Pharaoh’s dream of seven fat cows and seven thin cows as seven years of plenty followed by seven of famine. Since Pharaoh had the same dream twice (two witnesses), Joseph saw it as confirmed by God. He conceived a plan that would seal God’s judgment on Egypt: for Pharaoh to collect a fifth of all the harvest and store it for the famine ahead. This was done.

When the crisis hit Joseph sold the grain back to the people it was taken from. They bought. When money ran out, Joseph traded for their cattle. When the cattle ran out, Joseph traded for their land. The people still agreed to this. When the land was all possessed by the State, the people offered themselves into slavery in exchange for the grain. When all was said and done, the famine passed, but the State owned everything. The lesson is simple: crisis or not, when government becomes a means of provision, the end result can only be loss for the people. You may be fed today, but it will come at the cost of freedom.

As the famine ended, and all property and person had become property of Pharaoh, Joseph set forth the rules under the new total-State:

Then Joseph said to the people, “Behold, I have today bought you and your land for Pharaoh; now, here is seed for you, and you may sow the land. At the harvest you shall give a fifth to Pharaoh, and four-fifths shall be your own for seed of the field and for your food and for those of your households and as food for your little ones.” So they said, “You have saved our lives! Let us find favor in the sight of my lord, and we will be Pharaoh’s slaves.” (Gen 47:23–25).

It was clear, that even when the famine was past, the results of the new order would last. Rights, property, and freedoms voluntarily given up once in the face of crisis and emergency are never returned. The State never voluntarily gives up its powers. This is why the founder Ben Franklin once wrote, “Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.”2 For Egypt, hunger was the need, slavery was the result, and a 20% income tax to Pharaoh was the legacy of their indentured servitude to the State (a total tax burden actually much less than our own).

So, where does all of this lead? The story of Egypt tells us: slavery. Ownership of the people by the State. This sounds far-fetched, of course, but is it?

Slavery is very difficult to talk about in America because it is so closely related to racism in the popular mind (partly due to the facts of history, and partly due to the limitations of public education). Slavery, however, is neither necessarily tied to race nor abolished in our time as we believe. It still exists in a few forms. The prison system, a military draft, and debt are all forms of slavery. Recall, it was the war-era spending including the military draft that were credited with bringing the U.S. out of its Great Depression.

The takeover of such a large portion of the U.S. mortgage market, and the draining need for money and manpower for perpetual war on Terror provide evil portends for freedom in America. Biblical law protects private property from other people and from the King (thus Naboth was not required to sell Ahab his property, 1 Kings 21), and the early theoreticians of American freedom saw property rights as essential to liberty. Our Declaration’s phrase, “life, liberty, and the pursuit of happiness,” was taken from John Locke’s earlier (and better) phrase, “life, liberty, and estate (or property).” These Rights are inherent—given by God—not given by the State. If the State gave them, then the State could take them away. But since God gives them, the State has no right to interfere. When the State is viewed as the benefactor or savior, people are simply denying God by attributing these rights to the State. In such a circumstance, God will give the people exactly what they ask for. The result is a form of judgment—a glimpse of hell—not salvation in the least.

We must confess—it is vital to admit—that along with all of the tyrannical aspirations of government, the will of a complicit people is vital to tyranny to continue. Dictators, tyrants, and tyrannies do not pop up and survive on their own. It was popular support that cheered Hitler into office. It was the voice of the people that let Joseph “buy” the people and all the land for Pharaoh. It was the rush for credit that was key to the Great Depression and the current economic crisis. And it will only be the popular mandate for government salvation that will further the tyranny. One article noted this earlier this week: “With the nationalization of Fannie Mae and Freddie Mac, it’s impossible to argue the Federal government isn’t playing a crucial and growing role in the financial markets. ‘Call it socialism, manipulation, intervention, or desperation. Call it what you will but don’t underestimate the mandate,’ says Todd Harrison, CEO of Minyanville.com.”3 This move, in other words, is cheered by the public. It is a mandate (which means “command”). “Save us!” “Save us!”

Don’t join that chorus. It is the song of slavery, the chorus of chains. It is the unprincipled refrain of the denial of god. Look for “salvation” to come in the form of inflation. Since Fannie and Freddie are off the books, their liabilities are hidden from the public, just as monetary inflation is a hidden tax on the public. The debts will have to be secured or paid, and the money will have to come from somewhere. Inflation is a handy tool for such expenditures: hidden taxes for hidden debts. We will all pay in devalued dollars and higher prices. Pharaoh will take his percentage; but he doesn’t yet have our land or our persons. Understand that now before the mandate changes, and fight it if it tries.

1 Margit von Mises, My Years with Ludwig von Mises (Arlington House, 1976), 31.

2 Historical Review of Pennsylvania, 1759. Notice, this was written years before the Revolution.

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