Anticipating legislative action on a bailout for Fannie Mae and Freddie Mac in the House tomorrow, the White House reaffirmed a veto threat Monday if the proposed package includes a money for state and local governments to buy real estate. Speaker Nancy Pelosi responded, “Let me get this straight. The president is asking us to do something quite significant on the housing crisis, and he is going to prevent local government from buying up these properties?”

Pelosi’s statement exemplifies the mentality on the left that makes it essential conservatives and President Bush stand firm on the $4 billion in grant money: liberals refuse to do something for the good of the nation (shoring up the financial system) unless they get something in return (a $4 billion slush fund to dole out to their political allies). It is exactly this sense of entitlement that got us into this current mess, and it must end if we ever hope to make sure this doesn’t happen again.

The most important thing to remember in this housing debate is that the government is the cause of, not the solution to, this housing crisis. Fannie Mae and Freddie Mac were not founded by enterprising American capitalists. They are government-created relics of the New Deal and Great society. They are leftovers from an era when giant government entities seemed essential to achieving social goals. Fannie and Freddie exist to create liquidity so that lenders can make more home loans. The current crisis was caused because money was so cheap it was too easy for lenders to make many bad loans.

Conservatives have been fighting to eliminate the systemic risk Freddie and Fannie pose for years. But Freddie and Fannie have long been protected by liberals in Washington, and the companies built a lobbying machine that co-opted many non-profit “housing advocates” such as ACORN (Association of Community Organizations for Reform Now) to solidify their political muscle. As a result, the companies have a long history of beating back regulators looking to curtail their bad practices.

But Fannie’s and Freddie’s nefarious histories with housing non-profits are not the only reasons conservatives should stand firm on the elimination of the $4 billion slush fund from a housing bailout. The Washington Post editorial board explains:

Our main problem with the proposal is that it may give lenders a perverse incentive to foreclose. Ordinarily, the costs and risks of foreclosure, including the risk of getting stuck with unmarketable properties, force banks to avoid foreclosure whenever they can. But that deterrence will be weakened if state and local governments suddenly appear on the scene with almost $4 billion to spend on homes that have been foreclosed on. This would not be a concern if the plan were restricted to properties that had been foreclosed on prior to its adoption, but it does not have such a restriction. Without that limitation, the plan shouldn’t pass.

The long-term goal for conservatives is to eliminate Fannie and Freddie entirely. There simply is no need for the government to pass a housing subsidy through semi-private, for-profit corporations that expose the taxpayers to $5 trillion in potential liabilities.

Quick Hits:

  • Iraqi insurgents have nearly ceased their once-constant attacks on U.S. convoys with only 1.5% of convoys attacked last month compared to 20% during some months in late 2006 and early 2007.
  • The Ford Motor Co., responding to consumer demand and not government mandates, is about to drastically alter its focus to building more small cars.
  • The European Union began crucial global trade talks Monday with an offer of reducing its farm tariffs by 60% — the highest figure it has yet offered — in a challenge to developing countries to make concessions.
  • According to Rasmussen Reports, 68% of Americans are confident in the stability of the U.S. banking system, even as Treasury Secretary Henry Paulson says more banks in this country are likely to fail.
  • Also according to Rasmussen Reports, 44% of Americans believe reporters are trying to help Sen. Barack Obama win compared to only 14% who believe reporters are trying to help Sen. John McCain win.