December 27, 2010
Fannie, Freddie, and FurBy Jeffrey Folks
In a fascinating book entitled Furs, Fortune, and Empire (New York, 2010), Eric Jay Dolin recounts the entire history of the fur trade in America. Dolin's book is full of interesting stories, one of which involves government's attempted takeover of the fur trade during the early 19th century. The story calls to mind government's intervention in the home mortgage market nearly two centuries later, and for much the same reasons, the government fur operation was a dismal failure.
As Dolin points out, the U.S. government did not enter the fur trade with the idea of making a profit. Its overriding purpose was to protect American Indians, who, as liberals of the day believed, were being cheated by private fur companies. In creating the so-called "factory system," government would organize the fur trade as a nonprofit enterprise. With the advantage of taxpayer subsidies, government agents would then drive the for-profit traders out of business.
In the minds of liberals of the day, social justice necessitated government intervention in the fur trade. Once government had driven profiteers from the field, Indians would receive a fair price for their furs, and they would be spared the harmful effects of alcohol (with which the private traders were said to ply their "victims"). And once they realized how much better off they were under the protection of government, Indian tribes would become allies of the United States, to the betterment of both parties.
That, anyway, was the theory -- sort of like the idea of increasing the proportion of low-income homeowners, thus integrating them into middle-class neighborhoods and "uplifting" them by assimilating them into the middle class. The reality in both instances was something else again.
The government "factories" (or trading posts) were perhaps the first example of government-sponsored enterprises, or GSEs. Like latter-day GSEs, the government fur trade was designed by political do-gooders who cared more about ideology than they did about economics. As Dolin relates, the government posts were manned by appointees with no experience in the fur trade -- sort of like putting a Justice Department lawyer in charge of the Minerals Management Service to oversee Gulf oil drilling.
Nor did those government agents, whose sole mandate was to engage in trade with Indians, have any prior experience in dealing with Indians.
As if to ensure their lack of initiative, the fur agents were paid generous salaries without regard to productivity. Their competition, private traders such as those working for John Jacob Astor's American Fur Company, were compensated on the basis of the quantity and quality of furs they collected.
Unlike the private traders, government agents were not allowed to trade alcohol for furs, nor were they allowed to offer gifts prior to trading. Long accustomed to trading for alcohol, which they prized, and to receiving gifts as a mark of goodwill, Indians walked out of the government trading posts in disgust.
Finally, the government men were permitted to trade only American-made goods -- at that time, inferior to the British-made articles that Indians preferred.
As Dolin's superb account makes clear, government's foray into the American fur trade was an abysmal failure. After a quarter-century of mediocre results, the factory system collapsed. Astor stepped in, carefully organized every aspect of the trade, reinvested his profits, and saw his business flourish.
Motivated entirely by profit, Astor instructed his employees to maintain good relations with the Indians on whom his supply of raw furs depended. His agents were chosen on the basis of their knowledge of and respect for the Indians with whom they dealt. Most of Astor's agents had lived among the Indians for many years, and many had intermarried with them.
At the same time, Astor supplied a high-quality product in great demand in Europe, Asia, and America. He employed tens of thousands of people. And he provided valuable trading goods to Indians, thereby raising their standard of living.
While all of this was taking place, how many jobs did the government-sponsored enterprise create? At its height, its twelve trading posts were manned by a total of perhaps a hundred men. How much value did the government system produce? The furs that it managed to obtain were of inferior quality, and many were mishandled and ruined as a result of the ignorance or lack of concern of government employees. With no economic incentive to produce something of value, nothing was produced.
Exactly 150 years after the demise of the government fur trade, Congress authorized the creation of the Federal Home Loan Mortgage Corporation, or Freddie Mac. Twenty-five years later, under intense political pressure from the left to support affordable housing, Freddie Mac and its sister institution, Fannie Mae, began guaranteeing sub-prime mortgages. Like the government fur trade, government mortgage corporations operated on the principle of social justice rather than profit.
Once Freddie Mac got into the business of "fairness," however, its days were numbered. With liberals like Franklin Raines of Fannie Mae in charge, mortgages began to be extended to borrowers on the basis of fairness rather than merit. Those who were low-income -- in other words, those who were incapable of repaying the loan to begin with -- were moved to the front of the application line.
The result was predictable. Government's grand plan to make housing affordable to low-income borrowers failed, and the consequences were even worse than those of the failed fur trade. Once government exited the fur trade, private traders stepped in to reclaim the industry. It is now almost two and a half years since Freddie Mac and Fannie Mae were placed in conservatorship. Taxpayers are still on the hook, and they will be for a long time.
Jeffrey Folks is author of many books and articles on American culture and politics.