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Why you should worry about Fannie and Freddie

Marxist Analysis · 2008-07-15

Core Argument

The central thesis is that the crisis engulfing Fannie Mae and Freddie Mac in July 2008 was not a contained financial accident but the next, deeper stage of a systemic crisis of capitalism. Brooks argues that the sub-prime mortgage crisis, initially presented as a localised problem, has metastasised into a generalised insolvency crisis affecting the entire financial system. The hybrid public-private status of Fannie and Freddie — nominally private but government-guaranteed — is precisely what makes them dangerous: they concentrated risk across the entire housing market while operating with only 2% capital cover. The article claims that the state's inevitable intervention (euphemistically termed "conservatorship") will amount to effective nationalisation, doubling the US national debt at a stroke and confirming that the shares are worthless. The political conclusion is that the working class should demand genuine nationalisation under democratic control, not bailouts that socialise losses while preserving private profit.

Theoretical Grounding

The analysis is grounded in the Marxist theory of capitalist crisis, specifically the understanding that financial crises are not external shocks but immanent expressions of contradictions within the accumulation process. Brooks draws on the Marxist distinction between the "real economy" (production of value) and the "fictitious economy" (financial speculation), showing how the housing bubble inflated fictitious capital — mortgage-backed securities — far beyond the underlying value of the houses themselves. When the bubble burst, the gap between nominal asset values and real values became a chasm.

The article also deploys the Marxist critique of the capitalist state's role: the state intervenes not to defend the general interest but to rescue the system as a whole, socialising losses while leaving ownership and control in private hands. This is consistent with Lenin's analysis of state monopoly capitalism and the Marxist tradition's insistence that nationalisation under capitalism is not socialism but a different form of capitalist crisis management. The piece sits within the Trotskyist tradition's emphasis on the inevitability of capitalist crisis and the necessity of revolutionary, not reformist, solutions.

Conjunctural Relevance

The article was written on 15 July 2008, at the precise moment when the financial crisis was accelerating from its sub-prime origins into a full-blown systemic collapse. Key data points include:

  • Fannie Mae shares fell 38% in a few days; Freddie Mac lost 45% in the same period. Over the preceding year, Fannie lost 80% of its value, Freddie 86%.
  • The two entities held $5.3 trillion in liabilities — equivalent to the entire US national debt at the time.
  • IndyMac had just been effectively nationalised by Treasury Secretary Hank Paulson, with losses of $4–8 trillion (the article's figures appear to conflate billions and trillions; the point is the scale relative to Northern Rock's £55bn bailout).
  • Merrill Lynch was predicting a 30% fall in US house prices for 2008.
  • Home loans totalled approximately $12 trillion, with over 80% recently guaranteed by Fannie and Freddie.

The article names key institutional actors: Alan Greenspan (whose comment that the Bear Stearns rescue eliminated uncertainty about state backing for Fannie and Freddie is quoted approvingly), Ben Bernanke, Hank Paulson, and analysts from BNP Paribas and Societe Generale. The conjuncture is one where the financial establishment had repeatedly declared the crisis over — after Bear Stearns in March 2008 — only to be proven wrong. Brooks correctly identifies that the crisis was entering a new phase of generalised insolvency, not merely illiquidity.

Where the Argument Continues

This article is part of a sequence of IDOM pieces from 2007–2008 tracking the financial crisis as it unfolded. The argument continues in several directions:

  • Mick Brooks, "Hedge funds, speculation and capitalism" (14 July 2008) — published the day before this article, it extends the analysis to the broader role of speculative capital.
  • Mick Brooks, "The dollar down the pan – monetary chaos to follow?" (1 May 2008) — connects the financial crisis to the crisis of the dollar as world reserve currency.
  • Michael Roberts, "Capitalism beared" (27 March 2008) — analyses the Bear Stearns bailout as a precursor to the wider crisis.
  • Mick Brooks, "US slides into recession – who's next?" (17 March 2008) — situates the financial crisis within the broader economic downturn.
  • Mick Brooks, "Financial meltdown: another day, another finance house bites the dust" (17 March 2008) — provides the immediate context of cascading bank failures.
  • Mick Brooks, "1929: Can it happen again?" (17 March 2008) — draws historical parallels to the Great Depression, arguing that capitalism has not overcome its crisis-prone nature.

The argument is also developed in later IDOM pieces on the eurozone crisis, the 2008 crash's tenth anniversary, and the COVID-19 economic crisis, which revisit the same theoretical framework of overaccumulation, fictitious capital, and state bailouts.

Connections

This article should be read alongside:

  • Marx, Capital Volume 3, Part V — on the division of profit into interest and enterprise, and the fetishism of interest-bearing capital.
  • Hilferding, Finance Capital — on the fusion of banking and industrial capital and the role of the state in managing crises.
  • Lenin, Imperialism, the Highest Stage of Capitalism — on the parasitic nature of finance capital and the state's role in bailing it out.
  • Mandel, Late Capitalism — on the structural tendency toward stagflation and financial crisis in the post-war period.
  • Roberts, The Great Recession: A Marxist View (2009) — the most systematic Marxist account of the 2008 crash from within the same theoretical tradition.
  • IDOM, "The 2008 crash: ten years on" (2018) — retrospective analysis that confirms the article's predictions about the long-term trajectory of the crisis.

Key Quotes

  1. "The financial establishment has been alarmed for a year about the sub-prime mortgage crisis. They are aware that dodgy mortgages were sold to people who could not possibly afford them as the housing bubble was inflated. They hoped that they could isolate this toxic waste and deal with it over time. It is quite clear from the scale of the crisis that the poison has entered the bloodstream of the capitalist system."

  2. "Fannie and Freddie are almost certainly insolvent, and so are big chunks of the financial system."

  3. "Taking over Fannie and Freddie would double the national debt at a stroke."

  4. "Though privately owned and issuing shares and (until recently) posting profits, Fannie and Freddie are government sponsored enterprises (GSEs). The government has guaranteed that, whatever happens to the two, the mortgages they underpin will not fall into the chasm. So Fannie and Freddie could do business with assets covering only 2% of its mortgage exposure. In normal times this is not a problem. We are not living in normal times."

  5. "Up till a year ago finance capital and the whizz kids in the City were held up to us as the masters of the universe, as 'wealth creators.' Now we see them as hapless bums always begging for a handout. It's high time to nationalise the banks."

  6. "This is a new, deeper stage in the ongoing crisis. The sub-prime mortgage scandal led to the credit crunch. The sub-prime crisis and the credit crunch pricked the house price bubble. As house prices fell off a cliff, housebuilding collapsed. Now share markets are heading south and one financial institution after another is under siege. There seems no end to the unravelling."