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Paul Kiesel
Paul Kiesel
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New York Times Op-Ed: Mortgaged to the World, Exchange Stabilzation Fund

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An very well written Op-Ed showed up in the New York Times on Tuesday concerning President Bush’s signing of the housing bill, which occurred the following day.

The most interesting element to the article is that instead of giving Fannie Mae and Freddie Mac a blank check to correct their mortgage problems, we did have another option, a little pool of money called the Exchange Stabilization Fund, which was set up in 1934 by President Roosevelt. The last time it was used was when President Clinton’s Treasury Secretary, Robert Rubin, used it to extend a $20 billion line of credit to Mexico in 1995. Ultimately, the fund allows for maintaining orderly exchange arrangements and an orderly system of exchange rates, thus, it doesn’t affect the value of our currency as greatly or negatively, as the Fed’s plan to bailout Fannie and Freddie would likely hurt an already weak dollar (it just fell below 10 pesos today).

Here is the first part to the article. If you want to view the entire article click here.

CONGRESS has given the Bush White House yet another chance to operate outside the Constitution. Unsurprisingly, the administration has taken it. Treasury Secretary Henry Paulson now has the go-ahead for his two-part plan to salvage Fannie Mae and Freddie Mac, the government-sponsored mortgage companies — a blueprint that violates fundamental American principles in two worrisome ways.

First, the Treasury will be allowed to advance money to Fannie and Freddie (and even to buy their stocks) in unlimited quantities to keep them afloat — in any fashion Mr. Paulson sees fit. Yet the Constitution requires that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law.” Even in wartime, budgets for the military specify how much is to be spent for what purposes.

Second, as an alternative to increasing the national debt, Mr. Paulson wants to let the two mortgage lenders become preferred customers of the Fed’s discount window, with the authority to pawn their own securities for cash. But only Congress has the constitutional power to borrow on the credit of the United States. Wright Patman, who headed the House Banking Committee from 1963 to 1975, liked to say that the Constitution gave Congress exclusive power to coin money and regulate its value, and that power was merely “farmed out” to the Federal Reserve.

It isn’t a good idea to authorize the Treasury secretary to spend unlimited amounts of taxpayer money, even accepting the administration’s argument that Mr. Paulson will probably never have to use it. Even worse is the notion that the Fed’s portfolio of assets — assets that back our currency — should be polluted by the inferior stuff of collateralized mortgage obligations.

Fortunately, there might just be a way to bail out Fannie and Freddie without willfully ignoring the Constitution. Should the two mortgage firms need a cash infusion, Mr. Paulson could spare the Treasury and dip into a little-known pool of money called the Exchange Stabilization Fund [. . .] (New York Times, 7/29/08)