It’s rare to see a public official be this forthright while cameras are rolling and reporters are massed:

Mortgage giants Fannie Mae and Freddie Mac are now basically a “public policy instrument” of the government, Rep. Barney Frank (D-Mass.) suggested Tuesday.

Frank, the chairman of the House Financial Services Committee, asserted that the companies, which were taken over by the U.S. in September 2008, have become an extension of the government’s policy-making tools.

“Remember now that Fannie and Freddie have been converted,” Frank said during an appearance on CNBC. “Part of the losses of Fannie and Freddie are that since the housing collapse, Fannie Mae and Freddie Mac have become a kind of public utility.”

That’s absolutely correct, and it’s a helpful reminder to those willing to reflexively recoil from any criticism of Fannie and Freddie as motivated by teabaggers who think that the financial crisis was caused by the government forcing lenders to give mortgages to poor people.

The role of Fannie and Freddie today bears no resemblance to the historical role through the decades. Fannie and Freddie came late to the housing bubble and only suffered because they were made to run like a Wall Street firm, massively over-speculating and over-leveraging. Today, as Frank rightly says, Fannie and Freddie are being used as a policy instrument, as an alternative apparatus to financing housing and supporting prices for housing. The uncapping of their debt limit for three years offers an opportunity for Treasury to use them to buy up bad securities from banks, to puchase mortgages whole, or basically whatever they want.

The problem with that is that the GSEs (government-sponsored entities) have effectively no oversight, and Treasury’s free hand to operate with Fannie and Freddie represents a stunning shift of control away from the legislative branch and toward the executive branch. Frank may actually be defending the Administration in this instance, but he should properly be horrified that there are virtually no checks on what Treasury can do with these two companies.

In a great piece, Matt Taibbi explains how partisan politics has limited the scope of inquiry into the failures by basically everyone in the financial system, both public and private. It’s irresponsible to blame solely GSEs as the proximate cause of the crisis any more than it’s irresponsible to blame any one entity (credit agencies, the big banks, regulators, Congress, etc. – they all can share some blame). But it’s just as irresponsible to use that fact to dismiss these very real concerns about a runaway GSE set up to perform the functions of TARP or any number of other Treasury programs, without any of the oversight. Taibbi explains:

We’re starting to see fault lines develop, where one side blames the government while another side blames Wall Street for the messes of the last two decades. The side blaming the government tends to belong to the free-marketeer class and divines in safety-net purveyors like the GSEs and in the Fed’s money-printing fundamental corruptions of the capitalist ideal, while the side blaming the bankers tends to belong to the left-liberal tradition that focuses on greed and seeming absence of community conscience among the CEO class as primary corruptors of the social contract.

In the former view the government is to blame for punting on its oversight responsibilities and for corrupting the financial bloodstream with market-altering guarantees, while in the latter view the bankers are at fault for lobbying the politicians to make exactly the same moves. The antigovernment folks like to focus on the irresponsible (and typically low-income or minority) home-borrower and their political allies in Washington as chief villains, while the anti-banker crowd looks at the massive personal profits and outsized influence of the executive class and waves the Cui bono? stick in that direction.

Both sides are right and both sides are wrong. I know that sounds like pox-on-both-their-houses pundit sophistry. But the point is that if you focus on one side and not the other, you miss the entire point [...] This GSE story is a big one, but if it gets used as a path back to a “The Market Reacted Rationally” version of history, we’re screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.

To the extent that I agree with the trans-partisan coalition forming around financial issues, it’s if they agree with Taibbi and look at the whole. And what they also must understand is that each Administration shapes the federal role in finance as much as each new set of Wall Street titans shapes the industry role, and they are never static. So knee-jerk defenses of Fannie and Freddie neglect Rep. Frank’s essential truth, that they are being utilized vastly differently than we have previously seen.

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