This is the Cato Daily Podcast for Monday, July 14th, 2008. I'm Caleb Brown.

As Fannie Mae and Freddie Mac face perhaps more scrutiny than ever before, just how did the relationship between the feds

and these two companies become so close?

Cato Institute Senior Fellow Peter Van Doorn, editor of Regulation magazine magazine tells us.

The story starts in the depression.

When and when housing prices collapse and mortgages were in foreclosure.

And the federal government created the Federal National Mortgage Association in February of 1938.

And it was charged with creating a national market for home mortgages and the reason it needed to do that was because there were restrictions on interstate banking

so that banks could not do that.

And as this really comes into prominence after World War II when California starts to grow.

And the savings is back east and the demand for capital is out west and because we had a 50 state non-national banking system it was

difficult for the writers of mortgages in California to get the capital to fund those because

under the rules of banking particularly for savings banks which were also created in

depression in order savings banks by law had to have which were also created in the depression.

Savings banks by law had to have 80% of their assets,

i.e. mortgages, in mortgages that were within 50 to 60 miles of the bank in question.

And so you have this extremely segmented housing capital market.

And in effect, Fannie Mae was the thing that created a

national market which would have been done by banks had banks been not been

regulated to have prevented that. It was on budget until the 60s and then in

1968 it was privatized to get its obligations off the federal books because it was adding to the federal

deficit at that time in the Vietnam War and the pressures to borrow for that and

...