This lbo-news guest post is written by Michael Pollak, a writer living in New York.

Some kinds of socialism make simple financial sense. We start with something we all need, like housing, or health care, or old age pensions. Then we all pool our money and pay for it. We all know how this works for single-payer health insurance. How would it work for housing?

The original Fannie Mae (full name: Federal National Mortgage Association), as set up under FDR in 1938, was a pretty good equivalent of a single-payer housing system. It was a government agency which bought all home mortgages which certain other agencies (the Federal Housing, Veterans and Farm Agencies) had insured. They inspected you and the property, ensured sure both were good risks, and insured your payments in exchange for a continual small percentage fee. Fannie Mae then gave the local bank money or a security and took the mortgage in return.

In single payer health care, you go to the doctor, the government pays, and we pay the government in the form of taxes. Here, the government buys the mortgage from the bank who sells it to you, and this keep your mortgage payments down. The initial affordability gain was enormous, thanks to the FHA having recently introduced the 30-year self-amortizing (i.e., fixed payment) mortgage—before Fannie and the FHA, most payment plans were impossible for most people, with 50% down payments and balloon payments at the end. And the system was safe as houses. For the next 30 years the insurance agencies and Fannie were not only self-financing, they consistently made more than they spent, which provided a substantial buffer to protect them in down markets, even while their monopoly kept mortgage prices low.

Fannie was “privatized” in 1968 for the most trivial, short-termist and ultimately futile of reasons: to make the Johnson administration look good for the 1968 election. Back then, running a budget deficit was a serious campaign liability, like sexting is today. Johnson felt he had to close it. But he didn’t want to raise taxes, curtail the war, or curtail the war on poverty, all of which would have been liabilities as well. So he cut a hundred million here and two hundred there through a fistful of budgeting gimmicks like deferring highway expenditures for six months. And one of these gimmicks was to “sell” Fannie to a “private” company the government created (“5 Dumb Fannie Mae Bailout Assertions That Are Actually Secretly Smart!”). It was intended to change nothing in its functioning.  The sale of its huge assets for one-time income of $160 million was all to help that year’s budget. (You will often read that Johnson privatized Fannie to “get it off the books,” which implies it was a huge debt liability. That’s exactly wrong. Johnson’s whole motivation was based on the fact that Fannie was making money. It wouldn’t have made sense otherwise.)

In succeeding years, a series of  things happened (“History of the Government Sponsored Enterprises”) which really made Fannie and its much younger sibling Freddie Mac (founded in 1970 and from the first a private corporation, though federally sponsored) more and more like normal companies. (Normal companies that financial markets always believed had an unspoken federal guarantee.) And finally, 40 years of transformation later, they ended up doing an entirely normal company thing: they leapt in late in a bubble screaming “Me too!” and died a semi-normal death.

They were put in into “conservatorship” in July 2008, which means the feds now effectively own both Fannie and Freddie.

So what is to be done? When you take this long view, the obvious thing would seem to be go back to 1967, when things worked perfectly, because they could work even better now. In the age of technology, conforming mortgages are so simple that all you need is a well-oiled bureaucracy. (Conforming mortgages, as defined by Fannie Mae, have standard debt-to-income ratio limits, documentation requirements, and a maximum loan amount.) A competent clerk can figure out in minutes whether the odds of you paying your mortgage back are greater than the interest rate using their laptop. In fact, Fannie Mae has been doing this since the late 1990s using their own program called “Desktop Underwriter.” The data has to be confirmed, but that was originally chiefly the job of the agencies who insured the mortgages. There’s no reason it couldn’t be again.

Basically you don’t need mortgage banks for conforming mortgages, which are now commodities. But to make a new, reunified Fannie conceivable even in our dreams, let’s stick to the single-payer model instead of going on to Britain’s NHS.  We’ll keep the mortgage banks and let them originate conforming mortgages. We’ll closely regulate their practices via the Consumer Protection Agency that Elizabeth Warren created. (It’s part of their brief already. And while we’re dreaming, we’ll make it an independent agency.) And then we’ll keep mortgage interest down by giving the now reunified and socialized Fannie a monopoly on buying these mortgages from banks. By these mortgages, I mean homes people live in (not second properties) that aren’t mansions—about 60% of the market. Landlords, speculators and rich people don’t need our collective aid.

There’s only thing we’d have to change from the pre-1968 period. Back then, Fannie bought the mortgages and held them to maturity, living off the steady payments. It was a great and simple business model. They only accepted rock solid mortgages, their portfolio was gigantic, and it was diversified to the greatest extent conceivable. So default and prepayment risks could be calculated to a hair and incorporated in the rates and buffer.

But one key thing has changed since then. The end of Bretton Woods brought us the world of gyrating interest rates, and with it, interest rate risk. In fact, the real pressure that transformed Fannie into a normal looking-and-acting company was that these gyrating interest rates killed its old business model of buy-and-hold during the 1970s.

The solution to that problem is securitization. Essentially New Unified Fannie says to investors: “We’ll keep the default and prepayment risk we’re comfortable with—we’ll guarantee them—and you take the interest rate risk off our hands.” If we keep that one change, but otherwise return to the original model of a unified, monopoly, government agency, we’ve essentially recreated the original FDR model, souped up only slightly for the post-Bretton Woods world.

Of course, mortgage-backed securitization has a terrible name now, but that’s because there were shit mortgages at the bottom of it. If all you securitize are widely diversified conforming mortgages, the resulting securities are just as solid as they are. And will be eagerly sought by bond buyers who live to trade interest rate risk.

So that’s the obvious solution to Fannie’s woes. We should declare that the privatization of normal, owner-occupied mortgages is a 40-year-old experiment that has spectacularly failed. And we should go back mutatis mutandis to the previous New Deal model that worked. We should siphon off the interest rate risk through securitization, and then the new Super Fannie can go back to sitting like a brood hen on the nation’s nest eggs.

So what have Obama and the ruling class decided? Exactly the opposite: to wind down Fanny and her brother so as to leave everything to the private markets—even more than before.  The Corker–Warner Bill (S. 1217), introduced on June 25, and publicly endorsed by Obama on August 6, proposes to wind both down “no later than five years after passage.” Obama makes clear that the primary reason for this unwinding is “to protect the American taxpayer.”  But how on earth is the taxpayer protected by returning to—nay intensifying—the free market dynamics that crashed so spectacularly?

Primarily this is the result of instinct and inertia. Obama is the anti-FDR. Facing the biggest financial crisis in 2 generations, and hence a momentous chance to really change things, he has done everything he can to restore the status quo ante. But to the extent anyone is really thinking about this, rather than just oiling us, this policy choice represents a complete misreading of every lesson we should have learned from this crisis.

There is, however, one thing everyone today agrees on about the Corker-Warner-Obama plan: it will make mortgages more expensive. So the ruling class proposal fails the only two goals we say we have, to make mortgages more affordable, and to protect the taxpayers from risk. But hey, that’s capitalism for you. Anything better is called socialism.