Wednesday, July 9, 2008 at 9:25 pm
Fannie and Freddie: Time to become government agencies again?
The WSJ is reporting that people in the Bush administration are beginning to talk seriously--albeit of course entirely hypothetically--"about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter."
The view from outside the administration is pretty straightforward, the paper reports:
If a loss of confidence among investors made it impossible for Fannie and Freddie to continue supporting the mortgage market, "the government would have to step in," said Douglas Elmendorf, an economist at the Brookings Institution in Washington.
"They can't be allowed to fail," said Peter Wallison, a former Treasury Department general counsel. "The losses would extend through so much of our economy, and so much of the world economy. There is simply no way that the United States government can let it happen."
The folks at S&P ran a little thought experiment a while back and estimated that the cost of a Fannie/Freddie bailout would run somewhere between $420 billion and $1.1 trillion. Better that than another Great Depression, I guess. But if it comes to that is there any way we can help pay for it by garnisheeing the investment income of all the ex-Fannie/Freddie execs who raked in zillion-dollar paychecks back when we were under the mistaken impression that the two companies were private enterprises?
Update: In the most exciting development of my career so far, this post has been linked to by the Dutch-language financial media (at least by a blog on the website of the Belgian paper de Tijd). So to my hordes of new readers from across the sea, I say: Welkom, allemaal! Ga je comments gewoon in het vlaams schrijven!
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Thursday, July 10, 2008 at 7:30 am
Yes, you end up with executives like Franklin Raines who believed that the role of a CEO was to lobby Congress rather than run a business.
Thursday, July 10, 2008 at 10:05 am
"But if it comes to that is there any way we can help pay for it by garnisheeing the investment income of all the ex-Fannie/Freddie execs who raked in zillion-dollar paychecks back when we were under the mistaken impression that the two companies were private enterprises?"
Don't forget the investment bank and hedge fund wunderkinds who engineered the entire credit crisis. There is enough blame to go around to lasso in a majority of Wall Street execs.
Thursday, July 10, 2008 at 11:07 am
Don't forget that Fannie and Freddie are mandated by Congress to pick up loans and get involved in certain types of deals that are money losers from the moment they touch them (this isn't the whole problem but it is a huge problem). Either Congress should loosen its regulations and stop forcing them to do deals that lose money or have the government at least do a partial bailout with respect to the money-losing mandates. I don't like government bailouts, but when the government is part of the problem (creating serious market distortions), then it has some responsibility to be part of the solution.
In the end, I think the real solution is to have some functions of Freddie and Fannie become more private and other functions become more public, especially the affordable housing and general housing market backstop functions.
Thursday, July 10, 2008 at 12:07 pm
Remember the S&L bailout and the subsequent Keating 5 scandal? It's like a replay, all over again. Good times, good times.
Thursday, July 10, 2008 at 3:25 pm
These are not good times for Fannie or Freddie. We are only seeing the tip of the iceberg. I don't think most people realize what a huge player each of them is in the real estate and financial sectors of this country and how much trouble they are really in.
Thursday, July 10, 2008 at 4:10 pm
So BrooklynGurl, do you think that the government should backstop speculators in the real estate and fixed income markets?
Friday, July 11, 2008 at 3:06 pm
OK, you dared me.
Dit toont volgens mij dat een volledige vrije markt niet de beste organisatie is. Als het misloopt betaalt de staat hoe dan ook, dus kan je best vanaf een passieve rol voor de overheid inplannen, die actief wordt in geval van crisis.
Flanders rules!
for non-dutch speaking Americans:
I feel this demonstrates the need to have some government protection of the market. In Belgium, or in Canada (two examples I happen to know) the government will play a role in the mortgage market. It will avoid excesses, and if things go wrong, the government ends up picking up the tab, but it also seems to do so in a fully "private" market.
Saturday, July 12, 2008 at 6:59 am
Mooi zo!
Wednesday, October 15, 2008 at 3:47 am
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