Paul Krugman on Fannie and Freddie
The way Laura Tyson puts it, a mortgage packager and guarantor is almost surely a good thing--but the GSEs should never have been privatized in the first place. Organizations with great government privilege are government responsibility--and there is no way in which they should ever have been let loose from oversight and made responsible to their private shareholders alone.
Paul Krugman:
Fannie, Freddie and You: And now we’ve reached the next stage of our seemingly never-ending financial crisis. This time Fannie Mae and Freddie Mac are in the headlines.... How worried should we be?...
Fannie and Freddie probably will need a government rescue. But since it’s already clear that that rescue will take place, their problems won’t take down the economy. Furthermore, while Fannie and Freddie are problematic... they aren’t responsible for the mess we’re in....
Fannie Mae — the Federal National Mortgage Association — was created in the 1930s to facilitate homeownership by buying mortgages from banks.... The case against Fannie and Freddie begins with their peculiar status: although they’re private companies with stockholders and profits... [with] privileges... [especially] the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue... profits are privatized but losses are socialized.....
Such one-way bets can encourage the taking of bad risks, because the downside is someone else’s problem.... But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago.... [W]hatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated... the Fannie-Freddie experience shows that regulation works.
In that case, however, how did they end up in trouble?... [T]he sheer scale of the housing bubble... a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines... [and they] haven’t been required to put up enough capital.... And yes, there is a real political scandal here: there have been repeated warnings that Fannie’s and Freddie’s thin capitalization posed risks to taxpayers, but the companies’ management bought off the political process, systematically hiring influential figures from both parties....
[L]et's be clear: Fannie and Freddie can’t be allowed to fail. With the collapse of subprime lending, they’re now more central than ever to the housing market, and the economy as a whole.
They cannot be allowed to collapse because we want to keep the economy near full employment, which means that construction-sector employment can't be allowed to fall faster than tradeable manufacturing-sector employment can rise. But they could be put into "conservatorship." And there is no reason that their stockholders need to emerge from this with any money at all.
