In the past, Fannie Mae and Freddie Mac operated as profit-making entities backed by an implicit government guarantee. That toxic combination always seemed designed to lose billions of taxpayer dollars, and that is exactly what happened.
Looking forward, the best option is to replace them with an entirely public entity that enables securitization by guaranteeing 30-year fixed-rate mortgages and that charges a high enough premium to stay solvent. We then should hope that private competitors will eventually put the public entity out of business.
I support the public option not out of blind faith in the public sector, but out of profound skepticism toward mixed public-private models, like Fannie and Freddie. The free-market friends of privatizing those entities envision a bold new world where the government no longer stands behind their debt. But if the last three years have taught us anything, it is that the government is not going to sit by and let a major part of the financial system fail.
So the question of whether the government should bail out any Fannie-Freddie successor is moot. It will be bailed out. If the government is going to bear the costs of any future catastrophe, then it might as well acknowledge that inevitability and ensure that the entity is as prudent as possible.
Such prudence is far more compatible with a slow-moving public bureaucracy than with a nimble, profit-seeking private company.
The case for keeping Freddie and Fannie public reflects an even deeper problem: wealthy, powerful private companies that are deemed to have public missions find it disturbingly easy to subvert the political process. A century ago, progressives supported public ownership of streetcar lines and utilities because they believed that the owners of those companies had far too much power over local governments.
Wednesday, October 06, 2010
Edward Glaeser makes sense on Fannie and Freddie