The Giants Fall: Eliminating Fannie Mae & Freddie Mac
In the three full years since the first emergence of the credit crisis, market participants and policymakers have offered a variety of competing narratives regarding its genesis. The commonsense perspective of nearly all of those competing narratives is that the US residential mortgage market was at the center of global financial market turbulence.
Despite that seeming consensus, policymakers remain undecided as to the fate of the largest (and to taxpayers, the most costly) participants in the US mortgage business: the government sponsored enterprises, Fannie Mae and Freddie Mac (together, the “GSEs”).
Fannie and Freddie’s central function, guarantying mortgage credit through government-sponsored private firms, is fatally flawed. Although they arguably provide other systemic benefits beyond credit guaranties (liquidity support, interest rate risk absorption), those benefits could be more transparently and efficiently delivered through other means. As a result, there is no logically defensible reason for the GSEs’ survival. They should be eliminated.
From the Endnotes:
Because both private-market and GSE performance suffered from precisely the same kind of problems, traditional partisan arguments regarding the GSEs tend to ring hollow. The GSEs were neither, strictly speaking, the ‘cause of’ nor the ‘victim of’ private-label mortgage market dysfunction. They were simply examples (albeit, by far, the largest and most costly examples) of the broad structural shortcomings within the mortgage market.