More comments on the Fannie Mae, Freddie Mac takeover
Plenty of people had warned about the problems of Fannie Mae and Freddie Mac. As Arnold Kling notes in a new Cato Briefing Paper, the current crisis ” may have been the most avoidable financial crisis in history.” Treasury Secretary Larry Summers was one of those Cassandras back in 1999. So was Lawrence J. White in a 2004 Cato Policy Analysis calling for privatization, or failing that, a clear removal of the federal guarantee for the two companies. Instead, Congress and successive administrations continued to push Fannie and Freddie to get bigger and to buy mortgages that were in clear jeopardy of default. And now, having created this crisis, the federal government proposes not to wind down the overextended companies but to take them over so they can get all the benefits of crack federal financial management. Kling proposes a better exit strategy.
Government Bytes adds:
But before we start talking about this as a failure of the private sector, let’s make one thing perfectly clear: the bailout of Fannie and Freddie prove, once again, the miserable failure that is government running business.
Fannie and Freddie, of course, aren’t private entities. They’re pseudo-governmental entities where private shareholders get all the profit and the taxpayer assumes all the risk. This perverse system of incentives helps explain why Fannie and Freddie have pursued such truly absurd policies.
The Wall Street Journal comments:
By far the biggest risk here, however, is that the companies could still emerge with their business model intact. That model is the perverse mix of private profit and public risk, which gave them an incentive to make irresponsible mortgage bets with a taxpayer guarantee.
Mr. Paulson could have ended that model immediately by putting the companies into “receivership.” Both companies could have continued to securitize mortgages, even as their riskiest businesses were wound down. …
Treasury says all of this will provide a motive for Congress and the new President to change how Fan and Fred do business, and in the meantime the conservator has also ordered a stop to their political lobbying. It’s also nice to see that on this point Mr. Paulson has found religion. In his statement Sunday, he blamed the need for a bailout on “the inherent conflict and flawed business model embedded in the GSE structure.” Welcome to our merry band of “ideologues,” Mr. Secretary.