Dean Baker argues that Fannie and Freddie should be run as public corporations. There are (at least) two ways to support this, one is as a means of promoting home ownership, and the other is to stabilize housing markets. Not everyone agrees with the first justification since it distorts markets (assuming the promotion of home ownership is not correcting a market failure in which case it would be hard to argue against). However, the second justification – stabilization – is, I think, harder to dismiss since volatility in these markets produces large welfare losses:
Freddie’s dead, by Dean Baker, Comment is Free: Fannie Mae and Freddie Mac finally kicked the bucket this weekend, with the Treasury department stepping in to take over the companies. The top management is being sent packing (albeit with multi-million dollar severance packages), and the shareholders will stop seeing dividends, probably forever. …
The big question is what these institutions will look like going forward. There is a strong argument for keeping these institutions publicly run. In effect, both Fannie and Freddie can be operated as public corporations, which was the case with Fannie Mae prior to its privatisation in 1968.
The current disaster should not lead people to forget the benefits that these companies conveyed to homeowners. By creating the secondary mortgage market, they created first a national and then an international market for home mortgages. This had the effect of equalising interest rates across the country and making homeownership affordable to millions of families.
Perhaps the private sector would have created a secondary mortgage market on its own, but it didn’t. Furthermore, private issue mortgage backed securities have performed far more poorly in the current crisis than the securities issued by Fannie and Freddie. This is why private issue mortgage backed securities have virtually disappeared over the last year, and Fannie and Freddie are now financing almost 80% of the new mortgages being issued. Those who tout the virtues of the private sector in the secondary mortgage market are arguing based on faith, not evidence.
There is still a very big need for Fannie and Freddie to ensure a well-operating secondary mortgage market. … Fannie and Freddie can best serve their role of providing the stable anchor of the secondary mortgage market…
Private banks would still be free to be creative and innovative in developing complex new mortgage derivatives, if they can find anyone to buy them. The difference is that the taxpayer would not be standing behind the private sector banks, prepared to absorb any losses even as the stockholders and top executives got rich off the gains.
The federal takeover of Fannie and Freddie will force a debate over their ultimate status. It is clear that many Republicans want to see them broken up and privatised, which has long been their explicit agenda.
The current crisis has shown the failing of Fannie and Freddie in their role as public/private hybrids. We should see that as reason for ending the private side of the equation. The only obvious value added by the private side is the tens of millions of dollars of compensation received by the CEOs. The CEOs can go to Wall Street if they want those salaries.
Originally published at Economist’s View and reproduced here with the author’s permission.