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This Relationship Ought to Be So Over

Posted By Conn Carroll On July 15, 2008 @ 10:48 am In Ongoing Priorities | Comments Disabled

Heritage scholar David John makes the case for splintering Freddie Mac and Fannie Mae in light of their recent financial troubles. From the New York Post [1]:

WITH the Treasury and Federal Reserve in effect promising to keep Fannie Mae and Freddie Mac afloat, the mortgage giants’ crisis seems to be over. But the fundamental cause is still there – and without fundamental reform, we may very well endure a repeat performance in a few years.

while private stockholders own both Fannie and Freddie, they’re really government creations that differ greatly from true private-sector companies. That’s why they’re allowed to dominate mortgage securitization – and also why Fannie and Freddie need close oversight to ensure that they remain solvent and compete fairly.

Fannie and Freddie are leftovers from an era when giant government entities seemed essential to achieving social goals. The fact that both were later privatized doesn’t change their essential nature as dominators of a market, rather than mere participants in it.

Congress should look at breaking up both. A larger number of smaller entities could compete with each other without artificially dominating the market. In other words, let’s bring real capitalism to the housing-securitization markets.

The new companies would be owned by private stockholders and overseen by a regulator with enough teeth to ensure that they’re safely run. They could be bought, merged or even go out of business without the potential disruption that this crisis caused. Most important, they wouldn’t have the potential to bring housing lending to a screeching halt, or potentially required multibillion-dollar taxpayer bailouts.


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[1] New York Post: http://www.nypost.com/seven/07152008/postopinion/opedcolumnists/fannie__freddie__break_em_up_119904.htm

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