Fannie/Freddie Bailout Will Burden Taxpayers
July 16th, 2008
Perhaps the only silver lining to the ominous cloud that is the federal government’s proposed bailout of Fannie Mae and Freddie Mac is that this looming catastrophe presents a much-needed opportunity to reevaluate the role of Government-Sponsored Enterprises (GSEs) in financial markets.
Between the proposed $300 billion giveaway to Fannie Mae and Freddie Mac and legislation to fatten the Federal Housing Administration’s (FHA) loan portfolio, Congress and the President could soon be saddling taxpayers with more than half a trillion dollars in new liabilities – nearly $2,000 for every American. What was once an implicit taxpayer guarantee will be wholly explicit, and the government could for the first time be involved in both owning shares of and lending to GSEs.
If even part of this amount is eventually written off the government’s balance sheet as a loss, taxpayers will be left to clean up a financial scandal not seen since the Savings and Loan crisis. Rather than rewarding irresponsible lending and borrowing practices (and essentially socializing risk), Congress must enact reforms that will end the incentives for risky behavior in mortgage markets and shrink the undue influence GSEs have exerted on politics and finance. Here are some recommendations:
- The new GSE regulator should be required to consider systemic risks, as well as design appropriate capital standards and portfolio limits, whenever taxpayer funds are released to prop up the entities.
- Once any loans or share purchases involving tax dollars take place, GSEs should be prohibited from conducting any kind of political or lobbying activity.
- Competing housing finance franchises should be created by breaking up the GSEs and auctioning off the new entities in a manner similar to FCC spectrum auctions.
Few decisions are as fraught with future consequences for our free-market economy as the GSE bailout plans currently being debated on Capitol Hill and in the White House. Members of Congress and President Bush must consider these urgent reforms before the very first taxpayer dollar is put on the line.
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