Economics - General Public Policy

The worst of capitalism: Fannie and Freddie

Should the Treasury bail out Fannie and Freddie?  A recent Economist article gives a level-headed solution: nationalize and then dismantle them.

Most libertarians would say that Fannie and Freddie should fail.  Having these two giant players collapse, however, add dynamite to an already explosive mortgage finance market.  Thus, the short term solution must be to bail out these two entities and nationalize the assets.  Sending Fannie and Freddie a financial lifeline to benefit private shareholders, however, does not make sense and is not fair to taxpayers.  In the words to the Economist, “That is capitalism at its worst: it means shareholders and executives reap the profits, but the taxpayer bears the losses.”

In the long term, a housing market without Fannie or Freddie is likely in the U.S.’s best interest.  Taxpayers won’t be on the hook to bail out private shareholders and the mortgage finance market will likely be more competitive.

The two Leviathans have squeezed private firms into the riskiest ends of the mortgage market, such as subprime lending. They have not brought sharply lower mortgage rates to America.  Europe, where mortgage markets are fully private, is no worse-off.

Thus, I whole-heartedly agree with the Economist’s prescription: nationalization and dismantlement is the the best route.