A response to:
Put them back on the Federal Budget


The latter assumption is important.  Support for one future path for the GSEs—total privatization—can be based on the notion that the government should just stop providing so much support for home ownership. That's a defensible argument, but I take it that's not the point of this question. The current degree of support for housing makes many economists cringe, but there aren't many successful politicians who are going to run on a platform of reduced policy support for housing. Economic policy has many higher priorities than trying to persuade voters to lower government support for this sector. Most, though not all, analysts believe these supports were not a principal reason for the housing and credit bubble.


If there is going to be some degree of government support for housing finance, Fannie and Freddie should be brought onto the Federal budget as agencies that guarantee conventional mortgages and create a secondary market for them by securitising these mortgages. This avoids an investment portfolio for the GSEs, which produced the massive losses that the taxpayers are now covering. Any support for an economic sector should be run through the Federal budget to assure the normal disciplines that go with the budget and appropriations processes. Any alternative should clear a high threshold.

Various proposals for hybrid arrangements fall short of this threshold. These would privatise the companies but give them an explicit government guarantee, which the companies would pay for. Simply put, it's hard for a private company to serve both shareholder and policy interests. That was one lesson of the financial crisis. Also these proposals raise many political economy risks—regulatory capture, political influence buying, “corporate mission creep”—that characterised the status quo ante.

Unfortunately in the policy world the “on-budget” option has been labeled (by its own advocates no less) as "nationalisation". That's a good analytical description and it characterises next steps, but it shows a tin ear to the political debate. This option just restores Fannie Mae's status prior to 1968, when LBJ, to prevent the Vietnam War from pushing total Federal spending above critical levels, moved Fannie Mae off budget and created the government-sponsored enterprise.