First We Save Fannie Mae and Freddie Mac, Then We Destroy Them. – Op-Ed – NYTimes.com
by Tom on July 28, 2008
in Market Musings, banks
A good op-ed piece in the New York Times yesterday by former Fed governor Poole.
CRITICS of the Congressional housing package complain that we are now committing taxpayers to huge new outlays to rescue Fannie Mae and Freddie Mac. That view is wrong: Congressional inaction over the past 15 years had already committed taxpayers to the bailout.
Fannie Mae and Freddie Mac are not essential to the mortgage market; if they were put out of business in an orderly fashion over 5 to 10 years, the market would pick up the business they abandon.
Gee – a former Fed governor is saying that we need to put a 5 to 10 year plan in place that would eventually result in Fannie and Freddie being either totally privatized or closed down. Where have I heard that before?
What do you think?
Tom
We are not saving Fannie and Freddie so that we can destroy them. Saving Fannie and Freddie is all about saving 70% of the Fannie/Freddie bondholders who are foreign for example, the Chinese Communists. If we want them to keep lending us money so that we can buy their stuff, we need to make sure they don’t lose money on our IOU’s. With a trillion dollars of foreign currency reserves, mostly dollar denominated, Fannie and Freddie’s creditors will be bailed out by the US taxpayer. Get your mortgages while you can.
I think that the point Poole is trying to make is similar to the point I was making and that is that Fannie and Freddie, as quasi-governmental agencies, need to go away. Over the next 10 years, we need to move from a governmental mortgage institution to a private one.
Yes, the ramifications of defaulting on the Chinese would not be good. The international ramifications would be very unhealthy, thus the “too big to fail” issue.
Tom