Republicans had a fairly valid criticism of the financial-reform debate: Democrats who crafted the Dodd-Frank bill had little or nothing to say about the fate of Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, the now-taxpayer-owned mortgage financiers that have cost the country billions because of their crucial role in back-stopping the housing markets, and thus the financial sector. Democrats made the decision to put off GSE reform because of the fragility of the recovery and the poisonous politics around GSEs, which essentially provide huge subsidies for the housing market.
Fannie and Freddie mainly securitize home loans and thus promote low-interest-rate, long-term mortgages and the broad homeownership that goes along with them. When the crisis hit, they were victimized by broadly lowered lending standards and used by Congress to bear the brunt of plunging home values -- they weren't the cause of the crisis, but in protecting the rest of the economy, they have been seriously compromised. Now policy-makers need to find a way for them to stop hemorraghing public money while still supporting the housing market as much as they think appropriate.
In broad strokes, there are a few different ideas for fixing the GSEs, outlined here. One somewhat radical way to fix the problem is presented below by the Cambridge Winter Center's Raj Date:
Date's policy gets to the bare bones of the project: Privatize everything that can be be done outside the public sector and redirect the savings into transparent housing subsidies -- or perhaps into supporting more affordable rental housing. It's a relatively elegant solution, but I fear that by privatizing the market-backing mechanisms that have long been a tacit government function and approaching subsidies transparently, the plan will raise too many political hackles. Fannie Mae and Freddie Mac have long served the function of artificially boosting homeownership, and the heart of GSE reform will be deciding how to do that and how much we should. It's not an easy conversation.
Next week, the Treasury Department will host a conference with stakeholders and experts to lay out a framework for GSE reform in advance of an administration policy report expected this winter. Expect coverage of the conference here at TAP, and for much of the content to be live-streamed on the Web.
Most important next task: Figuring out the right hashtag for this beast. #GSEREf? Too confusing. GSEries? Maybe. Let's keep thinking.
Update: More from Kevin Drum and Felix Salmon.
-- Tim Fernholz
