GSEs Such As Fannie Mae, Freddie Mac, Are Proven Losers

Government Sponsored Enterprises such as Fannie Mae and Freddie Mac are proven losers.

The federal government is spending hundreds of billions of dollars to bail them out.

The politicians pushed Fannie Mae and Freddie Mac to buy all sorts of risky mortgages and this government intervention was a key reason for our housing crash.

There seems to be no end in sight for the federal government's pumping of billions in to Fannie Mae and Freddie Mac.

I wonder how long it would take the free market to sort out this housing crash. I suspect it would make short work of it. Housing prices would plunge to levels the free market would support.

From The Washington Post:

THERE IS NO END in sight to the federal bailout of Fannie Mae and Freddie Mac. President Obama's fiscal 2011 budget proposal said as much in a few phrases that promised nothing more definitive than continued "monitoring" of the two mortgage giants, which have been operating since mid-2008 in the legal and organizational limbo known as government "conservatorship." The administration had said its plans for definitive reform could be expected "at the time of the budget," not in the budget itself, so technically this doesn't count as a broken promise or a blown deadline. Still, as the two agencies' chief regulator, Edward J. DeMarco, gently reminded congressional leaders on Tuesday, conservatorship was intended as a "timeout" during which policymakers could reinvent the entities. With an election year upon us, that timeout is looking more and more like a cop-out.

This is alarming. The Fannie-Freddie business model — "government-sponsored enterprises" (GSEs) with private shareholders but a public purpose, promoting homeownership — is a proven loser. In fact, Fannie and Freddie were in large part responsible for inflating the housing bubble that burst so disastrously in 2007. The market's perception (correct, as it turned out) that the GSEs enjoyed federal backing enabled them to take on far more risk than their capital bases could support.