Jonathan Chait

The Conservative Case Against Privatizing Fannie

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Right-of-center economics professor Ed Glaeser argues against privatizing Fannie and Freddie:

Fannie and Freddie are the rare exceptions where the taxpayer is safer with them in government hands rather than private hands.

Fannie Mae has been a private entity since 1968. Since then, the federal government has proven itself unable to allow let it or Freddie Mac default. When Fannie and Freddie get in trouble, the government is always there to back them up, most recently at a cost of many, many billions.

Given the trillions in mortgage-backed securities that are securitized by these enterprises, once a crisis occurs, the government faces the option of a bailout or risking financial Armageddon. Unsurprisingly, it chooses bailouts....

If the federal government is going to bail out Fannie and Freddie anyway, the fiscally responsible thing to do is to keep them in government hands.

Then the government can write strict rules that limit their behavior. They can be forced to charge high fees for guaranteeing mortgages. They can be tightly restricted in the types of mortgages they insure.

If they remain government entities, the leaders of the House can play a large role in designing a structure that won’t cost future taxpayers billions.

All of that control disappears when the entities become private. They will be able to experiment with new products and cut their fees to expand market share. They will be able to hold billions, or trillions, of dollars in their retained mortgage portfolios. They will be able to go back to exerting enormous political influence.

I think he's clearly correct. The problem is that he's arguing against an impulse, shared by privatization-advocating Karl Rove and others, that's deeply felt among Republicans right now. The Republican belief is that the economic crisis was caused by too much government, full stop. Freddie and Fannie were the problem, and Barney Frank is history's greatest monster.

The reality is that the problem was caused by profit-seeking enterprises, both fully private and quasi-private, that took large risks with implicit government backing.  If an entity is either going to be too big to fail or undertake a public function, it needs to be heavily regulated and/or directly controlled by the government. Turning Freddie and Fannie private again may satisfy the Republican impulse to blame government for the crisis but it's precisely the wrong thing to do.

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