Saturday, June 20, 2009

Unwinding Freddie and Fannie

This article in Time makes clear that reforming Fannie and Freddie should be at the heart of any reform proposal, and yet we don't plan on dealing with it till next year. An excerpt:

"What I have seen is that government insurance programs are high-risk," said Lockhart. "It is often difficult in a political environment to calculate or charge an actuarially fair price." It is essentially a moral-hazard argument. Lockhart believes that the government will never be able to accurately price the guarantees that Fannie and Freddie offer mortgage lenders and investors. And as long as the government is offering that insurance too cheap, banks will be encouraged to make loans they shouldn't. And that will lead to more losses for Fannie and Freddie down the road.

Option A: Start unwinding Fannie and Freddie sometime next year, and watch the life get sucked out of the nascent housing recovery.

Option B: Kick the can down the road, and watch the federal government lose its AAA bond rating causing borrowing costs to increase and the now more politically dependent Fed to monetize the debt and destroy the dollar.

I'd go with option A, but I'm thinking the politicians will go with option B.

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