Fannie Mae, Freddie Mac Future Is Assured by Congress

Perhaps it shouldn’t be when you consider Fannie and Freddie have a good chance of costing taxpayers more than the bailouts of the banks (-$7 b.), AIG ($36 b.), and GM and Chrysler ($34 b.) put together according to this Congressional Budget Office analysis of last month. In December, CBO estimated Treasury will end up spending $163 b. of taxpayer money to keep Fannie Mae (FNM) and Freddie Mac (FRE) afloat, and Treasury’s Christmas Eve lifting of the $200 b. caps on what it can put into each gave me cause to believe the ultimate cost could be a lot larger. It all depends on a housing market rebound that hasn’t happened yet.

Yesterday, the House Financial Services Committee held a hearing on the future of Fannie Mae and Freddie Mac. Treasury Secretary Tim Geithner said:

“at the heart of this debate will be to think about what is the appropriate role for the government in providing some form of guarantees to assure a more stable flow of housing finance and what role should the private markets face.”

He concluded: “You [Rep. Mike Castle (R-DE)] ended by asking is, is it possible to advocate a system in which the government plays no role in providing support for mortgage finance market through explicit guarantees, subsidies, support for liquidity.

And I think there is a — there is a — certainly a pure theoretical option in which they may make sense, but my own view is there’s probably going to be a good economic case, good public policy case for some continued provision of a carefully designed guarantee by the public sector going forward.

Because housing markets are so critical to overall economic activity, they play such a large role in people’s wealth, the perception of wealth, they are very vulnerable to volatility when you see — when you experience broader financial market shocks to the financial system.

And because of that unique role housing markets play, I think there’s likely to be a good public policy case, good economic case likely that both conservatives and liberals could agree on, where they design a carefully calibrated guarantee, appropriately priced, that would continue in some form.”

This debate also took some interesting turns on CNBC, where Larry Kudlow placed blame on Republicans and Democrats alike for refusing to lift government housing guarantees. I agree with Kudlow that despite the moral hazard most economists see inherent in Fannie Mae and Freddie Mac, Congress will never leave homeownership to the market.

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About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

Visit: Capital Gains and Games

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