I don’t claim to be an expert on housing finance, but I really can’t make sense of the proposed Fannie/Freddie bailout. If the taxpayers are going to take the downside, why shouldn’t they get the upside to go with it? And what’s the case for “honoring” a guarantee that was never given to the bondholders?
True, if we make the bondholders take a “haircut” after they purchased securities that were backed by a wink-and-a-nod pseudo-guarantee from the government, future investors won’t trust any government guarantee that isn’t written into law. Good. This country is supposed to be run on laws, not on winks and nods.
I don’t have any problem with the Fed opening the discount window to the GSEs for a while, if that means lending to them on good security. But why should be the taxpayers and not the bondholders and shareholders who take their lumps when the overpaid managers of two for-profit enterprises allow them to get overextended in the course of profiting from, and fuelling, a catastrophic financial bubble?
Fannie Mae started out as a government agency. As a government agency, it operated prudently and made a profit. (Not hard, admittedly, when you’re borrowing at Treasury rates and lending at mortgage rates.) Then it was spun off as a private business. As a private business, it has operated imprudently and is now, on a mark-to-market basis, insolvent. That ought to suggest that the job of guaranteeing mortgages and bundling them into securities is better performed by civil servants than by overpaid executives.
To add to all that, high housing prices are social poison. Putting the taxpayers on the hook for mortgage defaults creates a perverse incentive for the government to keep those prices high. Me, I’m agin’ it.
Keep the mortgage market functioning, sure. But that can be done as well by a conservatorship (like the takeover of an insolvent bank) as by a bailout. We have better uses for $300 billion than protecting investors from the consequences of their own folly.