CHOOSING WISELY
This New York Times piece does a better job than most in covering what just happened with Fannie and Freddie over the weekend, and the complicated history that lead to this unfortunate stage. It starts appropriately enough with the fundamental problem when these two entities were created (image source):
"No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other.
— Matthew 6:24
Fannie Mae and Freddie Mac were intended to serve at least two masters — the investors who put up capital and a government that wanted to help the housing industry and extend home ownership. In the end, they failed to serve either one very well.
The government tried to navigate a narrow line, aimed at allowing Fannie and Freddie, as government-sponsored enterprises, to borrow at low interest rates through implicit government backing, while publicly criticizing what the Treasury Department earlier this year called “the financial markets’ misperception that G.S.E.’s are backed by the federal government.”
Now, with its rescue plan, the government hopes that perception will return to financial markets that have grown dubious.
Remarkably, the country that prides itself on being the beacon of free enterprise finds itself with a financial system that needs government money to finance the most important asset most Americans will ever own.
There have been bailouts before, but none that seemed more crucial than that of Fannie and Freddie. The housing boom and bust have left them virtually the only sources of large amounts of money for home loans in the country."
The whole piece is worth reading, especially if you're a little fuzzy about how we got to this point.
The events of this weekend, ironically, do not solve the fundamental problem of two masters in the near-term:
"In the near term, Fannie and Freddie will be encouraged to grow, to help the housing market and economy recover. But beginning in 2010, after a new president has taken office, Fannie and Freddie will have to become smaller each year.
By then, perhaps Congress will have confronted the contradictions inherent in the business model of the enterprises.
“The new Congress and the next administration must decide what role government in general, and these entities in particular, should play in the housing market,” Mr. Paulson said. “Government support needs to be either explicit or nonexistent, and structured to resolve the conflict between public and private purposes.”
The right thing to do with these institutions will have to wait a better time to do it in.
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