The Giants Fall: Eliminating Fannie Mae & Freddie Mac
In the three full years since the first emergence of the credit crisis, market participants and policymakers have offered a variety of competing narratives regarding its genesis. The commonsense perspective of nearly all of those competing narratives is that the US residential mortgage market was at the center of global financial market turbulence.
Despite that seeming consensus, policymakers remain undecided as to the fate of the largest (and to taxpayers, the most costly) participants in the US mortgage business: the government sponsored enterprises, Fannie Mae and Freddie Mac (together, the "GSEs").
Fannie and Freddie's central function, guarantying mortgage credit through government-sponsored private firms, is fatally flawed. Although they arguably provide other systemic benefits beyond credit guaranties (liquidity support, interest rate risk absorption), those benefits could be more transparently and efficiently delivered through other means. As a result, there is no logically defensible reason for the GSEs' survival. They should be eliminated.
Raj Date is Chairman and Executive Director of the Cambridge Winter Center for Financial Institutions Policy. He is a former Wall Street managing director, bank senior executive, and McKinsey consultant.
The views expressed in this paper are those of the author and do not necessarily reflect the positions of the Roosevelt Institute, its officers, or its directors.