Posted: 08/20/08

Fannie Mae and Freddie Mac

Kerby Anderson

            In the last few weeks you have probably heard about the proposed bailout of Fannie Mae and Freddie Mac. Most of us don't know much about these entities but we should learn fast since this action is likely to be one element of the presidential campaign.

            Fannie Mae is the Federal National Mortgage Association, and Freddie Mac is the Federal Home Loan Mortgage Corporation. They are stockholder-owned corporations and referred to as government sponsored enterprises, known as GSEs. The two of them are considered the largest financial companies in the world with liabilities of approximately $5 trillion.

            The bailout has been controversial for a few reasons. First, these two GSEs are private companies which the government wants to help with taxpayer money. Economist John Lott believes "this whole approach is pretty dubious. If you subsidize risk, you get more of it. If you don't have to bear the cost of the risk, why not shoot for the moon?"

            Former House Majority Leader Dick Armey says we are "privatizing gains while socializing losses."  Stockholders of Fannie Mae and Freddie Mac already receive higher interest rates than Treasury securities because of higher risk of repayment. He suggests that the government repay 90 cents on the dollar rather than 100 percent.

            Stephen Moore point out that the primary beneficiaries are: the Chinese, the Russians, and oil nations in the Gulf region. He says, "Why Democrats and Republicans think it's good economics, let alone good politics, to put the interests of the Chinese and Russian governments ahead of their own constituents is a question members should be asked over and over between now and the election."

            This is certain to become a campaign issue. Already John McCain's economic advisor, Steve Forbes, has suggested that we break up Fannie and Freddie into a dozen companies, sever their ties to government, and make them compete in the mortgage market. I believe this would revive the housing sector and benefit the taxpayers.

By Kerby Anderson Click here for bio and archived articles