9/07/2008

One step back, two steps forward on reforming Fannie Mae and Freddie Mac?

While the government will take over Fannie Mae and Freddie Mac in the short-run, the long run goal is supposedly to turn this business over to the private sector. My concern is whether future administrations will follow through.

Mr. Paulson signals that he wants to remake the U.S. housing-finance system in the longer term, ditching the "flawed business model" of government-sponsored enterprises like Fannie and Freddie. This model has produced conflicts between the companies' desire to earn maximum profits for their shareholders and the public mission of supporting housing that has persuaded investors that the government would have to rescue them in a crisis.

The plan limits the size of each companies' mortgage portfolios to a maximum of $850 billion as of the end of 2009. After that, the Treasury intends for the mortgage holdings to shrink about 10% a year until they reach about $250 billion at each company. But that is subject to decisions that may be made by Congress and future administrations.

The government had to wade deeper into the mortgage market because for now "private markets are just not willing to put up the capital" for home mortgages at prices U.S. consumers could afford, said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School. Without government support for the mortgage market, home prices would fall much farther, exposing the country as a whole to greater economic strain, Ms. Wachter says. . . .


I know that Wachter is supposedly an economist, but the notion that you should subsidize the housing market to get the right number of homes is strange. Should the government subsidize computers or cell phones or some other products in the same way? If people value homes more than their cost, they will buy them. I am not sure what argument you can make for why houses should not only be subsidized but that they should be subsidized through interest rates. Subsidies mean that too much will be purchased, that people will purchase homes past the point where they value them, possibly getting even larger ones than they would otherwise get.

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1 Comments:

Anonymous Keith said...

If state control is the answer, where was the state regulator when these companies were lending on upto 65 times leverage?

Oh, I forgot, they were trying to regulate London's petroleum futures market...

Political or what?

9/08/2008 4:11 AM  

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