New Op-ed at Fox News: The Fannie Mae and Freddie Mac Mess

My new piece on Fox News starts off with this:

Should the government cover a private company’s losses during bad times, but let it keep their profits during good ones? It doesn’t sound like a very good deal for taxpayers. But that is how we treat Fannie Mae and Freddie Mac, the two big corporations that make loans and loan guarantees as well as handle the secondary mortgage market in the US.

As most probably suspect, 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? Economists believe that the federal government subsidizing risk is what caused the whole saving and loan meltdowns during the 1980s.

On Saturday, the Senate followed the House and overwhelmingly passed a massive “housing bill” that promises an unlimited line of credit to Fannie Mae and Freddie Mac. Of course, these two companies already get all sorts of preferential treatment. For example, they are exempt from all state and local income taxes. . . .

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Blogger Unknown said...

Mr. Lott: You undermine your entire set of arguments by getting a fundamental fact dead wrong. Freddie Mac and Fannie Mae are NOT exempt from federal government's corporate income taxes, as your headline and first paragraph strongly suggest. The two companies pay their full share of federal taxes when they make profits. In fact, there have been times in the past when they were among the top corporate taxpayers in the country.

No doubt you'll respond to this comment by referring to yourself saying that the two companies are exempt from state and local taxes.

Well, that's true -- if you're referring to their exemption from state and local INCOME taxes (they pay local property taxes -- the income stream that pays for municipal services -- where they own or lease office buildings). But the exemption from state and local income taxes is part of the statutory requirement that Fannie and Freddie do business in every state, every locality, in good times and bad. Unlike other corporations -- which can stop doing business anywhere they choose if the tax environment there is deemed unfavorable -- Freddie and Fannie can't do the same. That's good housing policy which benefits Americans and U.S. communities -- something that has been well demonstrated by the GSEs, particularly as the housing market has collapsed in so many places.

I'm in agreement that new, stronger regulation has been necessary to improve the oversight of the two companies. That's what the Congress has just passed and the President has committed to sign.

And I think there is ample room to discuss improvement in how Fannie and Freddie operate and carry out their responsibilities. Let's just keep the facts straight.

7/28/2008 2:46 PM  
Anonymous Anonymous said...

your an idiot. u can't let these 2 entities fail. they control over 70% of the mortgage financing market and every bank in the country owns a lot of thier debt. letting these 2 guys go would put us in a depression. in addition, i think the government will MAKE MONEY off of this deal through issuing debt (treasuries) and putting capital in the companies thru a convertable perferred rate treasuries +500 (a guess). This keeps these institutions afloat until things improve and then they can break them up into 10 to 20 companies to remove systemic risk.

7/28/2008 3:13 PM  
Blogger John Lott said...

Dear djeffers:

My piece says "For example, they are exempt from all state and local income taxes." I never say that they are exempt from Federal taxes. The title is "Why Give Taxpayers' Money to Freddie Mac and Fannie Mae's Shareholders?" Nor did I argue for new and stronger regulation. I think that government regulation caused the problems that we now face. I am not sure that you actually read the piece.

Dear Bill:

Thanks for your comments. Plenty of companies can do this job. The mortgages will still be there. It is just a question of who is bundling them for this secondary mortgage market. There is no reason why these two companies should be the ones to do it.

7/28/2008 3:59 PM  
Blogger Junkyard Sam said...

Wow! We agree on something! =)

YES, bailing them out and letting them get away with it will just encourage more "bad behavior."

It's the same thing with Nixon. We should have prosecuted him to the fullest extent of the law... Instead we set up a get-away-free-card-for-important-people so now the Bushes and Cheneys of the world can abuse their power with no fear of recourse from The People.

A comment above mentions the bigger cost of letting them fail - and that might be right... I know one thing though, I'd like to see a lot of these weasels JAILED the way you or I would be if we did something so damaging...

There has to be someone - probably a lot of people - to blame here... Didn't Phil Gramm help set the stage for a lot of this with his push for bank deregulation prior to all this?

Good thing he was McCain's chief economic advisor...

7/29/2008 3:00 PM  
Anonymous Anonymous said...

We can't have it both ways, capitalism on profits made and socialism on losses incurred.

It wrecks the whole system down the road when the taxpayer burden wipes out the economy. Its already happening, they have to draw the line on taxes, accept that loans have risk and let them fail when they mismanage. Government involvement only delays and magnifies the pain. There is nothing it does efficiently except break things and kill people. Don't let them get involved.

7/29/2008 4:43 PM  
Anonymous Anonymous said...

Dear Dr. Lott,

Where do people get these ideas that if some companies fall the whole economy will tank? Every time there is a Gov. bail out one hears this non-sense. Specially in this country where there are efficiently run companies waiting for an opportunity to grow.

7/30/2008 8:57 AM  
Blogger Unknown said...

Letting these entities fail will not cause a depression. The everyday american will not be affected. They will still pay their mortgage as usual just to a different company. The only thing this bail out does is keep afloat a sinking ship for a little longer. If the ship is poorly designed from the beginning, no amount of bandages will keep it from sinking eventually. We are led to beleive that most Americans are going to lose their home because of this, but the truth is that 96% of borrowers pay their mortgage ON TIME. The people in the 4% took a huge risk with an ARM. To say now that " I didnt know my payment would go up, " means they didnt read the papers the signed or are lying. I should not be held responsible for a failed gamble of someone elses own doing.

7/30/2008 10:26 AM  

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