The “Toxic Twins” – Reforming Fannie and Freddie
If you only read one article out of each day’s Wall Street Journal, select something from Review & Outlook at the back of Section A. I particularly enjoyed yesterday’s editorial on the need for reform of the GSEs, addressing a recent proposal by GOP Senators McCain, Shelby and Gregg. The essence of the argument is that no financial reform is adequate so long as it exempts Fannie Mae and Freddie Mac, two of the biggest culprits in the housing meltdown. In an attempt to wind down government support for these entities, the McCain proposal seeks to shrink the size of their portfolios, increase capital requirements, and repeal the infamous affordable housing mandates which dramatically increased subprime exposure.
The GSEs have had a host of problems, the most significant issue of which is the asymmetric privatization of gains and socialization of losses – that is, “crony capitalism.” Further, losses to these GSEs are effectively off-balance-sheet, and thus their expected $380 billion budgetary impact is hidden from the government’s books. If we are to see meaningful financial reform, we must address the GSEs role in the housing bubble and create a structure where these entities are left to stand on their own two feet. Link below: