January 26, 2011
Dean Baker
The Atlanta Journal-Constitution, January 23, 2011
The debate in Washington over the future of government-owned mortgage-backers Fannie Mae and Freddie Mac has increased scrutiny of government-sponsored enterprises, corporations established by Congress to direct the flow of credit to targeted sectors of the economy, such as home finance and agriculture. Should the United States dissolve its government-sponsored enterprises?
The collapse of Fannie Mae and Freddie Mac was a highlight of the 2008 financial crisis. However, this collapse was not about well-meaning liberals making loans to poor people who could not afford them, it was about rich executives trying to pull market share away from their private-sector competitors. When they collapsed, Fannie and Freddie were run as for-profit corporations whose top executives received paychecks in the tens of millions. It was profit, not public good, that motivated the bad loans. The answer is to restore the old Fannie model of a public company that buys and holds, rather than securitizes, mortgages. This was the successful model that fostered the huge increase in home ownership in the quarter century following World War II. It also helped support small banks by creating a secondary market to sell their mortgages. It’s simple and cheap — great for the country, but impossible in Washington today.
