Alan Reynolds - Fanny Mae and Freddy Mac

Alan Reynolds has written an assessment of the troubled Fanny Mae and Freddie Mac which seems right on target to me. He describes the special privileges these publicly traded corporations receive. He explains how the effective subsidies that they receive reduces competition in the mortgage business and undermines market discipline. Reynolds says, "Fannie and Freddy may be 'too big to fail,' but that means they are also too big for taxpayer bailouts."

They pay artificially low interest rates on borrowed money because it is assumed they will be protected by the federal government. They have a $2.5 billion line of credit with the U. S. Treasury! Recently, Treasury Secretary Henry Paulson suggested that Fanny and Freddy be given unlimited access to the U.S. Treasury for 18 months. This caused the dollar and U. S. Treasury bonds to go down in value!

Sec. Paulson is also proposing a new regulatory agency to replace the one that is now 16 years old. Every time a politically regulated industry or organization gets in trouble, and this is commonly because of political considerations, it is proposed by politicians that the government regulate more vigorously. Well, Fanny and Freddy have a history of being very generous with their campaign contributions, which has made them very close to many politicians. Reynolds correctly notes that "A new regulator is unlikely to be any better than the old regulator because the whole notion of a government-sponsored business is thoroughly politicized and inherently corrupt."

As Reynolds concludes, Fannie and Freddy "need to be downsized and de-leveraged, relieved of special privileges and loan guarantees, and broken into small pieces agile enough to sink or swim on their own, without taxpayer support." I am wondering why they would need to be "agile enough to sink", but clearly they should be allowed to be independent enough to sink or agile enough to swim.